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Cryptocurrencies have opened up new ways for users to handle investments and assets in digital form. The technology behind it, called blockchain, is like a digital record that makes various types of investments possible.
With the use of smart contracts, blockchains bring the idea of asset tokenization and lets you represent different assets on blockchains, and show ownership. Now, anyone can invest in things that were hard to buy before, whether it's art, online platforms, real estate, company shares, or collectibles. This article will discuss everything about asset tokenization.
What Is Asset Tokenization on a Blockchain?
Asset tokenization is transforming real assets like real estate into digital tokens by using blockchains. Asset tokenization converts almost any virtual or real asset into digital tokens. This process transfers the value and ownership of real-world assets to blockchain-based tokens, potentially overcoming financing barriers in advanced infrastructure.
Why Are Tokenized Assets Necessary?
When you turn things into digital tokens, like assets, it brings benefits. It makes it easier for you to trade them by removing middlemen like brokers. This process can also make transactions cheaper, give you more transparency, and allow for different ways of owning assets.
- Transparency: Asset tokenization creates a clear record of who owns what assets and the history of transactions. You get purchase or own assets that are more trustworthy, as it lowers the chance of scams.
- Liquidity: Now, with the help of tokenization, you can trade assets easily on digital markets. It makes buying and selling easier for investors, resulting in more investment opportunities.
- Efficiency: Turning assets into tokens cuts out a bunch of middlemen and the extra costs that you face with regular ways of trading stuff.
- Accessibility: With tokens, you can invest in things that were not easy to get to before, like because of where you are or sometimes legal stuff. It breaks down big assets into smaller pieces, so more people can join in and invest in things they couldn't have access to before.
- Composability: Asset tokenization connects the real-world value of assets with the flexibility of the DeFi world. Thus, you can use tokenized assets in decentralized money markets to earn a piece of the interest generated by your assets.
What are the types of tokenized assets?
Fungible Asset Tokenization
- Interchangeable: Each piece of the tokenized asset is worth exactly the same in the market. For example, every single Bitcoin is identical and can be swapped without worry. It doesn't matter who you got your Bitcoin from; they all work the same way on the same network.
- Divisible: A fungible cryptocurrency can be split into smaller parts, as decided when it was created. Each part stays just as valuable and valid as the whole, making transactions and splits simple.
Non-Fungible Asset Tokenization
- Non-interchangeable: NFTs are special; you can't just trade them with identical tokens because each one has a unique value.
- Non-divisible: NFTs usually can't be split up, but Fractional-NFTs let you own a fraction. This is handy for really expensive stuff like fancy art or big buildings.
- Unique: Every NFT is different from the others. Each one of them might have special information and features that make them unique.
RGB Use Cases and Benefits in Asset Tokenization
The RGB protocol allows you to convert real-world and online items into digital assets. It’s built over the Bitcoin blockchain's Proof-of-Work (PoW) consensus layer. The RGB protocol helps with asset tokenization and makes it convenient to store, trade, and transfer ownership.
For those interested in digital identities, the RGB Protocol ensures the authenticity of individuals and the legitimacy of their transactions, and tokenized assets.
How Does Asset Tokenization Work?
You can use smart contracts to tokenize assets. These digital tokens are backed by real assets and follow the rules set in a smart contract.
Once the conditions in the contract are met, the tokens go to investors through the same smart contract. This not only keeps things clear and accurate but also makes the whole process efficient. It's really important to check the smart contract using standard methods or get experts to review and approve the code before putting it on the internet.
How to Tokenize an Asset
Nowadays, with the help of partners like Kaleido, any financial institution can get into tokenizing assets. You don’t need to have expertise in blockchain technology. You just need to make sure the digital version of your assets is accurate, has safety measures to prevent fraud, and follows the rules.
Tokenizing assets involves a methodical process. Follow these steps to tokenize your chosen assets effectively:
- Analyze business needs and market trends to pick assets suitable for tokenization.
- Depending on your asset, choose between utility tokens, security tokens, governance tokens, or NFTs.
- Examine legal regulations applicable to your asset type.
- Develop a tokenomics model defining supply, demand, value, and associated rights.
- Select the ideal blockchain platform based on your requirements, or build on an existing one.
- Design and implement smart contracts to tokenize assets and automate compliance.
- Develop a custom asset management application or integrate it with a chosen crypto wallet.
- Connect the asset management solution with relevant systems like accounting, payment gateways, KYC/AML verification, and trading platforms.
- Execute token issuance (ITO, STO, IDO) on your chosen blockchain platform.
- Optionally list tokens on exchanges for secondary market trading.
The Benefits of Asset Tokenization
The token economy makes your life easier when dealing with digital tokens. Creating, buying, and selling securities becomes a breeze. The best part of it is that art or real estate, which are usually tricky to trade, you can now easily buy and sell to more people.
- Record of Ownership: Every token comes with a solid record of who owns it and what rights come with it. This helps you, whether you're a seller or investor, know the nitty-gritty details. It's easy to detect who had the token first and who's dealing with it now. And things like smart contracts make things easier for you. Besides, fewer fees go down, and faster transactions make everything smoother for you.
- Faster Transaction: Transactions are really faster now—just a few seconds compared to the long hours or days it used to take earlier. This makes managing your tokenized assets much more efficient, making it an easy job for you to swap goods and services.
- Lower Investment: Another advantage of tokenization is that now, even more people can get in on tokenized assets because the minimum investment amount is lower. Plus, blockchain technology lets startups dealing with tokenized assets access funds without dealing with middlemen. And because security tokens are easy to trade, you can exchange them anytime, anywhere, on global markets.
How to Invest in Tokenized Assets
Investing in tokenized assets is a bit like getting into cryptocurrency trading. Let's simplify the steps using an example of buying IHT Real Estate Protocol (IHT) on Coinbase:
- Download the Coinbase wallet browser extension or app. Pick a username and keep your recovery phrase safe.
- Before you start with IHT Real Estate Protocol, you'll need to get some Ether (ETH).
- In the app, go to "Trade" and select IHT Real Estate Protocol. For the browser extension, hit "Convert." Enter how much ETH you want to trade for IHT, considering transaction costs.
- Once you're set, confirm your purchase, and follow the on-screen instructions to finish the deal.
Conclusion
Tokenization revolutionizes asset management, making markets accessible to everyone. Legal challenges, especially for pricier assets like paintings, might require experts to navigate tax and jurisdiction issues. However, the complexity varies based on the asset type.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.