Asset Tokenization From A to Z: Explanation, Benefits, Limitations, and Real-Life Use Cases
5 March, 2021
Back in 2009, when Bitcoin was first launched, there weren't many people who truly believed in and invested in the new cryptocurrency. Yet here we are, over a decade later, and the whole world is breathlessly watching the growth of cryptocurrency, with many people regretting not buying a few Bitcoins years earlier. The next blockchain-related phenomenon that is about to blow up and transform the way we own and trade real things is asset tokenization.
Although blockchain was first created to enable the existence of cryptocurrency, the possibilities of this technology have gone much further. Blockchain is disrupting a lot of industries these days and isn’t showing any signs of stopping. Blockchain technology now enables the tokenization of any real physical asset and allows its owners to present it in digital form.
But what is behind the tokenization of assets and is it really possible to tokenize literally anything? Read on to find out the answers to these questions and discover the opportunities associated with issuing blockchain tokens backed by real assets.
What is asset tokenization?
Asset tokenization is a way of digitizing tangible and intangible assets and converting them into tokens, which are then stored on the blockchain. One asset is not generally equal to one token: assets are usually broken down into smaller parts, which form many tokens.
Once the owner has tokenized their assets and they have entered the digital world, it becomes possible to store and trade them fractionally or completely, as well as transfer them to other owners.
Those who have heard about asset tokenization or searched for the term on Google before may have heard something about STO as well. Indeed, STO (short for Security Token Offering), has a lot to do with blockchain technology and tokenization.
The connection between these three concepts is quite simple. Everything starts with blockchain – the technology makes it possible to create and store tokens. Then an asset owner needs to choose a special STO platform that enables them to digitize their assets and turn them into the number of tokens they need. After that, they can launch their own STO campaign, and anyone in the world can buy those tokens, thereby investing in the asset holder’s business.
In recent years, more and more asset owners, startups, and investors are discovering tokenization opportunities. As the popularity of asset tokenization grows, so does the size of this market. According to Plutoneo, for example, in Europe alone, the size of the tokenized asset market is projected at €1.4 trillion in 2024.
Asset tokenization is obviously about to become the next global trend. Just like Bitcoin, which changed the financial world in the 2010s and made cryptocurrencies the new norm, asset tokenization has the potential to be a new transformative force in the 2020s.
What are the benefits of asset tokenization?
You may be thinking that the concept of digitalization is nothing new, but the biggest difference between conventional digitalization and asset tokenization is the use of blockchain technology. Blockchain is precisely what delivers the main benefits of tokenization. Let’s take a closer look at some of them.
- Greater accessibility and liquidity of assets
Blockchain technology provides a decentralized system and allows anyone from anywhere in the world to tokenize their assets and sell them at any time. Moreover, the list of assets can be extremely broad and it even includes rather illiquid assets such as real estate, antiques, artworks, private company interests, cars, etc. Blockchain thus removes numerous barriers to investment and provides greater liquidity.
The public blockchain by default implies transparency: all transactions taking place on the blockchain are available to all its participants. This is important for any user, as they can trace the entire history of all actions with a particular asset, verify its origin, and see how its ownership has been transferred.
All data stored on the blockchain is immutable. Anyone interested in creating, selling, or buying tokens can rest assured that the asset information and transaction records are accurate, as they are verified and cannot be changed once recorded onto the blockchain.
- Fractional ownership
The owner of the asset can split it into as many parts as they need. The ability to split assets also grants the ability to partially own them. This attracts a large number of investors and provides, again, greater asset liquidity.
- Cost savings
Blockchain technology allows the owner of the asset and its buyer to contact each other directly, thus eliminating the involvement of intermediaries. This significantly reduces the costs that would normally be spent on third-party services.
Moreover, it usually may take hours or even days to transfer assets and conduct related transactions, but thanks to the blockchain this process can now be completed within a few seconds.
Risks and challenges associated with asset tokenization
Despite the ever-growing interest in blockchain asset tokenization, the world is still being slow to adapt to this phenomenon. Let’s consider in more detail what challenges and barriers stand in the way of tokenization and how they can be overcome in the future.
Most of the obstacles are related to regulatory issues and current technology constraints. Blockchain itself has a borderless nature and offers many opportunities for businesses and individuals. At the same time, countries haven’t yet developed common regulations that would apply in different jurisdictions.
However, this is a completely normal situation faced by any new technology or global trend, and there is always a way out. Politicians, regulators, and even developers need to join forces and begin work on defining the legal framework and drafting global laws and regulations regarding tokenized assets and the activities associated with them.
Not immune from attacks
Like any other technology, blockchain is unfortunately often targeted by hackers. For example, during 2020, hackers launched 122 cyberattacks and stole $3.78 billion.
Though the statistics are not the most positive, we have good news – there is a downward trend in the number of cyberattacks on platforms, wallets, and other services running on the blockchain. In 2019, there were 133 attacks targeting various applications, so in 2020 the number of attacks decreased by 8%. While this drop is not very significant, it still reflects the increasing security of the technology and demonstrates the efforts made by developers to protect end-users from the loss of their information, money, and assets.
As you can see, these obstacles can all be overcome in due course. In the meantime, the benefits of blockchain technology and the opportunities offered by asset tokenization are still worth considering and exploiting in the near future.
Real-world applications of asset tokenization by industry
Despite some of the limitations described above, the world is still gradually being tokenized. Tokenization has already entered many industries, from the financial sector and cryptocurrency transactions to real estate, precious metals, and even sports and music. Let’s find out what asset tokenization is doing within each industry.
Tokenization in finance
Many financial market players are gradually introducing blockchain-based financial assets into their work. It is vital for investment banks, for example, to study asset tokenization and present it to their clients so that their banking business thrives and clients can discover new avenues for investment. Stock markets and asset managers should keep up with this trend, too.
Equity tokens and crowdfunding
ESMA concluded that, in terms of regulatory status, equity tokens can be considered financial instruments and treated as securities. Equity tokens function as a traditional share, that is, the owners literally possess a certain percentage of the total enterprise and can receive a portion of its profits and participate in making decisions about the company’s future.
For this investment model to work, first of all, investors should have free access to reliable information about STOs. It’s also important that knowledgeable broker-dealers should be involved: they can identify and sell securities to qualified investors. Finally, there must be crowdfunding platforms, complying with KYC/AML requirements, that can serve investors.
There are many examples of such platforms, and here are just a few of them:
KickICO is an online reward and donation crowdfunding platform built on Ethereum smart contracts with its own KickCoin token. This solution allows you to buy tokens for innovative start-up projects. Besides, the platform received the title of ICO of the Year after its launch in 2017.
TaoDust provides an equity crowdfunding platform backed by the blockchain. Investors can invest in Euros, USD, BTC, and ETH, and enjoy low transaction fees.
This type of investment is associated with high risk, so developers have the job of providing the most advanced solutions that will help both promising startups and investors who are willing to take risks.
Smart Valor, for instance, launched the VALOR platform, which serves as a decentralized marketplace for tokenized alternative investments such as venture capital and hedge funds. In fact, the opportunities offered by this platform go beyond this functionality as users can also exchange cryptocurrencies and manage their digital asset portfolios.
For those interested in the stocks of companies such as Tesla, Google, and even Netflix, there is good news – Bittrex Global, a US-based digital asset exchange, now supports and offers “tokenized stocks”. Using this service, customers can purchase the shares of many world-famous companies for cryptocurrency or fiat money. Moreover, unlike the regular stock market, you can trade tokenized shares 24/7 from anywhere in the world.
Tokenization in real estate
Real estate tokenization is unlocking many new investment opportunities. Since blockchain technology eliminates multiple intermediaries, it has become easier for buyers and sellers to interact with each other. In addition, fractional ownership is still possible in this industry. How does it work? Let’s say you and a friend (or any other random person) are buying a summer house. After the purchase, both of you are the owners and you can agree on the times and conditions for using the house.
And now let’s look closer at real facts and examples.
- Templum Markets sold a security token representing the St. Regis Aspen Resort stock, accepting USD, Bitcoin, and Ethereum.
By buying Aspen Coins through a regulated broker, accredited investors can now indirectly own the resort’s shares.
- A company specializing in asset tokenization called Liquefy partnered with a consortium of Gulf families to tokenize assets worth over $1 billion.
The first tokenization target will be a $600 million luxury hotel located in London’s Mayfair. Security tokens that represent the “economic interests” of the hotel will be issued.
- One more real-world case – the AnnA villa near Paris became the first piece of real estate in France to be sold through a blockchain transaction.
The villa, whose value is estimated at €6.5 million, was sold in three stages. First, the ownership of the building was transferred to the joint-stock company SAPEB AnnA. Then the property was divided into 10 Ethereum-based tokens and the tokens were distributed among the new owners. The result was that each of the tokens was split once again, into 100,000 units worth €6.50 each.
These examples show that real estate tokenization is a successfully working mechanism, which significantly increases the liquidity of real estate and opens the market to a larger number of investors.
Tokenization of precious metals and natural resources
The interest of traders and investors in precious metals and natural resources has remained unchanged for many centuries. The 21st century is no exception, but the form of trading is changing due to the introduction of asset tokenization.
What could be more attractive than investing in gold? It comes as no surprise that blockchain can help with it, too.
The tokenized gold that exists on the blockchain has many benefits. It is important to understand that investors don’t just buy tokens, but purchase the rights to a real asset that is stored in secure vaults. Another advantage is that unnecessary documentation and red tape can be eliminated, as well as the participation of third parties who may not always be reliable.
In addition to that, trading tokenized gold is just as easy as trading cryptocurrencies. In fact, many crypto coins have been created that are backed by real physical gold, and their value is in line with current gold prices. DGX, PMGT, XAUt, and Meld Gold are just a few of them.
These days, Latin America is also into the idea of tokenizing gold. As an example, Chilean distributor Aurica Metales became the first gold broker in Latin America to offer digital tokens backed by real gold. The company teamed up with the British firm Aurus Technologies Ltd. and launched a gold-backed token called AurusGOLD (AWG). Each token represents full ownership and can be exchanged for 1 gram of 99.99% gold from LBMA accredited refineries.
Silver tokenization works the same way as gold, but silver is more volatile, so traders can buy silver coins and earn off their volatility. Among the most popular silver-backed tokens are SilverCoin (SVC), Silverlink (LKNS), and SilverTokens (SLVT).
Although the tokenization of oil and gas still sounds unbelievable, this may become a reality very soon because blockchain provides all the necessary tools and infrastructure to digitize natural resources and issue resource-backed tokens and cryptocurrencies.
Tokenization of artworks
When we talk about fine art, we often associate it with world-famous artists, museums, auctions, and, of course, extremely high prices for paintings sold at auction. But what if we told you that blockchain has the capacity to change this perception? Blockchain can make art more accessible not only to art lovers but to artists themselves because they can now tokenize their works and sell them around the world without intermediaries.
Let’s take a look at several successful asset tokenization platforms dedicated to fine art.
Monart represents an innovative international art community and marketplace and invites investors to buy shares in great artwork collections to capitalize on the growth of the art market. The platform offers its own token called MART. This art cryptocurrency is based on the standard public Ethereum blockchain with an audited ERC-20 token.
Maecenas is an art investment platform that allows artists to tokenize their masterpieces and build their own portfolios. In addition, Maecenas enables any art lover or investor to acquire fractional interests in works of art using blockchain technology.
One of the more recent cases that made headlines was the successful tokenization of the first multi-million dollar work of art. It’s a painting by Andy Warhol named “14 Small Electric Chairs (1980)”. To take part in the auction, 100 participants were selected from more than 800 registrations from 56 countries.
The main purpose of the beta auction was to test the Dutch auction process and generally check how the artwork tokenization and blockchain technology work. The beta auction raised $1.7 million for 31.5% of the artwork, given that the painting is valued at $5.6 million, so the main goal was successfully achieved.
In addition, during the auction period, 36 bids were submitted, of which 34 were successful, with a maximum bid of $6.5 million.
Tokenization in sport and entertainment
Tokenizing sports stars, musicians, soccer teams … sounds ridiculous, doesn’t it? In fact, all this is not just possible but is already happening.
While the COVID-19 pandemic has affected many industries including sports, the Spectator Sports Global Market Report 2021 still predicts that the global entertainment sports market will grow from $108.48 billion in 2020 to $132.6 billion in 2021 at a CAGR of 22.2%.
When everyone, including sports teams and fans, starts getting back to normal life, market size may start to grow rapidly, and tokenization will have its part to play too: companies are already developing and introducing new solutions for fans, and athletes are exploring tokenization opportunities as well.
For example, in 2020 basketball star Spencer Dinwiddie tokenized part of his $34-million contract with the American professional basketball team Brooklyn Nets, creating a unique tokenized investment opportunity. This was done through the Dream Fan Shares platform based on the Ethereum blockchain.
Spanish club Barcelona has also recently joined the wave of blockchain adoption. The club invited fans to buy 600,000 tokens based on a Barcelona cryptocurrency, worth €2 each. Owning these tokens would give Barça fans exclusive voting rights in club polls and the chance to win awards, including meeting their favorite players. In the end, the Spanish champions earned €1.2 million in less than two hours and increased fan engagement. Seems everyone’s happy, right?
Music artists aren’t standing aside either. Blockchain and asset tokenization can help independent musicians discover new funding opportunities and raise money to develop new projects and record albums.
An artist can sell their tokens directly to fans. Thanks to smart contracts, musicians can receive automatic and instant payments for songs and recordings, instead of having to wait for a long time for their hard work to be rewarded.
The most recent examples of entertainment tokenization are as follows: rapper Redfoo, one of the performers of the hit “Party Rock Anthem” signed a contract with TokenStars. This platform aims to provide transparent interactions between celebrities, fans, brands, and advertisers. Lothar Matthaus, Vinny Lingham, Tommy Haas, and several other celebrities have also joined the project.
Tokenization for better ecology
After the description of athlete tokenization, it might be difficult to surprise you with something even more amazing, but we will try. Major environmental platforms and initiatives are starting to literally tokenize nature in order to save it. Let’s see how it works in some real-world cases.
Reducing environmental impact
Moss.Earth, a Brazilian environmental organization dedicated to developing innovative approaches for a sustainable environment, is working hard to combat climate change. In 2020 the platform suggested doing this by tokenizing carbon credits which are now helping to create a global environmental market. Moss has introduced its own MCO2 tokens and put them up for sale.
Through this project, Moss has made a direct contribution to offsetting the emission of 2 million tonnes of greenhouse gases. In just the first 8 months since the platform’s launch, Moss has bought and sold over 900,000 tonnes of CO2. The campaign that involves the MCO2 token helped pay rewards for the conservation of nearly 1 million hectares of forest.
Another tokenization example is the introduction of so-called impact tokens. They are issued with the specific purpose of attracting investment for projects with positive social and environmental impacts. Plastic Bank, for instance, is an asset tokenization solution that is meant to make our world a better place.
The approach of this Canadian startup is not only to make the planet cleaner but also to help people on low incomes earn a living. Their idea works as follows: collectors are recruited to collect plastic in places where there are problems recycling it. The plastic waste is then exchanged at local collection centers for cash, digital tokens, or vouchers for essential items.
To date, company employees have collected 31,124,187 pounds of plastic, the equivalent of over 500 billion plastic straws.
The goals of this kind of tokenization are slightly different from those described above. This type of asset tokenization is not designed to gain access to a market and obtain ownership rights to an asset, but rather to make a profit here and now.
We often say that education is an investment in our future. Self-tokenization is borne of a very similar concept. With this, people are looking for investors for themselves. So investors are investing now to benefit from the successful work of a particular person in the future.
So what is it like to tokenize yourself? There are a bunch of people who are already experimenting with this.
- Alex Masmej
In April 2020, Alex Masmej, a 23-year-old guy from France, sold $1 million worth of $ALEX personal tokens on Ethereum. In total, he managed to collect $20,000. The young man stated that holders of $ALEX tokens will receive a distribution of 15% of his income over the next 3 years, and the money will be paid quarterly.
Alex clarified that he will spend the collected $20,000 on moving to San Francisco where he’s planning to launch a startup in the field of DeFi.
- Matthew Vernon
Matthew Vernon, or dApp Boi, is a talented designer who is obviously a big fan of the crypto world and blockchain technology. Matthew created BOI tokens worth $100 representing 100 hours of his time. These tokens can be traded for UI/UX design, prototyping, brand design, or anything else related to Matthew’s professional career.
As you can see, young people have a particularly strong belief in the power of blockchain and the future of this technology, and hopefully, they’ll be able to reap some well-deserved benefits.
Is the asset tokenization process difficult and time-consuming?
To join the token economy, that is, to successfully tokenize your own assets and provide access to them for a pool of investors, you need to learn about the asset tokenization process. If you are new to the crypto world and are taking your first steps in tokenization, you will need some time to understand the whole process. But we will try to explain the most important things briefly and clearly.
Asset tokenization in 7 steps
Step 1. Choosing an asset
The very first thing you need to do is to decide on what exactly you are going to tokenize. It is better to choose an asset that already has a significant market because you will know the price range and will be able to correctly set the prices for tokens. If your asset is not very popular and it is difficult to evaluate it yourself, you should request a valuation from an accounting or auditing company.
Step 2. Developing a business model and strategy
You also need to be clear about your future business model. To design it, you have to think about sources of income and financing details and decide where the client base will come from.
Step 3. Creating the platform
This stage is about how your idea is embodied in a mechanism that will work according to your business plan. Here you have the choice to either create the platform yourself (you need to have coding skills and be familiar with blockchain technology) or delegate this task to professional blockchain developers.
Step 4. Learning about regulations in your jurisdiction
This step can be relatively difficult as it is necessary to clearly understand the laws relating to digital assets and blockchain technology and strictly comply with them. It is best to contact an experienced legal advisor and ask for a professional consultation.
Step 5. Publishing a whitepaper
Next, you write and publish a whitepaper in which you briefly describe why your token has been created and how potential buyers can benefit from purchasing your asset-backed tokens. Include an analysis of your work and the conclusions that you came to when preparing your project.
Step 6. Attracting investors
After publishing the whitepaper and testing your new platform, you can start working on attracting potential investors. This is where your marketing skills come into play.
Step 7. Finishing work on the platform
With the financial backing of investors, you can continue to improve your platform and get it ready for production.
You now have a complete platform for exchanging real-world assets and turning them into tokens. But don’t stop there. No matter how ideal the platform may seem to you, it can always be improved.
Tokenization is already playing a transformative role in asset management, slowly but surely entering numerous markets, democratizing them, and making them safer and more equitable. Asset tokenization is no longer perceived as a temporary phenomenon as companies, startups, and individuals keep finding new objects to tokenize.
Nowadays we can tokenize literally anything: works of art, gold, silver, cars, houses, carbon credits, football teams, music producers, and even ourselves! However, the tokenization process itself may seem complicated, especially for those who are not yet familiar with the digital crypto world.
PixelPlex is here to help you out! Our engineering team has years of experience developing various blockchain applications, cryptocurrency wallets, and asset tokenization platforms. Specifically on the latter, our company has designed an STO platform that can digitize any type of asset, providing the infrastructure and complete ecosystem needed to run a Security Token Offering campaign.
Feel free to contact us, and we’ll tell you more about this solution, or create a brand new one! We’ll make sure that your new application brings the maximum benefit to your business.
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