Blockchain asset tokenization: what is it, how it works, potential and use cases. Asset tokenization or blockchain-enabled tokenized assets promises to revolutionize how assets are managed and transferred in finance, real estate, investments, and more sectors, opening the door to an open, transparent, and innovative digital economic ecosystem.
In essence, tokenization opens the door to a new way of interacting with assets, with new opportunities for investors and democratizing access to physical and digital assets in an unprecedented way thanks to blockchain.
Among its different use cases, asset tokenization is one of the most powerful for blockchain technology. This article will explain everything you need to know about asset tokenization with blockchain: what it is, how it works, its benefits, potential, and more.
- 1 What is the tokenization of assets?
- 2 Tokenized assets: How does it work?
- 3 Types of Tokens
- 4 Real World Assets (RWA) and asset tokenization
- 5 Benefits of asset tokenization
- 5.1 Capital management efficiency
- 5.2 Transparency
- 5.3 Reduced investment and operational costs
- 5.4 Increased liquidity for illiquid assets
- 5.5 Fractionation
- 5.6 Transactional efficiency and process automation
- 5.7 Increased operational capacity
- 5.8 Security
- 5.9 Accessibility and fewer geographical restrictions
- 6 What assets can you tokenize? Use cases and examples.
- 7 Future of asset tokenization with blockchain
What is the tokenization of assets?
Asset tokenization is the process of creating a full or partial digital representation of an asset, both physical and digital, in a digital token stored within a public or private blockchain, which has all the information, characteristics, and attributes related to the underlying asset, through the use of Smart Contracts.
Thus, tokenization can involve tangible assets, such as precious metals, automobiles, commodities, works of art, documents, agricultural products, or real estate; assets with financial value, such as money, stocks, funds, or bonds. Intangible assets include patents, services, carbon credits, or intellectual property rights.
In addition, it is also possible to tokenize assets native to the digital world, such as digital art, assets linked to video games, virtual worlds, and other types of digital assets.
Tokenized assets: How does it work?
Tokenization begins with converting an asset’s rights into a smart contract, where the terms and conditions of the tokenized asset are defined, registered, and secured on a blockchain.
This conversion can be total, i.e., fully representing an asset (1:1), or partial or fractional, where the digital token represents a set fraction of the ownership of the asset.
Example: Imagine that a person owns a real estate property worth $500,000. This person decides to tokenize the property, i.e., creates a digital token representing the property’s total value. In this case, the digital token would equal the property’s entire value, i.e., $500,000. The person can then sell this digital token to someone who wants to acquire the property for that value. Imagine that the person wants to sell only a % of the property, say 20%. In this case, he could create five digital tokens, each valued at $100,000 (20% of $500,000). Each digital token would represent a portion or fraction of the total value of the property.
Once you establish the Smart Contract, digital tokens are issued, representing ownership or rights to the asset. People can buy, sell, or exchange them on digital asset exchange platforms, banks, or any platform enabled for asset tokenization.
In summary and very general terms, the step-by-step would be:
- You chose the physical or digital, tangible or intangible asset to tokenize.
- Configuration of tokens and smart contracts
- Choice of blockchain, public or private
- Issuance and custody of tokenized assets
- Distribution of tokens through trading-enabled platforms.
- Monitor, reporting, and tracking of tokenized assets.
Note that this process may vary depending on the tokenization platform and the tokenized assets. In the case of physical and tangible assets, the process must have an audit to verify the off-chain assets -i.e., the underlying asset – to ensure the backing of the assets on-chain in real time.
Types of Tokens
Within asset tokenization, there are different types of digital tokens that you should be aware of:
Utility tokens represent delayed (future) access to a product or service provided by a platform or company. Essentially, they do not grant ownership rights but function to allow access to specific tasks on a platform. A classic example of a utility token is Ether (ETH), which people use to interact with its infrastructure Smart Contracts and Dapps and pay its gas rates.
Equity tokens: Equity tokens are a subset of security tokens that imply ownership of an asset, such as shares in a company. In other words, owning an equity token is similar to owning shares in a company. For example, a startup could tokenize its capital by issuing equity tokens.
Security tokens: Security tokens, or security tokens, represent ownership of a real, underlying financial or investment asset, such as stocks, bonds, mutual funds, and real estate, among others. Unlike utility tokens, they provide ownership rights and, depending on the context, rights to dividends or interest. For example, you can tokenize a real estate asset by issuing a security token representing ownership of a portion of that asset.
Real World Assets (RWA) and asset tokenization
Real World Assets (RWA) are tangible, real-world assets you can tokenize via blockchain for benefits such as increased liquidity, security, and operational efficiency.RWAs encompass many physical assets such as real estate, commodities, infrastructure, art, intellectual property, inventories, machinery, invoices, etc.
Tokenizing these assets means issuing digital tokens representing fractional ownership of the assets, enabling them a new world of possibilities in markets based on traditional finance and decentralized finance or DeFi.
Benefits of asset tokenization
Asset tokenization offers different benefits for both investors and issuing institutions. Some of these include:
Capital management efficiency
Both investors and companies can manage their capital immediately and efficiently, thus maximizing the value of assets.
All token and transaction information is immutably recorded on the blockchain, providing greater transparency and making it visible to all stakeholders.
Reduced investment and operational costs
Asset tokenization reduces operational and investment costs by automating manual processes and eliminating intermediaries, hefty commissions, or bureaucracy-laden processes.
Increased liquidity for illiquid assets
Illiquid assets such as art or real estate become more liquid by tokenizing them, breaking down barriers for more limited markets.
A beneficial feature of asset tokenization is that assets that are difficult to split or have a high value, such as real estate or artwork, can be separated. The possibility of dividing an asset through digital representations in tokens opens up the opportunity for investment, access, and participation to more people.
Transactional efficiency and process automation
The use of blockchain technology accelerates and simplifies the transfer of ownership of tokenized assets. In addition, smart contracts enable automating processes such as dividend distribution, interest payments, or fulfilling contractual conditions.
Increased operational capacity
Asset tokenization enables a system that allows for an optimized way of creating, issuing, and managing traditional assets, thus reducing frictions and limitations due to its 24/7/365 availability.
Thanks to blockchain and Smart Contracts, the preservation and registration of tokenized assets are facilitated, ensuring the integrity of information and reducing the risk of fraud, providing confidence to investors, and enabling the auditing of transactions. Tokenized assets cannot be forged or duplicated, and a blockchain protects transactions and data integrity.
Accessibility and fewer geographical restrictions
Asset tokenization can also help democratize access to investment opportunities, allowing people worldwide to participate in previously inaccessible markets.
What assets can you tokenize? Use cases and examples.
The potential and benefits are vast, but which assets can you tokenize? In essence, asset tokenization stands out for its versatility, which allows it to stand out as one of its major attractions. Several use cases and examples of asset tokenization with blockchain demonstrate its potential to revolutionize different sectors and industries and its integration and real utility within them.
They use different forms of tokenization with the various digital tokens, such as non-fungible tokens or NFT. We present you some examples of tokenized assets:
- Money (stablecoins and CBDC)
- Bank deposits
- Digital tokens
- Buildings, apartments, and houses
- Airline tickets
- Physical and digital art
- Hedge funds
- Equity issuance
- Agricultural products
- Energy Assets
- Commodities (grains, soybeans, wheat, and corn)
- Genomic profiling
- Songs and music albums
- Memberships and subscriptions
- Loyalty programs
- Sports teams (Fan Tokens)
- Social media profiles
- Real estate properties
- Renewable energy projects
- Diplomas, trophies and medals
Future of asset tokenization with blockchain
What does a future with asset tokenization at the epicenter look like? The destiny of asset tokenization is promising, as it can potentially transform how businesses and individuals manage their assets. For example, the CEO of business giant BlackRock, Larry Fink, envisions a tokenized future with optimism.
For the asset management industry, the operational potential of some of the underlying technologies in the digital asset space could have exciting applications. In particular, tokenizing asset classes promises to improve efficiency opportunities in capital markets, shortening value chains and improving costs and access for investors. At BlackRock, we continue to explore the digital asset ecosystem, especially in areas relevant to our clients, such as permissioned blockchain and equity and bond tokenization.Letter to investors sent by Larry Fink, CEO of BlackRock.
The tokenization application can mean a before and after for many industries, which, hand in hand with digitization, allows access and interoperability to traditional and new markets that emerge in the future. In this sense, estimates and projections leave big numbers as an opportunity for tokenized assets. For example, according to Bernstein, with the momentum of stablecoins, CBDCs, private market funds, securities, and real estate, asset tokenization has a $5 trillion opportunity by 2030.
Analysts at Citigroup believe that $4 trillion to $5 trillion in tokenized digital securities could be issued by 2030. As blockchain technology becomes more widely adopted, mature, and regulated, we will likely see an increase in tokenized assets and greater investor participation in these markets. For this, the blockchain industry and technology will have to overcome different technical, regulatory, and trust challenges to establish itself as the ideal infrastructure for asset tokenization in the future.
Mastercard will test asset tokenization with blockchain technology through its Multi-Token Network. At the moment, companies, institutions, banks, governments, and global entities are exploring the world of blockchain tokenization as a tool based on technology and digitization, with the ability to facilitate the way assets are managed and transferred in a more efficient and accessible way.