Tokenization refers to converting real-world assets into digital tokens recorded on a blockchain.
Tokenization Industry: The Lifesaver for a Dying Economy
Today’s most well-known application of blockchain technology is in cryptocurrencies, which is only one blockchain branch. Cryptocurrencies, with Bitcoin and Ethereum at the forefront, have become so widespread over the past ten years that they are loosening the strong bolts of the money-printing machines (central banks). This is why clever governments dislike hearing the name Bitcoin. Now, I want to draw your attention to something beyond cryptocurrencies, something that can rescue those excluded from the centralized economy and save the economy of the future, and that is none other than the tokenization of assets.
Our financial goals and public expectations from life today are still similar to 50 to 60 years ago: good-paying jobs, successful investments, comfortable living standards, sufficient resources for retirement, and, of course, providing good education for our children.
Many of us want these opportunities in life, but how many have achieved these goals? Seventy percent of Americans have less than $1,000 in savings. However, thanks to blockchain technology, the future is believed to be different, and the world’s wealth will be distributed more democratically among people.
Blockchain technology has the potential to profoundly transform the current economy and more fairly distribute the Earth’s resources among humans. One of blockchain’s capabilities to do this is tokenization.
What Does Tokenization Mean?
Tokenization, or converting real-world assets into digital tokens, involves recording ownership rights of assets as digital tokens on a blockchain.
This can include real-world assets like real estate, art, or commodities, as well as digital assets like digital artwork, intellectual property, or company shares.
Tokenization enables the democratization of transactions and the creation of fairer markets by creating digital tokens that represent ownership rights.
Through tokenized real-world or digital assets, individuals can access investments that were previously out of reach or even tokenize their real estate or gold bars for sale to others.
What Can Be Tokenized?
Almost any asset in the world can be tokenized. Here are a few basic assets that can be tokenized:
Real Estate
Real estate refers to all immovable property located on land, consisting of land, buildings, agricultural products, natural resources, minerals, and underground water.
The most important asset class globally is real estate, with a market volume of $613 trillion. Real estate transactions worldwide happen very slowly and are not as easily conducted as stock transactions, often traded locally and regionally. Imagine if this massive market were accessible to everyone worldwide; for example, if someone in Iran could sit at their desk and buy a house in another country for micro-investment purposes, without being physically present, and store the token, which represents the title, in their wallet without a third party involved. Imagine a rural person in a remote area with extensive land who cannot sell it. Still, they can bring wealth into their region by tokenizing and offering it in global markets.
Real estate is one of the most reliable investments that people prefer, and as a profitable investment, it provides a steady income stream in the form of rent. However, one downside of investing in real estate is the lack of liquidity.
Therefore, even though global real estate investments are nearly double the investments in stock markets, the number of investors in the real estate market is significantly lower than in other markets.
Blockchain technology has real potential to solve liquidity and transparency issues in this market and can open the market’s doors even to small investors.
Another advantage of tokenizing real estate is fractional ownership. Investors can participate in a construction project by purchasing fractional ownership tokens, which can even be listed on secondary exchanges.
Thus, the strength of smart contracts can enable efficient token transfers and seamless income distribution among investors.
Now, imagine if only one percent of the world’s real estate were tokenized and traded on global markets—the total value of the blockchain ecosystem, which is currently $1 trillion, would increase by 600%.
It should be noted that no reputable platform for real estate tokenization currently exists, and as a result, no market for this has been established either.
Artwork
The painting Salvator Mundi by Leonardo da Vinci, the most expensive artwork in the world ($450 million), depicts Jesus in the act of blessing.
Artwork was the first type of asset to be tokenized, and today, the digital art market, which has been transformed into non-fungible tokens (NFTs), continues to grow alongside the main cryptocurrency market. OpenSea is currently the world’s largest platform for creating and selling NFTs.
The market value of NFTs related to digital art and collectibles is now $5 billion, and it is predicted to reach $80 billion by 2025.
Tokenizing artwork offers many advantages, including some of the following:
Increased Liquidity:
Tokenization allows for fractional and faster trading of artworks, opening the market to more buyers and sellers. This leads to better price reflection of artworks and lowers risks.
Ownership Preservation:
Tokenization enables registering and verifying ownership rights for artworks on the blockchain. This helps artists and buyers protect their rights against theft, fraud, damage, or loss of the artwork.
Reduced Costs:
Tokenization eliminates intermediaries and commissions from art sales. As a result, artists earn more from selling their works, and buyers pay a fairer price.
Increased Accessibility:
Tokenization increases enthusiasts’ accessibility to artworks, making them permanently viewable and purchasable globally.
Enhanced Creativity:
Tokenization fosters new and creative initiatives in art, allowing artists to create unique and innovative artworks using non-fungible tokens (NFTs) or tokens with special attributes.
Commodities
Tokenizing commodities means converting them into digital units tradable on a blockchain.
One of the benefits of tokenizing commodities is cost reduction, as it eliminates intermediaries and commissions from the sale of these commodities.
This allows sellers to earn higher profits from their goods and buyers to pay a fairer price. Another advantage is ensuring the authenticity of commodities. Producers can guarantee the authenticity of their goods for decades by tokenizing them on the blockchain, giving consumers peace of mind.
Counterfeit products are often produced under uncontrolled labor or health conditions in the shadow economy. This puts workers in a vulnerable position with an increased risk of exploitation. Counterfeit products also result in lost revenue for innovative companies.
Overall, any valuable item can be tokenized. However, some commodities are more suitable for tokenization, including:
- High-value and rare commodities like gold, jewelry, coins, stamps, etc.
- Long-lasting and durable goods like furniture, household appliances, electronics, etc.
- Commodities that can be divided and separated, such as agricultural products, oil, gas, etc.
- Goods that can be stored and transported, like food, clothing, stationery, etc.
For some commodities, tokenization might face legal, technical, or marketing challenges. For instance, some goods may require sellers’ identity verification or compliance with specific laws and regulations. Some commodities may be difficult to divide or value, and others may not have a sufficient market for buying and selling their tokens.
The Impact of Tokenization on the Global Economy and Future Opportunities
Financial experts estimate that tokenizing real-world assets could become a $16 trillion industry in the coming years. However, its impact goes beyond financial figures and can help people in developing countries find new ways to address economic problems.
If individuals can tokenize their assets and offer them directly without intermediaries, people worldwide can access them. This could redistribute wealth and trigger major economic transformations.
Stephan Rind of BrickMark Group highlighted that tokenizing assets can provide access to financial products that are currently unavailable to most people, thereby helping reduce the wealth distribution gap.
Everything from real estate to livestock and anything you can own can be tokenized, displayed, and sold in digital financial markets.
Carlos Mazzi, a rancher from Mallorca, Spain, in an interesting move, tokenized 3,500 cows along with 3,000 hectares of pasture. In a talk, he stated: “We tokenize the value creation of what we call turning grass into cash, converting grass to protein and then to cash through an incredible machine in nature, a cow. We were early pioneers in the tokenization industry, which was very challenging. It involved a lot of financial engineering, legal frameworks, and more to create a revenue-generating token. It’s incredible. The only thing we anticipated was an underdeveloped market. Market adoption is a systematic issue, which we hope will eventually be corrected.”
The global securities brokerage and stock exchange services market size increased from $1,696.91 billion in 2022 to $1,844.31 billion in 2023.
Tokenized Cows
According to Stephan, the issue of accepting these tokens will be resolved through Central Bank Digital Currencies (CBDCs). He noted, “This will allow billions of people worldwide to own cryptocurrency wallets.”
“We believe that in the next 10 years, most people, whether they realize it or not, will interact with tokens on a daily basis.” -Jose Fernandez, CEO of Tokengate
Using tokenized real-world assets, people can access investment opportunities that were previously out of reach. You can digitally own tokens representing real estate, gold bars, or a fraction of a Picasso painting. You can also tokenize physical goods, turning them into tradable assets and selling them to many people.
“It doesn’t matter whether you’re right or wrong; what matters is how much money you make when you’re right and how much you lose when you’re wrong.” -George Soros, Famous American Investor
Advantages of Tokenized Real-World Assets
Increased Access and Liquidity:
Tokenization removes long-standing barriers to asset ownership. Tokens can also be traded 24/7 on digital exchanges, increasing liquidity. Global access and interoperability; geographical borders do not restrict tokenized assets. With investors worldwide participating, a global market is created. Moreover, these tokens can be exchanged across different blockchain platforms, enhancing interoperability.
Reduced Intermediaries and Costs:
Traditional asset transfers involve high transaction fees due to the involvement of numerous intermediaries. Tokenization eliminates many of these intermediaries, reducing costs and increasing efficiency.
Increased Security and Transparency:
Blockchain’s immutability and transparency are guaranteed by its nature. The public ledger tracks ownership and transaction information, reducing the risk of fraud and providing a secure transaction environment.
Imagine simultaneously tokenizing the value, identity, information, ownership, and assets of any physical object in the real world and using that token as the digital representation of the physical item. Essentially, you tokenize something in the blockchain that exists in the real world.
That’s why I believe Ethereum advanced so quickly, and we see ERC-20 tokens becoming widespread due to the unique things people can do with this platform.
We need to find a new way to democratize wealth by changing how people interact with the economy and making it accessible to everyone.
Look at financial markets, especially since 2008, where complex regulations tell us that only companies and wealthy individuals should have access to a range of investments that most people don’t even know exist.
We all want to have an equal share in any investment. That’s why every company should be able to launch an Initial Coin Offering (ICO). The ICO’s fundraising through investment demonstrates the enthusiasm for participating in this new revolutionary economy. An ICO is one of the ways for developers and founders to raise capital in the cryptocurrency market. In this method, developers pre-sell tokens, or the dedicated cryptocurrency of their upcoming project, to finalize its development.
Ethereum is recognized as a pioneer in ICOs, with the Ethereum Foundation raising over $18 million during its ICO in 2014, marking the first-ever ICO.
Challenges Facing the Tokenization Industry
The tokenization industry can flourish rapidly if governments quickly establish and pass regulatory frameworks. The benefits of tokenizing assets—from democratizing wealth distribution to revitalizing the economy—depend on the willingness of governments. However, there are obstacles and challenges in implementing this, which include:
Regulatory Compliance:
Since the regulatory environment for tokenized assets is still evolving, token issuers must comply with a wide range of regulations and requirements. Token issuers must maintain legal clarity, as different jurisdictions may impose varying requirements.
Asset Valuation and Appraisal:
Accurately estimating the value of real-world assets is essential for tokenization. To ensure fairness and transparency for investors, reliable valuation techniques are needed. For instance, oracle networks like Chainlink can provide essential data for pricing or serve as manual indices.
Security:
While blockchain technology is generally secure, security threats exist, such as vulnerabilities in transactions or smart contracts. Issuers must implement strong security measures to protect against fraud or hacking.
One significant distinction is that they are immutable once smart contracts are deployed. If the token issuer loses access for any reason, it becomes nearly impossible to reverse any damage. Regular audits and other security precautions can help address this issue.
Fraud:
To foster the growth of the tokenization industry, it is crucial to address fraud. Since the Ethereum smart contract network was launched, fraudsters have exploited this industry by creating and promoting tokens, making billions of dollars. In the end, investors are left with worthless tokens and empty pockets. Fear of fraud is arguably the biggest barrier to the widespread adoption of the tokenization industry and cryptocurrencies. Therefore, the best solution is for regulators to enter this emerging and risky industry to curtail the activities of profiteers and create a conducive environment for growth, allowing everyone to benefit from the rewards.
“Statistics show that over 95% of NFTs (Non-Fungible Tokens) are now worthless.” -Yemel Jardi, Executive Director of the Decentraland Foundation
Tokenization and Blockchain
Tokenization, which uses blockchain technology to digitally represent the value of an asset, is carried out by a few key blockchain networks. These include:
Ethereum:
Ethereum is a smart contract blockchain network that supports token standards like ERC-20. It allows many crypto projects to issue their tokens using Ethereum’s infrastructure.
Binance Chain:
Binance Chain is an independent blockchain network launched by the Binance exchange. It is designed to speed up transactions and lower costs on the exchange and supports smart contracts and tokenization. It is compatible with Ethereum’s token standards.
Quant:
Quant is a blockchain network that aims to enhance interoperability between various blockchains. Services like Overledger allow organizations and developers to issue tokens across multiple blockchains simultaneously.
Solana is a blockchain network that supports smart contracts and is known as the fastest blockchain, processing 4,500 transactions per second.
Steps to Create and Issue Tokens
To issue your token on blockchain networks that support tokenization, several steps need to be followed:
Token Creation:
A smart contract must be executed on the selected blockchain to create a token. The smart contract should adhere to the token standards of that blockchain. For example, on Ethereum, ERC-20; on Binance Chain, BEP-20; and on Quant, QNT-20 is used. The token’s details, such as name, symbol, supply, and price, must also be defined in the smart contract.
Token Launch:
After creating the token, it must be listed on a digital exchange or a token trading platform. This allows you to trade the token with other cryptocurrencies or fiat currencies. You’ll need to choose an exchange or platform that supports your chosen blockchain and agree to its listing and offering terms and fees.
Token Promotion and Marketing:
Finally, you need to promote your token to attract investors and buyers. This can be done through social media, websites, blogs, podcasts, videos, or any other suitable method. Being transparent and trustworthy about your goals, strategies, team, and project can help gain investor interest.
Conclusion:
Tokenized real-world assets represent a major transformation in the financial world, offering numerous advantages for investors and issuers. While significant challenges exist, the potential for increased accessibility, liquidity, and transparency is substantial. As this space continues to mature, it is likely to have a growing impact on investors and the native currencies of smart contract platforms, reshaping how we think about traditional assets and investments.
Assets are not the only ones changing. Asset managers, issuers, providers, and intermediaries must also rethink their business models. We may remain in a hybrid world (off-chain and on-chain) for a time. Still, slowly, we will move toward a globally optimized system with fully tokenized assets and minimal intermediaries.
