Jan 31, 2024
Tokenization creates digital pieces of traditionally illiquid real-world assets (RWA), allowing anyone from large to small-scale investors to own a portion of real estate, art, or commodities at a fraction of the cost. This process leverages blockchain technology, ensuring each piece or token of an asset is secure and transparently recorded, making it nearly impossible to tamper with. The process boosts the liquidity of assets, makes them accessible, and enables fractional ownership, allowing a broader group of investors to participate in the market.
Tokenization is not just a fleeting trend. It will reshape how we think about ownership and investment in the digital age. Data published by DefiLlama painted a picture of market growth, revealing that by 2023, the Total Value Locked (TVL) by tokenizing RWAs would have surged past $6 billion.
Tokenization is converting the rights of a real-world asset into a digital token on a blockchain. Tokenizing real-world assets in the metaverse or 3D internet is a process that merges the physical with the digital, creating a bridge between tangible assets and their trading, storage, and transfer in the digital world.
Here's a step-by-step breakdown of the tokenization process in the metaverse:
Asset identification: The first step is identifying a real-world asset to tokenize, such as real estate, commodities, artwork, or collectibles. This asset must have a clear value and ownership.
Valuation and verification: The asset undergoes a valuation process to determine its worth, and a decision is made on whether an asset should be divided into digital tokens. Verification ensures the asset is legitimate and the owner has the right to tokenize it.
Legal structuring: Legal entities then structure an asset into a token-friendly format, ensuring it complies with current legal requirements and frameworks and establishes the rights of the token holders.
Choosing a blockchain network: The next step is to decide on a public or private blockchain network for token issuance. For instance, Ethereum is popular because it supports smart contracts and has a massive developer community.
Token creation: Tokens representing ownership or a share of the real-world asset are created using blockchain technology. These tokens are unique, indivisible, and encrypted for security. Identifying whether the token will be fungible or non-fungible, selecting the appropriate token standard (such as ERC20 or ERC721), and establishing the core characteristics of the token are done during this step.
Smart contract development: Smart contracts are programmed to govern the tokenized asset's terms of ownership and transactions and offer a robust, secure, and transparent framework for managing tokenized assets. These are self-executing contracts with the terms of the agreement directly written into code. Smart contracts automate many processes, including dividends, voting rights, and buy-back options. For instance, with regard to real estate, smart contracts play a crucial role by automatically distributing dividends to token holders, streamlining what would otherwise be a complex and manual process. Beyond the operational mechanics, smart contracts are instrumental in ensuring compliance with the legal landscape, rigorously adhering to laws and regulations, including KYC (Know Your Customer) and AML (Anti-Money Laundering) standards.
Launch and trading: The tokens are launched on a blockchain platform, making them available for trading on secondary markets. Investors can buy, sell, or trade tokens, each representing a stake in a real-world asset.
Management and compliance: Ongoing management of the tokenized asset is crucial, ensuring compliance with regulations and legal frameworks.
Benefits of tokenizing RWAs
Tokenization brings a suite of advantages to investors and asset owners, revolutionizing how we think about and engage with various asset classes. Here's a closer look at these benefits:
For traditionally illiquid assets like real estate or fine art, tokenization is a game-changer. By converting these assets into fractionalized digital tokens on the blockchain, they can be bought, sold, or traded easily, much like company stocks. This enhanced liquidity means asset owners can quickly access the value locked in their assets without waiting for a buyer who can afford the entire asset. For investors, this liquidity transformation opens up new markets and opportunities for diversification and investment that were previously out of reach due to the high entry barriers and long investment horizons associated with these assets.
Tokenization democratizes access to investment opportunities on a global scale. Breaking down large assets into smaller, more affordable digital tokens lowers the entry threshold for investors worldwide. Therefore, with tokenized assets available, someone in a different country can invest in a fraction of a real estate property or a piece of art without significant capital, complex legal agreements, or even a bank account in the asset's home country. This global accessibility not only broadens the investor base for asset owners but also provides investors with a wealth of new opportunities for portfolio diversification.
Fractionalizing assets in traditional markets requires complex legal structures and high costs, limiting broader investor participation and hampering liquidity. The concept of fractional ownership is at the heart of tokenization's appeal. It allows multiple investors to own a share of an asset proportional to their invested amount. For example, if a piece of real estate is tokenized into 1,000 tokens, buying 100 tokens would give the investor a 10% stake in the property. This approach benefits investors by enabling them to spread their investment across multiple assets, reducing risk and increasing the potential for returns. The concept also helps open markets like real estate and venture capital to new investor groups that could not invest in these markets due to financial barriers, infrastructural constraints, or geographic limitations. For asset owners, fractional ownership means they can sell off parts of their assets to raise capital faster than they might through traditional sales methods without losing control of their property.
Tokenization is transforming the illiquidity, high-capital commitments, and lengthy transaction processes through tokenization. Real estate properties like apartments and holiday homes are fragmented into smaller tokens, similar to the crowdfunding process, where investors own a part of these assets and are entitled to the profits and losses associated with the property owned.
In the real estate tokenization space is Meridio, a platform allowing property owners to convert their real estate assets into digital shares, enabling investors to buy and sell fractions of properties. Meridio leverages blockchain technology to create a more liquid, transparent, and accessible real estate market. By tokenizing real estate, Meridio allows investors to own a piece of real estate for as low as $1,000.
Art and collectibles
Tokenization is revolutionizing the art and collectibles industry, making it more accessible and inclusive by allowing individuals to invest in valuable artworks through digital tokens and own “shares” of the painting to benefit from its growth in value over the years.
A platform called CurioInvest specializes in tokenizing luxury and exotic cars. Investors can buy tokens linked to specific cars, enabling them to own a share of the vehicle and potentially profit from its value appreciation. Another platform specializing in RWA tokenization, Chronicled Collectibles, allows users to invest in physical art, sports memorabilia, and wine.
Tokenization is disrupting the commodities industry by digitizing ownership of physical assets from precious metals to oil and gas. Traditionally, investments in these items are made through the futures markets with more rigid functioning mechanisms. The tokenization of commodities enhances the accessibility, tradeability, and liquidity of assets, bringing substantial benefits to the traditional commodities market.
Santander ventured into tokenized agricultural products by announcing loans backed by tokenized soy and corn, where each token corresponds to a ton of grain produced and verified by a proof of grain reserve (PoGR).
Another notable example of commodity tokenization can be seen in the case of gold with platforms like Paxos’ Pax Gold (PAXG) token. Each PAXG token is backed by one troy ounce of a 400-ounce London Good Delivery gold bar, stored in secure vaults. Investors can buy, sell, or trade these tokens just like any other cryptocurrency, with the added benefit of being redeemed for physical gold. This approach makes investing in gold more accessible and divisible, allowing investors to own small, precise amounts of gold without the hassle of storage and security.
These examples shed light on the current use cases of tokenized commodities. However, there are still vast unexplored possibilities for tokenized goods in the decentralized and traditional finance worlds.
Jan 31, 2024
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