Over the last few years, asset tokenization has been a growing trend both inside the realm of crypto and far outside of it. So what exactly is tokenization? How does it work? Are there any successful cases of real-world asset tokenization to date? Let’s sort it all out.
Tokenize this, tokenize that — why all the buzz?
First, let’s step back a little. Picture a millennial in their mid 20’s making their first steps in the world of investing: their goal is to achieve long-term financial security and start receiving a steady income from their investments in the nearest possible future. Say they also believe the next global financial crisis is just around the corner — that’s why they’re looking for an asset regarded as a good hedge against inflation. What asset would they most likely prefer to invest in?
As far as long-term investments go, the answer would be residential real estate — after all, in terms of real returns, it has proven to be the best long-run investment over the course of modern history. Steady cash flow in the form of rental income, asset appreciation, financial security — if you purchase a piece of real estate in a rapidly developing urban area, it’s all there. There’s only one problem: there’s no way a beginner investor in his 20’s, can afford buying a house — it’s far too expensive. What a bummer.
Now imagine a boomer landlord in possession of a villa on the outskirts of Bordeaux. The villa is worth €1 million at the lowest estimate. He desperately needs half a million, and he needs it real quick. He would very much welcome the opportunity to sell his precious piece of real estate, but he won’t manage to swing such a deal in time — it would take months to find a customer willing to purchase such a costly asset. A bummer indeed.
But what if he could sell only a half of his €1 million villa? What if the aforementioned millennial investor could purchase only a fraction — just several square meters — of this same villa? What if there were 50 investors from all around the world, each looking to purchase several square meters for €10 000? This way, the landlord gets his half a million, whereas investors get the opportunity to invest in real estate, which they previously could not. Wouldn’t that be awesome?
That’s where tokenization comes into play. See, when you tokenize an asset, it becomes fractionalized, meaning that you can divide it into smaller ownership stakes. By tokenizing a given asset, you convert your ownership rights to it into a digital token — or multiple tokens. Now the landlord can convert the ownership rights to his €1 million villa into 100 tokens and sell half of these tokens to 50 investors for half a million. There could be one bummed boomer and 50 bummed millennials, but, thanks to tokenization, everyone is a winner and pretty much happy.
So how exactly does this work?
Broadly speaking, asset tokenization works similar to securitization: by securitizing an asset, you transform your ownership of it into a security, whereas by tokenizing an asset, you transform your ownership rights into a tokenized security (aka smart security, aka security token) — the digital representation of this asset that lives on a blockchain. After your smart securities are moved on the blockchain and all related legal work is conducted, they can be offered to investors and traded on exchanges similar to traditional securities.
As you might see, securitization and tokenization are almost identical conceptually; the real difference lies in the technology — and this is where the benefits of asset tokenization are coming from.
First, tokenization brings liquidity to previously illiquid assets. Take the previous example with real estate, that Bordeaux villa: even though it contains so much value, you can’t quickly convert this value into money — the asset’s illiquid. Tokenization allows to divide it into small stakes and sell them one by one, instead of tediously trying to sell the entire thing. With tokenization, assets such as real estate — those that have been considered illiquid for centuries — can be easily traded. You can’t overstate how disruptive this change is.
Second, asset tokenization increases cost-efficiency. Putting an asset on blockchain allows for disintermediation: when purchasing a share of a company on the stock market, you’re also paying for the services provided by brokers, transfer agents, registrars, clearing firms and other middlemen that facilitate the whole process. When it comes to tokenized assets, most of these middlemen are removed — their functions are executed by smart contracts that facilitate the token. Consequently, both asset owners’ and investors’ costs are significantly reduced.
Tokenization removes territorial and temporal barriers for investors: no matter where you live, you can now purchase any asset on the other side of the globe right from your bed at 4 AM. This is not the case for traditional assets.
The fact that your asset is now stored on blockchain also means increased transparency: blockchain is an immutable public ledger — once an investor purchases a token, the evidence of their ownership can not be erased no matter what. Those who for some reason don’t trust people from Wall Street can finally sleep well.
OK, tokenization is potentially a revolutionary thing. But are there any successful cases of asset tokenization?
Yep. Lots of them. Let’s name some of the most notable ones.
For starters, there’s BitCar — a blockchain-based platform that offers investors fractional ownership of exotic cars: their solution allows vroom-vroom aficionados all around the world to purchase stakes in rides like Bugatti, Lamborghini or Ferrari. The fractional ownership of assets is represented by CAR tokens traded on BitCar’s peer-to-peer trading facility. Another platform that provides investors with an opportunity to invest in tokenized blue-chip cars is Curio.
As far as fine art tokenization goes, there’s Maescenas — an online marketplace where art lovers can buy shares in tokenized paintings by famous artists. In 2018 they became the first company to sell 31.5% of a tokenized piece of art — Warhol’s 14 Small Electric Chairs (1980). The painting was sold for $1.7m; the company accepted payments in BTC and ETH as well as Maecenas’s own ART token. You can’t name a more aesthetically-pleasing application of blockchain technology than this.
The most exciting example of tokenization in sports would probably be the recent case of NBA player Spencer Dinwiddie, who recently attempted to tokenize his contract. Investors were able to purchase tokenized shares that represented a piece of Dinwiddie’s contract and receive dividends directly out of his bi-weekly paycheck. Unfortunately for Dinwiddie and his investors, NBA quicky shot his contract down.
Crazy as it might sound, soon literally anybody could own a fraction of a Dali painting. You could purchase several square meters of a 16th- century castle or a stake in the lengthiest yacht in the world. Gosh, you could even receive dividends from your favorite athlete’s earnings! Name basically any asset that comes to your mind — you could own a fraction of it. No more investment barriers, no more assets available only to the big cats — anyone could invest in anything. All of this — by virtue of tokenization.
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