Tokenization is changing almost every industry and establishments have to be ready for this major force. Asset tokenization could bring fundamental change in the way traditional investing was done. Tokenizing involves issuing a token on the blockchain, this would probably be a security token. This token would then be a representation of the real asset that can be traded. The tokens serve as a store of value while carrying the rights of the assets that it represents. At the same time, the real-world assets represented by tokens continue to exist outside the chain.
Tokenization is creating a variant of an Initial Coin Offering (ICO) known as a Security Token Offering (STO). STO creates a security token which is a digital representation of an asset. Creating a token on the blockchain simply means that it provides a representation of a share in a company, investment fund, or ownership of real estate. Digital tokens can leverage smart contracts through direct sales to buyers or on specialized exchanges to be traded. Any quantity could be purchased to completely own or just have partial ownership of an asset. could purchase their desired amount of digital ownership tokens.
Tokenization has many benefits, namely, improving efficiency, inclusivity and transparency in transactions. Tokens can help in reducing friction of the old model of transaction that is associated with purchase and sales of securities. The benefits include:
The tokenizing of illiquid assets like fine art could unlock trading of the tokens on the secondary market for the issuer. This allows access to a wider range of traders, hence improving the overall liquidity. Investors get access to more opportunities and sellers could realize the benefits of higher liquidity. Sellers could potentially get better value from the tokenized asset. This is one way how tokenization on the blockchain can help liquidity.
- Transparency and Accountability
Security token has the capabilities to embed the rights and legal responsibilities of token holders directly into the token. Essentially enforcing a smart contract. All this while the security token would have a record of token ownership. This will help in improving transparency in transactions. Tokenized assets could offer a clear impression of the ownership and who you are dealing with in a tokenized asset transaction. These features similarly resemble the blockchain feature.
- Better Accessibility for Investment Options
The lower threshold of investment amount and time taken to be tokenized could greatly reduce the barriers for entry of new participants in asset management and trading. Divisibility of the tokens, also known as fractionalization, implies that investors could purchase tokens representing smaller shares of the tokenized assets. With orders being cheaper and easier, there is less of a need to worry about high minimum investment amounts. The increased liquidity of security tokens can lower down the minimum investment period and investors could easily exchange their tokens on the desired secondary markets that is available globally at all times.
- Lower Costs and Faster Transactions
One of the most important benefits of tokenization is the possibility of lowering transaction cost as well as increased speed of transaction. Smart contracts that are activated during transactions would help automate specific parts of the process. These smart contracts serve as a software algorithm that integrates into a blockchain with actions triggered on the basis of specific parameters that have been pre-defined. This automation process is helpful in lowering the overall administrative cost, especially with buying and selling. The lesser intermediaries there are, the lower the fees and the faster the transaction.
Different asset classes call for different tokenizing types. Major portion of the future economy would focus on tokenization of digital as well as physical assets.There is no limit to the types of assets that can be tokenized.
Sources: Masterthecrypto, 101 Blockchains