Real-World Asset Tokenization: A New Form of Asset Ownership
Bitcoin has proven a concept that spawned an entire industry: digitally-native assets and asset tokenization. The invention of the blockchain created the infrastructure the internet needed for hosting digitally native assets that are able to be owned, transferred, and exchanged between people.
It doesn’t stop at Bitcoin. Digitally-native assets are a new form of ownership. Land titles, stock certificates, property rights, and more are all managed by a paper-based symbol of ownership, backed by a legal system. Digital token on a blockchain follow a similar structure: a digital token that represents a symbol of ownership, backed by a legal system.
The tokenization of assets is a brand new technological innovation, yet the World Economic Forum conducted a study that predicted that 10% of global GDP to be managed by blockchain infrastructure by 2027, as numerous different digital assets come to exist on the same financial platform.
What is Asset Tokenization?
Asset tokenization refers to the act of turning the ownership of a real-world item into a digital token. This can be done in various ways, but all result in the legally-upheld bridge between the physical asset (real estate property, vehicle, gold, etc.) and its representative token.
A token is a transferable unit of something. Deeds, titles, and certificates are all traditional versions of a “token,” a symbol or item that represents something else. A deed to a house represents ownership of that house. “Token” is used to refer to the digitally native asset which represents the real-world asset itself.
“Digitally native” refers to how the asset exclusively lives on the internet. Whereas traditional asset ownership like a deed, title, or certificate requires a piece of paper with legal approval, digitally native assets have ownership baked into the asset itself.
How Does Tokenization Work?
Tokenizing an asset has been achieved in various different ways, depending on both the asset being tokenized, and the country that the asset resides in. All tokenization strategies require one characteristic: a sound legal structure that links the token and the asset.
Asset tokenization depends on the legally enforceable linkage between token and asset. This means that companies or teams that tokenize an asset need, above all, to have strong legal guidance and structuring so that the tokenized asset is backed-up by the legal system of the relevant country.
The role of sound legal structuring is to enable the holder of a tokenized asset to have a legal claim on the physical asset itself. If an asset is truly tokenized, the owner of the token has a clear, legally-supported, claim on ownership of the asset. Owning the whole set of tokens (as tokens are often divisible) that correlate to an asset mean that the owner fully owns the asset outright, without any restrictions.
For example, with tokenizing a real estate property, effective tokenization would mean that the owner of the properties’ token(s) can gain access to the properties, and do anything they like with them. Effective tokenization means that owning the token, and owning the deed to the property, are the same thing.
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What Benefits Does Tokenizing an Asset Have?
Tokenized Assets benefit from the new medium that they operate in.
Tokenization creates a more seamless exchange process. Because all tokens exist on the blockchain, and a blockchain is another word for a ledger, a lot of bureaucracy and headache associated with exchanging a valuable asset is automated and maintained by the blockchain. Each transaction that involves a token has sender, receiver, signatures, time-stamp, and amount-paid all baked into the transactions data. This transaction “receipt” is immutable, verifiable, and made available for all to see.
This immensely benefits both token issuers and token purchasers, by making purchasing the token as easy as possible. Because compliance can be “baked in,” token issuers can reduce the amount of friction to a minimum. Now, purchasing real estate property is no more complicated than signing up for Airbnb, Uber, or Robinhood.
Blockchains are ubiquitous. The Ethereum blockchain that we access in the U.S. is the same Ethereum blockchain that is found in China, Argentina, or Australia. Physical assets that were previously unreachable by international purchasers, are now made accessible through asset tokenization.
Because blockchains bring a global audience, assets are able to achieve larger marketplace participation than traditional siloed markets. For many assets, like real estate, liquidity is a significant obstacle that can lower the value of the asset, as the search for finding the right buyer may prove difficult. By opening up the market to a global pool of purchasers, illiquid assets can more likely find liquidity via increased market participants.
Asset tokenization is growing rapidly on the Ethereum blockchain. Ethereum has become a selling-point for issuing a tokenized asset; because most people are doing it on Ethereum, others will too. Ethereum has become the “Land of Tokens.” Ethereum, as a blockchain capable of running software, has the capacity to create markets that leverage many types of tokenized assets at the same time. The legacy markets of the Chicago Mercantile Exchange and the New York Stock exchange are siloed from each other. While the world at large is one single place of commerce, various exchanges have broken up and siloed the assets that are made available to trade. Ethereum offers a single global marketplace to exchange all assets.
Various financial services currently exist on Ethereum, that theoretically could accept digital assets in their functioning. MakerDAO, a decentralized bank, can enable an individual a collateralized loan, based on the value of their asset. If, for example, someone deposits their tokenized real estate to the MakerDAO smart-contract, they could take out a dollar-denominated loan that is collateralized by their real estate. This would require MakerDAO governance to accept that particular token as collateral, however.
Ethereum is a software-capable blockchain. This means that the digital tokens found on Ethereum are programmable. They can be made to behave in a certain way, based on various inputs, to create certain outputs. For example, in the custody of a tokenized property, an owner of the property can make conditional scenarios to where the token can change owners.
Examples of various programs are:
Dead Man’s Switch
- If the wallet that holds the tokenized property makes no transactions for X-number of years, then transfer the token to a new owner.
Constant Market Price
- Allow anyone to take control of the tokenized property, if they transfer X-amount of dollars to the token holder.
These are very basic examples of software’s capability of managing digital assets. The limits of software-based asset management are only the imaginations of those that can develop them.
What Assets Have Been Tokenized So Far?
- Gold, tokenized by Digix
- Real estate, tokenized by RealT
- Bonds, tokenized by Societe Generale
- Equity, tokenized by Spice VC
- An Andy Warhol Painting
Want to see what tokenization looks like in practice? Visit RealT.co to gain a glimpse of the tokenized future of real estate.
Wherever or whoever you are saving for, we’ll help you get there.