In recent years, cryptocurrencies have garnered increasingly widespread public interest. As of 2020, bitcoin has achieved ever-higher market value. This is the most widely adopted cryptocurrency.
But cryptocurrencies are not the only use of blockchain technology.
Blockchain technology promises to revolutionize finance well beyond the world of currency. In fact, tokenization of assets might be the most revolutionary promise blockchain brings to modern finance.
Here is everything you need to know about the tokenization of assets.
What Is Tokenization of Assets?
Put simply, tokenization of assets is the process of converting real assets into digital assets.
Tokenization uses blockchain technology to develop crypto tokens. They represent ownership of real-world or financial assets. It bridges real-world assets and the trading, storage, and transfer of these assets in a digital world.
A real-world asset might be real estate, art, wine, precious metals, or any other physical goods. Financial assets, such as debt obligations or equity, such as stock in an unlisted start-up, can be tokenized.
A utility token gives its owner future access to a product or service. In this case, a token represents the right to, for example, license software that the token seller is developing.
Asset Tokenization and Smart Contracts
How do we go from blockchain to an asset token?
Technically speaking, we achieve asset tokenization using a smart contract.
At its core, a smart contract is a set of rules written in computer code. It is a cryptographic algorithm.
Every token belongs to a blockchain address, and is hence “placed on a blockchain”.
These smart contracts contain the features and terms of the tokenized asset. These features, like any contract, define what the token is and how it is executed.
Asset tokenization is the key technology to use if a government or central bank wants to initiate a central bank digital currency (CBDC).
Securitization vs. Tokenization of Assets
Tokenization of real-world or financial assets is not entirely new. It is similar to traditional securitization, which began in the 1970s.
Securitization is the process of taking an illiquid asset and transforming it into a liquid, tradeable security. It differs in that tokenization uses blockchain technology to issue asset-backed tokens.
Tokenization brings the potential to disrupt the nearly $1 trillion securitization market.
Benefits of Asset Tokenization
A new token economy offers the potential for a more efficient financial system. Asset tokens form a key part of web 3.0.
Widespread adoption of asset tokenization could greatly reduce the hurdles involved in creating, buying, and selling securities.
Asset tokenization provides increased liquidity to assets. They allow ownership of illiquid assets to be exchanged in smaller units.
Crypto tokens, and the smart contracts that back them, automate many aspects of financial transactions. This automation can reduce some of the administrative burdens that exist today.
Smart contracts provide increased transparency. They embed the terms, definitions, and responsibilities within the token itself.
By existing on a blockchain ledger, asset tokens provide an immutable history of token ownership and exchange.
Asset tokens open up investment to a much wider audience. Because they are divisible, tokens can reduce minimum investment sizes and holding periods.
Learn More About Asset Tokenization
Tokenization of assets will likely change the face of the future economy. Learn more now with iMi.
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