What is tokenization? Tokenization is the process of transforming the properties and rights of particular assets into a digital form. Through tokenization, you can transform indivisible assets into forms of digital tokens.
For example, if you want to sell the famous Mona Lisa painting. You would need to find a seller who wants to shell out millions of dollars for this. Obviously, this reduces the number of people who have enough worthy cash to buy it. But if we symbolize painting. Then we can have multiple people to share ownership of that painting with.
Tokenization is therefore a solution that converts ownership of an asset into a digital token. For example, the Mona Lisa worth around $900 million can be converted into 100 million tokens worth $9 each (the number is totally arbitrary, we could have issued 2 million tokens or 900 million of tokens). Thus, each token represents a % share of the underlying asset.
How Does Blockchain Tokenization Work?
Generally speaking, a token is a representation of a particular asset or utility. In the context of blockchain technology, tokenization is the process of converting an item of value into a digital token usable on a blockchain application. Tokenized assets on the blockchain come in two forms. They can represent tangible assets such as gold, real estate and art, or intangible assets such as voting rights, property rights or content licenses. Virtually anything can be tokenized if viewed as an asset that can be owned and valued by someone, and can be integrated into a larger asset market.
The concept of tokenization predates blockchain technology. The financial services industry has implemented a form of tokenization to protect confidential customer information since the 1970s. This process typically involves the conversion of sensitive information such as credit card numbers, social security numbers and other personally identifiable information into a string of alphanumeric characters, which are then processed through a cryptographic function to create a unique token.
To some extent, this method resembles the tokenization process enabled by blockchain technology. However, while earlier tokenization mechanisms were primarily designed to protect sensitive data, blockchain-enabled tokenization enables more secure yet flexible tokenization of assets which has greatly expanded the potential applications of digital tokens across a wide range of industries. .
There are four main categories of tokens on the Blockchain, although the delimitations can blur depending on the specifics of a particular token or the platform it is tokenized with.
- Security tokens: Security tokens embody a particular investment, such as a share in a company, a vote in a company or other centralized organization, or something of tangible or digital value. In addition to serving as a digital representation of an underlying asset or utility, security tokens can be programmed with an endless array of unique characteristics and proprietary rights. As such, these tokens are a whole new type of digital asset.
- Tokenized securities: It is important to note that security tokens are not the same as “tokenized securities”. Although the two terms are often confused, a tokenized security serves as a simple digital substitute for its underlying security and is generally designed to be easily traded, aggregated, or used. In other words, tokenized securities exist primarily to expand the market accessibility or liquidity of the security being tokenized, without the addition of unique programmed or cryptographic features such as those found in tokens. security.
- Utility tokens: Utility tokens represent access to a given product or service, usually on a specific blockchain network. Utility tokens can be used to power a blockchain network’s consensus mechanism, provide the operations of a decentralized marketplace, pay transaction fees, or grant holders the right to submit and vote on new developments within a blockchain network. a Decentralized Autonomous Organization (DAO) or other decentralized networks. While security tokens are primarily used to establish ownership rights, utility tokens are more geared toward practical use.
- Currency Tokens: Currency tokens are designed to be traded and spent. Some are based on underlying assets. Many others are not based on any underlying asset. Instead, their value is directly tied to their distribution mechanism and the underlying blockchain network.
It is important to note that just because a token is designed for a specific purpose does not mean that users will only use the token for its intended purpose. The development team can modify the token to suit the specifics of their needs.
Due to this flexibility, it is important to note that the exchange of token value does not have to be done through the cryptocurrency exchange but can be done through the fiat currency exchange. Based on scheduled medium of exchange.
Tokenization and real estate
Blockchain has great potential in real estate investing as it alleviates many of the asset class hurdles. Here is a brief overview of its benefits:
1. Asset divisibility and more liquidity
Buying and selling real estate is normally a tedious process. If a property were to be tokenized, it would essentially eliminate the middleman and allow buyers and sellers to transfer ownership directly. These transfers would be as simple as buying and selling any item on the internet.
One of the important advantages of tokenization in the blockchain is that it opens up the underlying assets to a wide audience. The divisibility of assets helps achieve this. We can now participate in investments that have a high investment threshold. Thus, removing the liquid premium from hard-to-sell assets like prime real estate and artwork.
Tokenization also offers a wider geographic reach, as blockchain is inherently global in nature. Anyone with a web browser can interact and track the asset from any part of the world.
With the divisibility of assets also comes the benefit of shared ownership. You can own a vacation home with 15 other people and agree on who will use the home for a specific period and how you will split the income when none of the owners are using the asset. This is just an example. There may be many more use cases.
Once tokenized, assets can be made available to a much wider audience, increasing market liquidity and removing the more difficult and time-consuming “liquidity premium” traditionally associated with the sale of real estate. Tokenized real estate can be designed to be freely tradable online and allow investors to acquire fractional ownership of a token’s underlying asset. As a result, tokens can both contribute to the liquidity of existing markets and offer a wider range of investment opportunities to a greater number of investors.
2. Remove barriers to entry
Because properties are expensive, real estate investing is generally limited to institutional investors with significant capital. Individuals can gain exposure through a real estate investment trust (REIT), but these vehicles can have high minimums and fees. Tokenization could allow individuals to buy and sell real estate in small denominations (even fractional tokens) and without traditional fees.
3. Transparency, security and provability
Block chains are decentralized digital ledgers known for their security. Tampering with blockchain data is incredibly difficult because the ledger is shared and verified by all of its users. This provides investors with full transparency into a property’s past transactions, as well as undeniable proof of ownership.
In a blockchain, all transactions are transparent and available to any computer interacting with the chain. This means you can dig up an asset’s previous owner history, increasing trust among potential buyers. Additionally, blockchain tokens also benefit from being immutable as all transactions are verified by the nodes.
Because the tokens live on the blockchain, users can easily trace their origin and transaction history in a cryptographically verifiable manner. Transactions can be automatically recorded on the blockchain, and the immutability and transparency enabled by blockchain technology help ensure the authenticity of each token’s reported history. These qualities allow the tokens to achieve a level of reliability that most others digital assets cannot match.
Tokens allow both information and value to be transferred, stored, and verified in a manner that is both efficient and secure. And while asset tokenization has massive implications in the financial services industry, this technology is equally valuable for retail investors and others who can benefit from greater market access and more efficient ways to leverage of their existing assets.
4. Faster and cheaper transactions
We can bypass any intermediaries involved in a transaction with tokens. Let’s understand it with an example if we tokenize the deed of a house and put it on the blockchain. Then interested parties can purchase the deed directly and the smart contract will transfer the deed to the new owner after a successful transaction.
The process eliminates the need for a lawyer, banks, escrow account, and even brokerage commissions, just charged to the forex market. The process is simply cheap and efficient. Additionally, the tokens are on the blockchain network, which means we can trade them 24/7 anywhere in the world.
Tokens allow investors to bypass market intermediaries and other intermediaries that are typically involved in the traditional asset management process. This effectively reduces transaction costs and processing time for each exchange, allowing for a more streamlined and cost-effective method of transferring value. Additionally, since the tokens exist on the blockchain, they can be traded and sold 24/7 around the world.
This article was contributed by Ellamediate. They have embraced the use of Blockchain technology to tokenize real estate assets and offer them to a wide cross section of the Nigerian population.