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- 1 Asset Tokenization is the ownership of real-world assets as digital assets on the blockchain.
- 2 The assets benefit from tokenization due to transparency and enhanced transactions on blockchains.
Any assets of the real world possessing monetary value can be converted to digital assets through tokenization. Tokenization is the inclusion of smart contracts and blockchain technology to show the ownership of an asset. It is the most promising use case of blockchain.
To reach the full potential of asset tokenization, a secure oracle is needed. Any instance where there is a need to interact with the external world can present a security threat and complications. Asset tokenization is a process that by nature depends on market information that is generally off-chain. Hence, a secure oracle is needed for reliable and safer information.
What is Asset Tokenization?
When any asset is converted into digital assets, then it is tokenization. It is the digital certificate of the ownership of assets. This includes any physical, digital, fungible, and non-fungible tokens.
Tokenization is a secure process that carries out transactions without revealing any information to a third party with the exchange of data. The sensitive data is replaced with tokens that can be mapped to the original data with the help of a tokenization system.
Smart contracts are used to define and execute the rules and conditions of the tokenization process. These are stored on a highly secure type of database known as blockchain. Thus, the tokenized asset becomes secure.
Nowadays it has been popularly used by small and mid-sized businesses. It improves the security of their industry.
Some examples of tokenization include:
Real-World Asset Tokenization: Real-world assets like property, fiat currencies, equities, fine arts, etc can be tokenized and stored on the blockchain. These assets can be stored, traded, and used as collateral across blockchain networks.
Digital Asset Tokenization: Tokenizing the assets that only exist in a digital form on a blockchain network is difficult with web3 technology for representing DAO, governance rights, and cross-chain assets. Since they are fully digital, tokenized assets stored on blockchain allow the owner to hold the asset instead of owning a claim on the asset.
In-Game Asset Tokenization: The in-game assets like the skin, avatars, and weapons can be represented as tokenized assets
Real-Life Use Cases of Tokenization
The process of creating ownership of an asset with the help of blockchain is called digital tokenization. This includes
Tokenization of Artwork: The original artwork from the artists is often sold by the owners. These art pieces are tokenized, thus having the ownership right. The physical delivery can be made to the given address once the token is retrieved.
If the value of the tokens retrieved does not match with the threshold value then the token holder can have the ownership of a fraction of the art print to its assessed value.
This makes it easy for the buyers and sellers to make the trade easily.
Tokenization of Physical Commodities: The dealings in the market have largely shifted to paperless. Physical assets can be tokenized as well, like gold. For example, the gold in the vault is owned by ABC, and the vault is owned by XYZ. A part of the gold can be offered as ownership by ABC to the public in the form of a digital token. The ownership registry of the gold is made with XYZ.
For every token sold, the ownership of that amount of gold is transferred to XYZ. The token holder can redeem the token by proving their ownership with a digital signature or certificate.
American bank JP Morgan has announced that they would be presenting the gold bars as a tokenized asset on Quorum, their blockchain network.
Tokenization in Cargo: The logistics company works on a method of issuing the bill called Lading, which is proof of ownership. But this causes a lot of issues like delays in delivery and reclaiming of goods in case the bill is lost or misplaced.
This is now replaced with the use of tokenization. Now they created an open system based on Ethereum called Smart Bill of lading (Smart B/L). It works exactly like the physical lading bill but the issues are solved as it is made digitally and hence transferred to the exporter as soon as the importer transfers the money. Thus, importers can claim the ownership of the goods by presenting the Smart B/L token.
How Does Asset Tokenization Work?
Asset tokenization is streaming the distribution, trading, and safekeeping of the assets on blockchains. The process of creating tokenized assets includes multiple steps like defining the type of token, whether it is fungible or non-fungible etc. selecting the blockchain to issue the token, then choosing the third party auditor to verify the off-chain assets, etc.
The decentralized nature of the blockchain network provides transparency and accessibility. The users can now make easy trades.
Benefits and Challenges of Tokenization
There are numerous benefits of tokenization including enhanced security, less risk of data breaches, improved liquidity, increased efficiency in transactions, and easy accessibility to assets.
These benefits are made possible due to blockchains as they offer transparency and security at every level. The nature of the blockchain network ensures that the records stored are immutable and resistant to tampering.
In traditional markets, the financial details are recorded in ledgers, resulting in market insufficiencies. This results in increased costs and it takes time too. On the other hand, digital asset tokenization results in fractionalized liquidity and easy and accessible exchanges. This eliminates the need for costly transactional intermediaries and it also widens the buyer pool.
Regulatory compliance and scalability are some challenges that need to be addressed. The organizations must confirm the protection of the tokenization system and maintain the data integrity.
Anurag is working as a fundamental writer for The Coin Republic since 2021. He likes to exercise his curious muscles and research deep into a topic. Though he covers various aspects of the crypto industry, he is quite passionate about the Web3, NFTs, Gaming, and Metaverse, and envisions them as the future of the (digital) economy. A reader & writer at heart, he calls himself an “average guitar player” and a fun footballer.
