With growing popularity, asset tokenization appears to be the word du jour in finance circles, but what is asset tokenization? And how does it work?
asset tokenization explained
Asset tokenization is the process of transforming the ownership rights of tangible assets into digital tokens that are recorded on a blockchain. Through this process, an asset such as a property, artwork, or any other valuable item, like a luxury watch is divided into multiple fractional shares or small ownership units (the digital tokens). This means that individuals can own a small piece of an expensive asset without buying the whole thing. This solution has become increasingly popular in recent years, and it works by allowing multiple people to share ownership and profits of an asset.
How asset tokenization works
Asset tokenization is facilitated through the blockchain technology. With blockchain, the ownership of the fractional shares of the asset is recorded and verified, making the transaction secure and transparent. An asset owner or issuer can subdivide the asset into as many fractional shares as they want, and these shares are then sold to multiple buyers through a platform that facilitates asset tokenization.
Once someone purchases a fractional share, they become a part owner of the asset and can enjoy the benefits of ownership associated with the asset. The ownership percentage is proportional to the number of shares an investor holds.
What is the blockchain?
Blockchain is a decentralized, digital ledger technology that records transactions in a secure, transparent and tamper-proof manner. It is essentially a database that is distributed across a network of computers, where each computer maintains a copy of the ledger. Each block in the chain contains a hash of the previous block, a timestamp, and transaction data. Once a block is added to the chain, it cannot be altered or deleted. This creates a transparent and trusting system, making it a popular technology for applications such as cryptocurrencies, digital identity verification, supply chain management, and voting systems.
asset tokenization Benefits
Let’s try to list the main benefits of asset tokenization:
- Access: provides everyone with the opportunity to own expensive assets that they would not otherwise have access to.
- Liquidity: Fractional ownership of an asset (co-ownership) enables people to sell or trade their shares easily, just as they would with stocks. This means that owners have access to a liquid market, which is not readily available with traditional ownership – this is particularly beneficial for watch enthusiasts who are looking to trade or sell their assets or shares.
- Transparency: This solution offers transparency that is not readily available with traditional asset ownership since blockchain technology is used to record ownership, which enables owners to monitor the movement of their shares and the value of the asset.
- Lower transaction costs: Traditional asset ownership often involves high transaction costs, especially when transferring title deeds, custody, or management fees. Asset tokenization reduces these costs, making it easier for everyone to own a piece of the asset.
- Flexibility: tokenization offers investors the flexibility to invest in assets that align with their specific interests or investment goals.
- Efficiency: tokenization can be more cost-effective and efficient as investors can avoid the costs associated with purchasing an entire asset or managing it themselves.
Is asset tokenization safe?
The safety depends on the type and nature of the asset being fractionalized. Luxury watches and other tangible assets, for example, are typically less volatile and more stable than stocks or cryptocurrencies.
Asset tokenization lets you own a portion of an asset without buying it entirely. Fractional ownership allows investors to access assets that were once exclusive to the wealthy or institutions. This approach offers benefits such as access to costly assets, liquidity, transparency, and reduced transaction costs. Fractional ownership is gaining popularity as individuals aim to diversify their portfolios and gain from valuable asset ownership.
In summary, asset tokenization is popular for democratizing opportunities, expanding access to previously out-of-reach assets, and providing greater flexibility to owners.