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.
How occurs tokenization on the blockchain
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:
- Incoming asset (cash).
- The mechanism of "substitution" of the asset (bank infrastructure).
- Virtual asset version (digital dollar).
#1 Fewer intermediariesThink about how many intermediaries you have to trust when you buy a company's share in the form of stocks in the stock market. People not in the subject can say that only the issuing company, but in fact the list is much wider:
- registrars and brokers;
- securities custodians;
- cleaning firms;
- transfer agents;
- and others...
With tokenization of assets on the blockchain, most of these intermediaries can be removed, since the distribution registry system serves as a “source of truth” that ensures the integrity of the transaction, is responsible for the safe storage of digitized assets and conducts transactions.
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.
#2 Divisibility of all
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.
However, if using a blockchain to divide a building at a cost of, for example, $ 250,000 per 100 tokens, the entry barrier to investment will drop to $ 25. That's exactly what was done when was tokenized the building in the East Village, which is in Manhattan. An object worth $ 30 million was tokenized in October 2018 by Propellr and Fluidity using the Ethereum blockchain.
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:
- intellectual property (music, video content, patents);
- pharmaceutical development;
- space research;
#3 ImmutabilityUnlike traditional databases, information recorded on the blockchain cannot be changed, deleted or “corrected” by bribing an official or hacking the system. This is one of the properties of the blockchain architecture, which, conventionally speaking, records information in "layers" - in blocks.
It is thanks to this feature that blockchains are introduced into state registries, online banking systems and corporate databases, where accuracy of the stored information is important.
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.
Thanks to cryptography, you can use open databases to store confidential or financial information. That is, anyone can download a database that contains information about tokenized assets and market participants, but only those who have a special secret key can access the “foreign” information.
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.
As for the distribution registry, this means that the information in the blockchain is simultaneously stored on many devices of users of the system as synchronized copies (like files in torrent trackers). Make new entries in these copies is possible only with the consent of the majority of the participants in the system, which is achieved through the mechanism of consensus.
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.
Such algorithms can be compared with the mechanism of the coffee machine, which, without the participation of the seller or the owner of the coffee, changes the buyer's money for drinks. The values, in this case, are money and drinks, the conditions are the making of drinks and the minimum amount of banknotes in the machine store.
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:
- Elimination of intermediaries. Thanks to smart contracts, you can refuse the services of trustees who check documents, verify transaction participants, guarantee money transfer, confirm the legality of the transaction.
- Accelerating the process. The use of digital signatures and computer algorithms instead of paper documents and manual data processing speeds up the process of transferring valuables several times. An apartment can be sold in a few days, you can buy oil or gold in a couple of minutes, and you can change Fiat to a cryptocurrency in seconds.
- Cost reduction. The less intermediaries, the lower the cost of the contract. In real estate transactions, these are payments to notaries, realtors and banks. In commercial transactions - commission to guarantors: banks, payment systems and gateways.
- Fight against corruption. If an official does not participate in the execution of a contract, transaction or issuance of a document, he is not able to receive a bribe.
#6 TransparencyAlmost all blockchains are open source software. In most cases, this means that any user or developer can view the source of the blockchain in order to:
- personally to make sure that the software does not contain vulnerabilities and unacceptable functionality for the user;
- change the source code of the software and use it freely in your needs.
If you go back to tokenization, then transparency gives the following bonuses:
- compliance with legislation, for example, the SEC rules on registration of the issue of security tokens - "digital" securities;
- reducing the risk of fraud and theft of assets;
- increasing confidence in the issuer and its assets.
#7 Additional featuresTokenization of assets by traditional methods creates tokens that can be traded, changed and used as collateral. In some cases, it is possible to manage a company when it comes to ordinary (non-premium) promotions. This is where the capabilities of traditional tokens end.
What can be done with blockchain tokens:
- change, trade, store and use as collateral;
- use as a means of payment for the purchase of goods and services;
- use in loyalty programs, promotions, ratings;
- use as a vote in polls, votes;
- pay for access to the blockchain platform.