The digitalization of business models has revolutionized various economic activities, and financial markets are also undergoing a profound evolution.
From real estate to fine art, the way we invest in assets and raise funds is rapidly changing as we move towards a decentralized and token-based economy.
This article explains the basics around the concept of tokenization and some of its main benefits.
What is tokenization?
To put it simple, tokenization refers to the process of securitizing an asset using the blockchain technology. Under this process, the value, rights and obligations of each real-world (physical) asset is represented by a certain number of security tokens that can be digitally traded, stored and transferred, whereas the underlying asset continues to exist “off-chain”.
In specific, non-fungible tokens (NFT) is gaining an increasing momentum. They can represent physical assets such as art, audio, video, and other forms of creative work. While the digital files themselves are infinitely reproducible, the NFTs representing them are tracked on their underlying blockchains and provide buyers with proof of ownership.
We cannot confuse a NFT with a fungible token, like bitcoin, since we can trade one bitcoin for another, and we’ll have exactly the same thing. This is a fungible token.
Each NFT is unique, irreplaceable and non-interchangeable. A one-of-a-kind paint if traded for a different paint, you’d have something completely different.
Benefits of tokenization
Physical assets are now liquid
One of the main benefits of tokenization is related to the fact that the token may be digitally transferred which means that the underlying assets may be traded with other investors in a simple and secure way on the secondary market chosen by the token issuer.
This represents a breakthrough as the market of real assets is typically illiquid and not accessible to many investors.
So, greater liquidity comes with a broader base of investors and sellers, unlocking trillions of euros in illiquid assets.
Lower Minimum Investment Threshold
Moreover, the beauty of tokenizing physical assets through a NFT is that each token will represent a fractional ownership of an underlying asset, lowering the minimum investment threshold and thus reducing investment barriers typically seen in the tradition financial markets.
With this, the market of real assets is more dynamic and makes even the most valuable collectible accessible to everyone.
Faster and cost-efficient transactions
One of the benefits of tokenization is that allows faster transactions with less costs, when compared with the traditional financial markets or the stock market.
This is possible thanks to smart contracts (algorithms integrated into the blockchain) that brings more automatism and efficiency to transactions, reducing the execution time, as well as the existence of intermediary and administrative fees.
Security and transparency
Tokenizing physical assets also ensures a real-time traceability and transparency. Since data stored in the blockchain is immutable, the same information is available to anyone at any time, namely in what regards ownership records and historic transactions, bringing more security and transparency to the system.
The way we invest in physical assets is rapidly changing, as we move towards a decentralized and token-based economy.
Issuing blockchain-based tokens to represent non-fungible assets brings many benefits when compared with the traditional financial markets (more liquidity, lower minimum investment threshold, faster and cheaper transactions and real-time traceability).
Please check our blog posts to know more and stay tuned.