What is Asset Tokenization?
Tokenization involves converting sensitive information into a unique code or symbol that maintains the integrity of the information without compromising its security and use.
The main types of tokenization practiced include utility, payment, and asset tokenization.
Asset tokenization converts assets into digital tokens managed through blockchain, eliminating the need for central intermediaries. This process allows individuals to acquire smaller units of complex assets they may not otherwise have access to, while enabling issuers to raise more capital for projects. For instance, in real estate, tokenization can raise funds from investors interested in properties, who can then hold digital tokens representing fractional ownership.
A variety of assets can be tokenized, including equities, debts, private equity, commodities, and venture capital. Tokenization simplifies asset ownership, making them accessible to more investors and reducing costs compared to traditional methods like IPOs. Overall, asset tokenization democratizes investment access and increases liquidity in typically illiquid markets.
It's important not to confuse tokenization with cryptocurrencies, which are digital currencies. While cryptocurrencies are digital currencies, tokenized assets derive their value from underlying virtual or real assets, created from an existing blockchain.
Aside from fractional ownership, asset tokenization allows for direct peer-to-peer trading without the need for middlemen, facilitates the innovation of new hybrid financial products (combining traditional and digital assets), and facilitates risk management.
How to implement Tokenization of Real World Assets (RWAs)
- Create digital tokens: Assets are converted into digital tokens on a blockchain. A smart contract is lauch stipulating the rights and obligations of token holders.
- Blockchain infrastructure: A secure and transparent ledger for recording ownership and transaction history using the blockchain.
- Smart Contract Implementation: These are decentralized self-executing programs that fulfill specific functions based on publicly available code. With regards to tokenized assets, smart contracts define token holders' ownership rights and obligrations, such as dividend payments, voting rights and transfer of ownership.
- Asset management and governance: Token holders are able to participate in decisions related to the management of the asset. The exact level of control is laid out in the legal entity's charter and encoded into the smart contract associated with the asset.
*These steps are not comprehensive but covers the main processes involved when implementing tokenization of Real World Assets (RWAs).
A Brave New Real World Assets
According to Citi GPS: Global Perspectives & Solutions, tokenization of financial and real world assets will be the "chatgpt" moment of blockchain, as "almost anything of value can and be tokenized". Citigroup estimates $4 trillion to $5 trillion of tokenized digital securities and $1 trillion of distributed ledger technology (DLT)-based trade finance volumes by 2030.
These insights makes RWAs very interesting and promising to investors and engineers.