Asset tokenization is the process of transforming rights or ownership of real-world assets into digital tokens on a blockchain. Tokenized assets can be classified as either:
- Fungible: These are interchangeable and divisible assets, such as shares in a company or units of a commodity. Fungible tokenized assets are uniform, meaning each token represents an equal fraction of the total asset’s value.
- Non-fungible: These represent unique, indivisible assets, such as a specific piece of real estate or a one-of-a-kind artwork. Non-fungible tokenized assets are distinct, with each token representing an entire asset or a specific, unique aspect of it.
For fungible tokenized assets, the process involves legally associating a divisible asset with multiple identical tokens, each reflecting a portion of the asset’s overall value. In contrast, for non-fungible tokenized assets, a unique token is created to symbolize the entire asset or its particular, indivisible attributes. While fungible tokens can be exchanged on a like-for-like basis, non-fungible tokens (NFTs) are not interchangeable.
Tokenization offers several significant benefits:
Liquidity enhancement: Tokenization has the transformative capability to turn traditionally illiquid assets into more liquid forms. By representing these assets on-chain, tokenization ensures transparent and auditable asset management, which reduces systemic risks and enhances the accuracy of leverage and risk assessment in the financial system. This has profound implications for real-world assets such as real estate, art, and certain financial instruments, as it allows for more fluid trading and investment opportunities.
Transaction efficiency through process streamlining: Tokenization significantly boosts transaction efficiency by reducing the need for intermediaries. This streamlining makes transactions faster and more cost-effective. Leveraging blockchain technology, tokenization introduces a higher level of automation, and the immutable nature of blockchain records enhances security and transparency. This improves the timeliness and accuracy of asset pricing, which is crucial for modernizing and optimizing the transactional aspects of investing, trading, and asset management.
Democratization of access by empowering the unbanked: Tokenization can act as a catalyst for democratizing access to investment opportunities, similar to how financial services have been extended to the unbanked. By lowering entry barriers and reducing minimum investment thresholds through fractional ownership, tokenization can broaden the investment landscape to a more diverse audience. This promotes a more equitable financial ecosystem, enabling individuals and entities with limited resources to participate in markets that were previously out of reach.