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Blockchain has the ability 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.
Increasingly, more organizations are exploring the possibilities of asset tokenization, which provide avenues for increasing liquidity in markets and alternative funding sources. But getting into tokenization itself can be a daunting proposition, as very few companies actually have any idea how to go about tokenizing a real-world asset.
Why tokenize a real-world asset?
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 businesses that want to manage and monetize high-value physical assets, especially those in markets characterized by low liquidity.
With tokenization, businesses can create investment opportunities beyond traditional share-based models. One of the most often cited benefits is “fractional ownership,” in which something such as a hotel might be split into 100,000 digital tokens, with each one representing a 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. A single token can be affordable to many. But if the only option is to buy the entire hotel outright, that eliminates anyone who does not have several hundred thousand dollars, at least, to spare. By making real-world assets more affordable and accessible, businesses can introduce more liquidity into asset markets.
How to tokenize a real-world asset?
1. Evaluate the asset
The first step involves identifying the asset that needs to be tokenized and evaluating it. Real-world assets can include properties, artworks, collectibles, digital media, rare commodities or more. It’s possible to tokenize just about anything that has value. Whatever that asset is, it must be audited by third-parties that can verify its market value and its unique characteristics.
2. Select a token
The next step is to choose a suitable token type. Blockchain supports many different types of digital token, including security tokens, utility tokens, stablecoins and non-fungible tokens or NFTs, with each one having different standards and trading criteria. In most cases, real-world assets are tokenized as NFTs, due to their flexibility and programmable nature. Unlike some kinds of token, NFTs can be programmed so that regular dividends are paid to the holder (for instance, monthly rental payments associated with a tokenized home). They can also be programmed to pay royalties to the original creator of the NFT, every time that token is resold.
3. Explore regulations and legal requirements
The exact rules around tokenized assets will depend on the local jurisdiction. While some countries have introduced forward-thinking legislation that establishes legal processes for tokenizing assets, others do not. In that case, businesses may need to get creative in the way they structure their tokenized assets to ensure token holders’ rights are recognized by local laws.
4. Choose a tokenization platform
Once the legal aspects have been established, the next step is to choose a tokenization platform that aligns with the rules and regulations related to the above step. Businesses can choose from a range of tokenization-as-a-service platforms and marketplaces that take care of the entire process of tokenizing assets and facilitating their trade.
5. Create a marketplace
Not necessarily the next step, but more of an alternative step, is for businesses to create their own marketplace for tokenized assets. This is an appealing option because it allows the business to remain in control of the process and use its own branding on trading platforms.
Rather than create a tokenized asset marketplace from scratch, it’s possible to use pre-built whitelabel RWA marketplaces such as the Blocksquare protocol.
Blocksquare, which manages more than $100 million of tokenized properties, is focused on tokenized real estate, and recently helped a company called Portio Capital to create a marketplace for investors in co-living properties across Europe. Portio leveraged Blocksquare’s Oceanpoint v0.5 launchpad to quickly spin up a fast and secure co-living property marketplace, complete with various token purchase options and secure digital wallets for investors. The advantage of using Blocksquare’s platform is that it created an established legal procedure in Europe that ensures token holder’s rights are recognized by law.
Portio Capital has since managed to build a thriving marketplace for tokenized co-living properties, partnering with property owners and industry expects to provide numerous exclusive opportunities for its investor community. As a result, it’s able to provide investors with access to some of the hottest co-living properties in Europe.
There are alternative white-label RWA platforms focused on different types of asset. For instance, Polymath gives businesses 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 it issues is based on the ST-20 standard, enabling companies to raise alternative capital in a legally compliant way.
Meanwhile, Tokeny is a dedicated and compliant platform for converting traditional securities into security tokens. With its API for marketplaces and liquidity providers, it simplifies the process of distributing security tokens, and provides businesses with access to its own network of distributors and investors. Integrated custody and recovery processes further reassure investors that they’re always in control of the assets associated with their digital wallets.
6. Mint the tokens
This is all about the details, or what investors in tokens can expect in return. Businesses will need to consider the number of tokens they’re creating for each specific asset, which is a decision that will be informed by the asset’s real-world value. To make a $1 million property affordable, that property could be split into 100,000 tokens, which would mean each one would be priced at $10 when it first lands on the marketplace.
7. Program smart contracts
Getting into the nitty gritty, smart contracts are the mechanism used to ensure that token holders receive regular dividends or payouts, based on the performance of the asset. Businesses can program the smart contract with rules regarding how often, and under what circumstances, token holders should receive a payout, and how much that payment will be worth. They may also want to introduce royalties, depending on the industry. For example, a winemaker or an artists may want to include royalties on future sales of their tokenized assets, to ensure their fairly rewarded if that asset’s value appreciates in the long term.
8. Tokenize the asset
With everything ready to go, the penultimate step is to actually tokenize the asset. In general, this means that the asset holder has to surrender the asset to some kind of custodian, or otherwise sign legal agreements that ensure token holders have legal recourse to claim that asset if needed.
9. Distribute the tokens
The very last step is to issue and list the tokens on a decentralized marketplace, where they can be freely traded by investors.
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Final thoughts
As blockchain technology matures, tokenization is likely to become more commonplace. By representing real-world assets as tokens on a decentralized ledger, markets become more transparent with increased transactional efficiency, and liquidity will increase. Perhaps the biggest advantage of tokenization is that previously illiquid markets become liquid by boosting accessibility, so it’s possible to buy and sell assets far more rapidly than before.
In the case of real estate, for example, the process of buying and selling property can take many weeks and involve multiple intermediaries such as agents, banks and mortgage providers. Tokenization eliminates those intermediaries and enables shares of properties to be traded in a peer-to-peer fashion in a matter of seconds.
It’s for these reasons that real-world asset tokenization is likely to grow in popularity. After all, it’s hard to think of a real-world asset that cannot be tokenized. As such, this technology has the potential to streamline every kind of financial market and investment opportunity.