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What is Blockchain Tokenization?
Tokenization converts the rights or ownership of a real-world asset into a digital representation (token) on the Blockchain.Asset tokenization is expected to reach $16 trillion by 2030.
1. What is Tokenization and what problem does it solve?
Tokenization converts the rights or ownership of a real-world asset into a digital representation (token) on the Blockchain.
Tokenization solves the problem of asset illiquidity.
Many illiquid assets make up a significant portion of global wealth.
Examples: Art & Collectibles, Carbon Credits, Intellectual Property Licenses, Luxury Liquors, Private Equity & Venture Capital, Real Estate, Stressed Assets, etc.
These assets are often traded at a discount compared to liquid assets due to various factors:
High stock-to-flow ratio
Reduced trading volumes
Less efficient price discovery
These assets are illiquid because of many reasons:
High cost, which makes them unaffordable for most investors.
Inability to divide the asset's utility.
Lack of information available to retail and high net-worth investors. Shortage of expert wealth managers.
Exclusivity and limited access to these asset classes restrict their liquidity to a select group of affluent investors and institutions. Regulatory challenges such as restrictions on certain investments.
Stringent rules for foreign investors in some regions.
Complicated processes for gaining access to these illiquid assets, such as multiple Know Your Customer (KYC) and payment setups without a unified platform.
The absence of established technological solutions to enhance liquidity in these assets presents a significant challenge.
Boston Consulting Group (BCG) estimates that
asset tokenization will reach $16 trillion by 2030.
3. Tokenization is a 4-step process
Tokenization is a 4-step process: Authentication, Provenance, Fractionalization, and Trading.
Tokenization of Assets on the Blockchain
Step 1: Authentication
Authentication ensures the legitimacy of the asset being tokenized.
Verification of the Asset: Depending on the asset type, experts ensure its legitimacy e.g. Artwork requires expert validation, while real estate relies on property title verifications.
Digital Identity Creation: A unique digital identity for the asset is crafted.
Immutable Recording: The asset's digital identity is permanently stored on the blockchain, ensuring a verifiable authentication trail.
Step 2: Provenance
Provenance is the detailed history of the asset—its origins, previous ownership, significant alterations, and other critical events. For many assets, like artwork or collectibles, provenance adds immense value and is a measure of authenticity and trust.
History Documentation: Each significant event or change in the asset's life is documented. For artworks, this might include exhibitions, restorations, or sales.
Integration with Token: The asset's provenance is encoded into the token, ensuring that its entire history is always linked with it.
Immutable Recording: Once recorded on the blockchain, the asset's provenance cannot be altered, ensuring a permanent, tamper-proof record. This offers potential buyers or stakeholders greater trust in the asset's history.
Step 3: Fractionalization
Fractionalization democratizes asset ownership by breaking the asset's value into smaller, purchasable tokens.
Dividing the Asset: The asset's total value is fractionalized into individual tokens, each representing a portion of the asset's worth.
Issuance of Tokens: These tokens, each bearing a share of the asset's value and rights, are issued on the blockchain.
Legal and Regulatory Compliance: Ensuring token issuance and management adhere to legal standards is crucial.
Step 4: Trading
Trading boosts the asset's liquidity.
Creation of a Marketplace: A platform, be it a decentralized exchange or a bespoke platform, is necessary for trading asset-backed tokens.
Peer-to-Peer Transactions: Direct transactions via blockchain bypass intermediaries, reducing cost and transaction speed.
Price Discovery and Liquidity: The easily traded tokens enable better price discovery and enhanced asset liquidity.
Redemption and Rights Execution: Token holders can exercise their token-associated rights, such as benefiting from dividends or claiming a portion of the physical asset.
4. Asset classes best suited for Tokenization
The Asset Classes best suited for Tokenization are:
Art & Collectibles
Intellectual Property Licenses
Private Equity & Venture Capital