Real-World example
Suppose we disregard Smart Contracts and Blockchain for a minute. Let us say you want to invest in real
estate, but your opening investment is $20,000, and you plan on gradually increasing your investment
each month. Indeed, with the traditional real
estate market, this is quite inconvenient to do. How do you expect to buy a few square meters of an
apartment?
Suppose we reverse the situation. Imagine that you own a property — say an apartment
in central
London, and you would like to raise some funds to renovate the property. The apartment is valued at
$2,000,000 but you need $100,000. Raising the necessary funds may be awkward.
We now decide to
tokenize the $2,000,000 apartment
into 2,000,000 tokens (the number is optional, we could have issued 20,000 tokens). Thus, each token
represents a 0.00005% share of the underlying asset.
Finally, we issue the tokens on a Smart Contract supporting platform, like Ethereum, so that
the tokens can be freely bought and sold on different exchanges. When you buy one token, you buy
0.00005% of the ownership in the
asset. If you buy 1,000,000 tokens, you own 50% of the asset. Buy all 2,000,000 tokens, and you are 100%
owner of the asset. Blockchain is an immutable public ledger. It ensures that nobody can "erase" your
ownership once you have
bought tokens even if it is not registered on a government-run registry.
Thus, to conclude this
example, we took an asset, tokenized it, and created its digital representation that lives on
Blockchain. Blockchain guarantees
that the ownership information is immutable.
Why is the market shifting to tokenization?
No territorial barriers
Investors can invest in the property mentioned above or other assets while being
located in another part of the world without physically visiting. Thus investment becomes secure, quick
and straightforward.
Elimination of brokers
Trading assets can take days or even months to accomplish a settlement. It requires
external entities to verify the documentation of transactions and investor's eligibility, which adds
additional expenses to the process. However, tokenization
eliminates the requirement for intermediaries with Blockchain's ability to provide immutability and
transparency.
Fractional Ownership
Assets become highly divisible when digitalized. Therefore, investors can invest in
small to large percentages of tokenized assets. For example, you can buy a 5% share of a tokenized
painting or real estate property.
Improved liquidity
Blockchain presents a low-friction environment for investments. Asset tokenization
facilitates the automated transfer of ownership while guaranteeing compliance. Tokenized assets benefit
from reduced complexity and expenses, and the opportunity
to invest with fiat money and P2P trading on regulated exchanges, thus improving liquidity.
Quick and cheaper transactions
Since token transactions and transfers are completed with Smart Contracts, the
exchange process is automated and simple. Automation reduces the difficulties associated with purchasing
and selling and requires no intermediaries. As a result,
deal executions are simple and have low transaction fees.
Broader Investor Base
Since asset tokenization allows for fractional ownership, virtually anyone can
become an investor, allowing them to diversify their investment portfolio into assets that they could
not previously afford.
What can be tokenized?
No territorial barriers
Investors can invest in the property mentioned above or other assets while being
located in another part of the world without physically visiting. Thus investment becomes secure, quick
and straightforward.
Accessible 24/7
Access Tokenized assets 24/7 from anywhere in the world.
Immutable
Once someone buys the tokens, ownership is guaranteed and can easily be transferred
to a new owner. In case of any disputes, conflicts can be resolved immediately by viewing at immutable
ownership records.
100% Transparent
No one can profess to own assets fraudulently as each transaction is stored and
maintained on a shared, immutable ledger. Transparency within the ecosystem ensures that everyone has a
clear view of the maintained ledger of ownership records.
Cost-effective
Tokenized assets eliminate the involvement of intermediaries that regularly restrict
investment accessibility. Therefore, it reduces the traditionally high fees by 65% and brings clarity to
the process.
Easy to invest
Tokenized assets allow greater liquidity with the opportunity of fractional
ownership and thus eliminates the need for minimum investments.
