Asset Tokenization Basics
Raising funds, trading, and proving ownership via reliable and airtight contracts is always important. The emergence of blockchain has made it easier to do this through tokenization. This article explains how tokenization works and the advantages and disadvantages of doing so.
How Does Tokenization Work?
Assume that someone owns land worth $1,000,000, and that person needs $100,000 to start a business or cover expenses. That person could mortgage the land to a bank, use the land as collateral, and get the money.
It is also possible to “tokenize” the land on a distributed ledger, whereby each token represents a certain percentage of the land. In this case, one token can be worth $100,000.
Why Are Tokens Better Than Traditional Assets?
The central benefits of tokenization come from automation via smart contracts, algorithms that start actions only if certain conditions are met. Smart contracts drop intermediaries, which raise costs and decrease the speed of transactions.
With smart contracts, costs are lowered, and transaction speed is improved.
The Most Promising Sectors for Tokenisation
Every sector of the economy can use tokenization because tokens represent ownership. Agricultural, mining, and drilling companies can tokenize their assets and sell them. The same principle applies to manufacturing and goods and services.
As long as private companies need to raise financial support, there will be a need to tokenize. Except, they will not have to go to banks or sell shares on the stock market.
Additionally, tokenized assets do not have to be a business in the economic sectors mentioned above. Precious metals, oil, or anything else of value can be tokenized.
Tokens backed by valuable physical assets and hard currency can also be used as a medium of exchange, giving them more purchasing power than fiat currencies.
Benefits of Tokenisation
There are other benefits to tokenization besides giving people an alternative to traditional asset management. Tokens are highly liquid, programmable, and they provide proof of ownership.
Since smart contracts power the transaction, the speed of said transaction is many times faster. This feature allows for higher liquidity than any other method of purchasing assets.
Furthermore, since the technology is likely to improve, transaction time will also improve, resulting in even higher liquidity.
Because tokens are code, the code can be changed to meet the needs of those using them. For example, there are dozens of Ethereum-based tokens, such as Tether, USD Coin, and Chainlink.
Reliable Proof of Ownership
There are different ways to prove that you own a token. Besides private keys and message signing, documents can be attached by generating a hash for the image file. The party at the other end of the transaction can verify the image and confirm.
These images can be copies of deeds to land, contracts, and other documents both parties want to see.
Obstacles to Tokenization
Despite the advantages of tokenization, there are still various obstacles to overcome. There is the problem of verifying digital identities and a lack of regulation, which makes people skeptical.
One of the major problems with tokens is that you know nothing about the character of the other person in the transaction.
If you buy tokens that represent a physical asset, like gold, the history of the transaction on the blockchain might say it is yours, but there is nothing to prevent the other party from keeping the gold and continuing to use it as if it were theirs.
Lack of Uniform Tokenization Standards
The second problem is partly caused by the first, because some countries may not recognize tokens as a legal means to sell an asset. Before entering into an agreement in your jurisdiction, make sure smart contracts have the same legal status as a regular contract.
Secondly, whoever writes the code for a smart contract may not be aware of all the legal considerations needed to write a contract. Vice versa, lawyers who have such knowledge are not likely able to read or create code.
Tokenisation has the potential to revolutionize how assets are sold. However, there are significant obstacles that still need to be overcome.
This can be best done by giving smart contracts the same status as regular contracts. In the meantime, ensure that you do business only where these contracts are enforceable and that the contracts are written by people with the legal and technical knowledge to do so.