Many people associate blockchain with cryptocurrencies without understanding its hidden potential. A token, in the case of a blockchain, actually offers a digital representation for a unit of value.
You can assign a token to something valuable, such as digital assets or a digital representation of real assets. Tokenization can help you turn any real asset into a digital asset, thereby simplifying the exchange and transfer of assets. Thus, tokenization implies the transfer of real assets to the blockchain or the transformation of values into tokens that reflect their value.
In order to understand the importance of this technology, it is necessary to find out the possible factors that encourage us to focus on its use cases. Here are some of the important advantages of tokenization, which confirm its feasibility for various use cases.
- Tokenization can significantly reduce barriers to investment, thereby encouraging retail investors to trade assets that have traditionally been expensive and had low liquidity.
- Tokenization can help increase the liquidity of assets by lowering the threshold for entering the market, along with the minimum amount of capital for transactions.
- Another significant advantage of tokenization is the possibility of easier interaction with regulatory authorities to adopt uniform standards.
However, tokenization of various types of assets encounters one of the serious obstacles in the form of uncertainty of the regulatory framework. Without proper preparation of the legal framework in many jurisdictions for transactions using blockchain, regulatory uncertainty becomes a mandatory obstacle to tokenization.
In addition, the lack of uniform technical standards for trading platforms working with tokenized assets also creates problems. How will tokenization overcome these difficulties? The answer to this question can be found by reflecting on the existing state of tokenization for various types of assets.
Use cases of tokenization
Tokenization basically involves converting real-world assets into digital tokens in blockchain-based systems. The acceptance of tokenization largely depends on a detailed understanding of its practical use. Here are some of the best examples of using tokenization that you may find useful for a clear understanding of tokenization.
- Tokenization of precious metals
For many centuries, gold has maintained its reputation as a valuable asset and a means of investment. However, when moving and storing gold, you will have to face various difficulties. In addition, most of the global gold supply is owned by national banks as reserve assets or brokers acting as representatives of the only parties that can sell gold directly to ordinary investors.
The options for using tokenization for precious metals, such as gold, are rightly justified by the relatively illiquid nature of the precious metals market. In the case of illiquid markets, large corporate firms may seek to enter into bilateral agreements, while encouraging information asymmetry along with restrictions on price discovery.
One of the highest barriers to entry into the precious metals market directly indicates high minimum investment requirements. In addition, the tightening of international standards also requires effective tracking of metals from the production stage to the consumer throughout the supply chain.
Tokenization provides the advantage of fractionalization, which can reduce entry barriers, as well as expand the opportunities for small players to enter new markets. Subsequently, options for using tokenization for precious metals with increased market participation may lead to increased market liquidity.
On the other hand, an increase in the number of market participants will entail the need to switch to multilateral transactions. Thanks to tokenization, support for atomic swaps and smart contracts could provide a secure and almost real-time settlement of complex multilateral transactions.
Vivid examples of projects providing tokenization of precious metals and listed on Coinmarketrate.com, are Cache. Gold (CGT), Pax Gold and DGLD. These projects have shown the possibility of increasing equity in the gold markets through the introduction of instant liquidity and insignificant commissions.
- Tokenization for real estate assets
Another notable position among the examples of the use of blockchain tokenization is directly related to the tokenization of real estate assets. The use of tokenization in real estate is aimed at creating fractional ownership of a specific asset using blockchain-based tokens. Tokenization in real estate can include digitization of financial instruments, securities and digital assets.
Using the Ethereum blockchain, digital assets can be programmed, including transaction history and ownership rights. In addition, tokens also include rules to ensure that the processes of issuing, distributing and transferring assets comply with regulatory requirements. For example, tokenization in real estate may be aimed at including control elements to ensure the transfer of tokens only to certain counterparties.
An example of tokenization in real estate refers to the company Elevated Returns. The New York-based asset management firm successfully completed its first tokenization-based real estate transaction in 2018. The company has placed a deal on the Ethereum blockchain for the St resort. Regis Resort in Aspen, Colorado, with a total cost of $18 million.
Interestingly, Elevated Returns planned to sell almost half of St. Regis Resort as a single asset. Subsequently, the company settled on offering an 18.9% ownership stake through tokens. Elevated Returns used Indiegogo for sale in collaboration with Templum Markets LLP.
- Tokenization in logistics
The logistics industry largely depends on the bill of lading as a method of issuing proof of ownership. However, there are noticeable drawbacks in the bill of lading, such as delays in delivery or return of the goods if you lose or incorrectly issue the bill of lading.
CargoX is one of the promising solutions that uses tokenization to solve the problems of traditional methods used in logistics. The company uses an open system based on the Ethereum blockchain, known as Smart Bill of Lading or B/L. The Smart B/L system has been adapted to work in the same way as the token system.
With the new CargoX system, the carrier can create a smart invoice using its application. The carrier can then send the Smart B/L to the exporter. After receiving money from the importer, the exporter can transfer ownership of the Smart B/L token to the importer. Subsequently, the importer on the recipient’s side can claim ownership of the goods by presenting the Smart B/L token to the carrier. Thus, it becomes obvious how the use of tokenization transforms the logistics sphere.
- Non-interchangeable tokens
Non-interchangeable tokens or NFT are one of the popular examples of blockchain-based tokenization. NFTs are suitable for tokenizing assets that cannot be divided into smaller units or exchanged for a similar product. For example, in the real world, it is difficult to separate ownership of a particular work of art.
Anyone who buys a work of art gets full ownership of it. However, tokenization can easily change such traditional precedents. The most common uses of tokenization in NFT draw your attention to art.
Digital art is one of the most promising examples of the use of non-interchangeable tokens at present. Tokenization of real works of art helps in promoting authenticity along with easier transfer of ownership rights to artists or the highest bidder to purchase a work of art. NFTS use the capabilities of blockchain technology and cryptography to provide a better volume of digital proofs of authenticity and scarcity of virtual works of art.
For example, CryptoPunks, an early addition among NFT projects that shows the feasibility of tokenization for virtual art. You can also find another plausible example of tokenization in the Rarible market. With the help of the Rarible marketplace, you can easily purchase digital collectibles as NFT art.
Individual use cases of tokenization demonstrate the promising potential of tokenization to revolutionize business operations in various industries. While tokenization provides significant benefits for the average investor, businesses can also use it to completely transform their business models. Examples of the use of tokenization in precious metals, real estate, NFT and logistics show that tokenization is now more than just a concept.
Most importantly, these examples show how tokenization can offer a promising increase in operational efficiency. In addition to optimizing business processes, tokenization can also stimulate the development of new platforms with the participation of representatives of various industries.