With the advent of tokenization, there could be a shift in how we invest assets. Everything is being tokenized on blockchain, regardless of whether it’s real estate, painting, precious metal, or company shares. Asset tokenization is the conversion of real assets into digital assets. Let’s take an example to illustrate the process.
An Example explaining Asset Tokenization
For a moment, let’s forget about smart contracts and blockchain. Imagine that you are looking to invest in real estate properties but have only $5000 available for investment. It may be a good idea to start small and increase your investment gradually. You might want to invest just a few thousand each two or three months. This might seem like a strange thing to do in real estate. It has been difficult for people to afford apartments larger than four or five square metres.
Reverse the situation. Now you have an apartment and need money. Your apartment has a value of $200,000 but you only have $30,000. You have $200,000 in your apartment, but only $30,000.
Tokenization is a way to do this. Tokenization can also be defined as the process of converting ownership rights in assets into digital tokens. A $200,000 apartment can be converted to 200,000 tokens. Each token equals 0.0005% of the apartment. Tokens can then be issued on any blockchain platform capable of supporting smart contracts such as Ethereum. A token is a token that a user purchases. This means they own 0.0005% of an asset’s ownership. A person who buys 80,000 tokens owns 40% of the asset. They become the 100% owner of the property if they purchase all 200,000 tokens.
Blockchain is an immutable public blockchain that guarantees that once you have purchased tokens, ownership cannot be deleted, regardless of whether it is registered on a government-run registry. This is why blockchain is used in these services. We took an asset and tokenized it. Then we built its digital representation on blockchain.
Tokenization is able to provide increased liquidity, lower costs, and faster settlement. This has fueled investments across all industries. Let’s look at why the market is moving towards tokenization more in detail.
These are just a few of the many reasons that the market is moving to tokenization
No territorial restrictions
Investors can invest in property anywhere in the world, without ever having to visit it. Asset tokenization on blockchain makes it easy to invest in property that is secure and fast.
Elimination of middlemen
It can take days or even months to settle assets trades. External entities are required to verify the documents and determine the eligibility of investors. This adds additional costs. Tokenization eliminates the need to have intermediaries because blockchain has the ability to provide transparency and immutability.
Fractional Ownership
Assets that are digitalized become highly disintegrable. Investors can therefore invest in tokenized assets in very small amounts. You can purchase 10% of tokenized real property properties. This dramatically reduces barriers that prevent billions of investors from entering the market.
Liquidity has improved
Blockchain technology makes it easy to invest in a low-risk environment. Asset tokenization allows for the automatic transfer of ownership and ensures compliance. Tokenized assets are simpler and cheaper than traditional assets. They allow you to trade on regulated exchanges and invest with fiat money. This can increase liquidity.
Transactions are quick and more affordable
The smart contract handles the transactions and transfers of tokens, making the exchange process automated. Automating the buying and selling process can significantly reduce the amount of work involved. It speeds up the transaction execution and charges less.
Broader Investor Base
The level of fractionalization has been a limitation in the trading of real-world assets. Asset tokenization removes this restriction by allowing tokens that represent fractions of ownership to be sold or bought. This allows for a wider range of investors to participate in the investment process. Tokenization will open up new opportunities for investors and give them the ability to diversify their portfolio into assets they cannot afford.
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