Why is blockchain making tokenization easy?
Tokenization: from physical to digital
A brief explanation of tokenization
Tokenization is the creation of a digital image of a tangible asset (e.g. machines, systems) or an intangible asset (e.g. software programs, licenses). This means that the specific asset is securitized using blockchain technology and represented by a token as a digital asset.
Three key benefits of tokenization
- Tokenization offers significant advantages over the conventional procedure of securitization via financial intermediaries such as B. banks, insurance companies, law firms. Their involvement can be reduced due to digital securitization and forwarding (disintermediation), which leads to a considerable increase in efficiency when trading digital assets. The trading hours are also being extended significantly, as trading can generally be done 24/7 via the blockchain. In addition, the costs of such transactions decrease significantly. Another advantage is the low susceptibility to errors, since human errors can be almost completely prevented.
- Tokenization reduces the hurdles for investors to participate in the financial markets. Since these new tokens can be broken down into very small pieces, investors can also participate in exclusive asset classes for which their capital was previously insufficient. For example, it is possible to purchase 0.01 percent of an expensive painting via the blockchain.
- In recent years, asset classes such as real estate, art or exotic vehicles have shown impressive returns, making them promising alternatives to traditional asset classes such as stocks and bonds. The disintermediation in the trading of digital assets also results in considerable advantages for the issuer: The previously high fees for the issue of unit certificates, which would result from the cooperation with investment banks and other institutions, can be avoided.
It is therefore possible to issue shares or bonds just as easily as e.g. B. take out a loan at the house bank. Tokenization therefore also enables small and medium-sized companies or startups to get the financial resources they need more easily. This should be illustrated by the following example: A bakery needs a new kneading machine at a price of CHF 25,000. By tokenizing this need, the bakery can sell the tokens together with the baked goods to its customers. With the money raised, the bakery can buy the expensive kneading machine. But what are the benefits for the donors? They receive - as the bakery intended when issuing the tokens - regularly part of the financial income generated by the new kneading machine.
How does tokenization work?
The tokenization process is based on blockchain technology. It is complex from a technical point of view, but can be easily explained as follows:
Let's say Max Mustermann owns a Bugatti Veyron worth CHF 2 million. In contrast, there is John Smith, who would like to invest CHF 2,000 in exotic cars. So far, he would have been unable to invest in this asset class due to his limited available capital. Thanks to the tokenization, Max Mustermann can "cut up" his car and sell these pieces to many individual investors. So it is also possible for John Smith to participate in the performance of the Bugatti Veyron!
An important question arises here: Does John Smith now have direct access to the Bugatti Veyron?
What rights does the investor have?
It is advisable to check carefully which rights are associated with the purchased token. In many cases, the token does not allow direct access to the valuable item such as B. the Bugatti Veyron mentioned above or a high-priced property. Thus, the investor's risk is to trust the issuer of the token that he will keep his promises related to the token.
Fruits as a new asset class?
Almost every imaginable possession can be made into an investment object accessible to investors by means of tokenization. Of course, the question arises whether it makes sense to subject fruits, for example, to this process. But basically, tokenization results in interesting opportunities and various new asset classes.
Examples of current application areas range from real estate, raw materials, diamonds, gold to art or luxury goods such as exotic sports cars.
Tokens as an alternative investment?
The aforementioned advantages of tokenized assets mean that interest and demand are likely to rise and the volume of token trading is likely to increase significantly. The higher liquidity, in turn, means that the underlying assets increase in value. Why?
An asset increases in value when it is easily tradable at a good price at all times. This can lead to broader acceptance of an entire asset class, which in turn is reflected in greater supply and demand. The higher liquidity is additionally strengthened, since every person with internet access tends to be able to participate in practically every investment opportunity within the respective legal limits, regardless of their geographic location. The low cost of the transactions and the ability to purchase small fractions make it possible for people with limited financial means to participate in tokens.
Secondary market challenge
In order to guarantee high liquidity and the associated successful trading, it is essential to maintain a functioning secondary market for digital assets. If this does not succeed, the token loses one of its purposes, namely to enable the trading of intangible assets. This inevitably leads to a loss of attractiveness of the asset, since it can no longer be sold or only to a limited extent. Many tokenization projects have so far failed precisely because of this challenge.
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