The Key Benefits of Asset Tokenization on Blockchain
The tokenization of assets on the blockchain opens up broad opportunities for growth and diversification of assets in the market. This has been proven by many successful cases that have brought real profit to both issuers and their investors. Nevertheless, many still fear to implement this process in their business. Therefore, we decided to talk about the seven key advantages of tokenization of assets on the blockchain, which will help to understand why blockchain is the future of asset tokenization.
Tokenization of assets is the process of transferring rights to a physical, financial or intellectual asset into a digital token. The simplest example is to replenish a bank account with cash. The process of replenishment at the cash desk or ATM is the tokenization, and the received virtual money is the tokenized assets.
In this example, you can see that tokenization includes three elements:
If we return to the question of trust, then in the case of a blockchain, the buyer of securities (tokens) will need to trust only the issuer and the registrar (usually these are government agencies, for example, the SEC in the USA). Thanks to this, it is possible to significantly simplify and cheapen the process, as well as to increase its safety.
Another key advantage of the blockchain is the ability to split any asset into an unlimited number of virtual shares, each of which will be represented by a separate token. Due to this, it is possible to bring liquidity in the market, where previously it was simply impossible.
An obvious example is real estate. For example, you want to invest in a building whose office premises are rented. With the usual approach, the building needs to be bought or rented - either entirely or into share ownership. What is problematic because of the high cost of real estate.
A less obvious example is artwork. Buying paintings by Leonardo da Vinci, Picasso or Modigliani is the millions of dollars that only very rich people have. If you divide the picture of the Savior of the World by Leonardo da Vinci, sold for $ 450 million by 1 million tokens, then the entrance threshold for investing in the most expensive picture in the world will drop to $ 450.
Similarly, you can tokenize:
So, in the case of banks, this is important, because if the Internet banking system is hacked, you can understand where the money went and return it back. An example of such a project is the Corda platform, created by the R3 consortium. The situation with state registries is the same, only instead of money it will be possible to return the rights to movable and immovable property. Such projects have been implemented in Switzerland, Estonia, Ukraine, Georgia and other countries.
For tokenization, immutability is important because it allows you to track the history of tokens (i.e. assets): who created it and when; who, to whom, when and at what price sold. Due to this, investors may not be afraid that their investments will be lost due to fraud, theft, system errors or corruption - tokens can always be tracked and returned to the real owner.
In addition to immutability, the data in the blockchain protect two more things: cryptography and the distribution registry. Cryptography is a method of ensuring the confidentiality of open data (i.e., everyone can download and see their code) when this data is encrypted using a secret algorithm (key). Decrypt such data using the same or another secret algorithm.
Moreover, usually such keys decrypt only certain information, for example, information about a specific transaction or account. It is impossible to access all data in decentralized blockchains. In private, only the main node, the central government, has such rights.
Each new blockchain entry matches with all its copies:
✓ If there are no discrepancies in the past entries and there is a majority agreement, the new entry remains and is copied to all copies of the blockchain.
✕ If a discrepancy is found, the system checks what is written in most copies and accepts it as the correct version.
To circumvent such protection, you need to gain control over most of the copies of the blockchain, i.e. hack 51% of user devices. This is theoretically possible, but in practice it is economically unprofitable, since the costs will exceed the possible benefits.
In terms of tokenization, the use of a distribution registry means increased security of information stored on the network. For example, information about owners, billing information and other confidential information.
Most of the workflow and bureaucratic procedures on the blockchain can be automated using smart contracts - computer algorithms for the autonomous exchange of valuables, such as fiat money for stocks, tokens or real estate.
The coffee machine mechanism first takes values from both sides, checks them and, if everything is all right, makes an exchange. The smart contract operates according to a similar scheme, only the “mechanism” of automatic exchange is registered in the form of computer code. This gives the following benefits:
If you go back to tokenization, then transparency gives the following bonuses:
What can be done with blockchain tokens: