Blockchain has the potential to support many new applications, and few are more promising than the tokenization of real-world assets, which combines the flexibility of decentralized trading with the tangible value found in traditional financial markets.
More and more organizations are exploring the possibilities of asset tokenization, which offers opportunities to increase liquidity in markets and alternative sources of financing. But getting started with tokenization on its own can be quite challenging, as very few companies have any idea how to tokenize an asset in the real world.
Why tokenize an asset in the real world?
Tokenization refers to the process of taking a real-world asset, such as a luxury penthouse apartment, a renowned painting, or a bottle of vintage wine, and creating blockchain-based digital tokens that represent ownership of that asset. This process opens the door to new opportunities for companies looking to manage and monetize high-value physical assets, especially those in markets characterized by low liquidity.
Tokenization allows companies to create investment opportunities that go beyond traditional equity-based models. One of the most commonly cited benefits is “fractional ownership,” where something like a hotel can be split into 100,000 digital tokens, with each token representing one 100,000th of a share in that property.
The advantage of fractionalizing a hotel is that it makes it much easier for people to invest. One token can be affordable for many. But if the only option is to buy the entire hotel outright, that eliminates anyone who doesn’t have at least several hundred thousand dollars to spare. By making real assets more affordable and accessible, companies can introduce more liquidity into asset markets.
How do you tokenize an asset in the real world?
1. Evaluate the asset
The first step involves identifying the assets to be tokenized and evaluating them. Real-world assets can include property, artwork, collectibles, digital media, rare goods, or more. It is possible to tokenize almost anything that has value. Whatever that asset is, it must be audited by third parties who can verify its market value and unique characteristics.
2. Select a token
The next step is to choose an appropriate token type. Blockchain supports many different types of digital tokens, including security tokens, utility tokens, stablecoins, and non-fungible tokens or NFTs, with each having different standards and trading criteria. In most cases, real-world assets are classified as NFTs due to their flexibility and programmable nature. Unlike some types of tokens, NFTs can be programmed to pay regular dividends to the holder (for example, monthly rental payments associated with a tokenized property). They can also be programmed to pay royalties to the original creator of the NFT every time that token is resold.
3. Research regulations and legal requirements
The exact rules surrounding tokenized assets depend on the local jurisdiction. While some countries have introduced progressive legislation that establishes legal processes for tokenizing assets, others have not. In that case, companies may need to get creative in how they structure their tokenized assets to ensure that token holders’ rights are recognized by local laws.
4. Choose a tokenization platform
Once the legal aspects are established, the next step is to choose a tokenization platform that adheres to the rules and regulations related to the above step. Companies can choose from a range of tokenization-as-a-service platforms and marketplaces that handle the entire process of tokenizing assets and facilitating their trading.
5. Create a marketplace
Not necessarily the next step, but rather an alternative step, is for companies to create their own marketplace for tokenized assets. This is an attractive option as it allows the company to retain control of the process and use its own brand on trading platforms.
Rather than creating a tokenized asset marketplace from scratch, it is possible to use pre-built white label RWA marketplaces such as the Blocksquare protocol.
Blocksquare, which manages more than $100 million in tokenized properties, is focused on tokenized real estate and recently helped a company called Portio Capital create a marketplace for investors in co-living properties across Europe. Portio leveraged Blocksquare’s Oceanpoint v0.5 launchpad to quickly build a fast and secure co-living real estate marketplace, complete with various token purchasing options and secure digital wallets for investors. The advantage of using the Blocksquare platform is that it has created an established legal process in Europe that ensures that the rights of token holders are recognized by the law.
Portio Capital has since managed to build a thriving marketplace for tokenized co-living properties, working with property owners and the industry expects to offer numerous exclusive opportunities to its investor community. As a result, it can offer investors access to some of the most popular co-living properties in Europe.
There are alternative white-label RWA platforms targeting different types of assets. For example, Polymath offers companies an easy way to tokenize traditional financial assets as digital securities and then create a marketplace for those assets. With Polymath, regulatory compliance is fully automated as every token issued is based on the ST-20 standard, allowing companies to raise alternative capital in a legally compliant manner.
Meanwhile, Tokeny is a dedicated and compatible platform for converting traditional securities into security tokens. With its API for marketplaces and liquidity providers, it simplifies the security token distribution process and offers companies access to its own network of distributors and investors. Integrated custody and recovery processes give investors even greater assurance that they are always in control of the assets linked to their digital wallet.
6. Mint the tokens
This is all about the details, or what token investors can expect in return. Companies will need to consider the number of tokens they create for each specific asset, which is a decision that will be based on the actual value of the asset. To make a $1 million property affordable, that property could be split into 100,000 tokens, which would mean each one would cost $10 when it first hit the market.
7. Program smart contracts
To get to the point, smart contracts are the mechanism used to ensure that token holders receive regular dividends or payouts, based on the performance of the asset. Companies can program the smart contract with rules about how often and under what circumstances token holders should receive a payout, and how much that payment will be worth. Depending on the industry, they may also want to introduce royalties. For example, a winemaker or artist may want to include royalties on future sales of their tokenized assets, to ensure they are fairly rewarded if the value of that asset rises in the long term.
8. Tokenize the asset
Now that everything is ready, the penultimate step is to actually tokenize the asset. Generally, this means that the holder of the asset must surrender the asset to some sort of custodian, or otherwise sign legal agreements that ensure token holders can take legal action to claim that asset if necessary.
9. Divide the tokens
The very last step is to issue and list the tokens on a decentralized marketplace, where investors can trade them freely.
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Final thoughts
As blockchain technology matures, tokenization will likely become more common. By representing real-world assets as tokens on a decentralized ledger, markets will become more transparent, transaction efficiency will increase, and liquidity will increase. Perhaps the biggest benefit of tokenization is that it makes previously illiquid markets liquid by increasing accessibility, making it possible to buy and sell assets much faster than before.
For example, in the case of real estate, the process of buying and selling property can take many weeks and involve multiple intermediaries such as real estate agents, banks and mortgage lenders. Tokenization eliminates these middlemen and allows shares of ownership to be traded peer-to-peer in seconds.
It is for these reasons that tokenization of real-world assets is likely to grow in popularity. After all, it’s hard to think of a real-world asset that can’t be tokenized. As such, this technology has the potential to streamline any kind of financial market and investment opportunities.