Tokenization: real assets on the blockchain
Yes, we are not exaggerating at all. Tokenization is able to inject liquidity into previously illiquid markets. In this article, we will look at the tokenization landscape and the three main categories of assets that can benefit greatly from the introduction of blockchain.
First of all, it is necessary to discuss what exactly tokenization is. According to Coinmarketrate.com, tokenization is the process of converting some assets into tokens that can be recorded, exchanged and stored in a blockchain system.
It may seem quite complicated, but we assure you that it is not. Simply put, tokenization converts the accumulated value of a physical object, such as a car, or an intangible object, such as a loan, into a token that can be manipulated in the blockchain system. Well, “manipulate” in the good sense of the word.
It would be possible to tokenize, for example, the production of electricity from renewable sources, such as solar energy, or home ownership, eliminating a large number of intermediaries in the trade of these goods.
The main thing to consider in order to understand and realize what advantages tokenization can bring is to consider the blockchain as a system or platform, and that its structure allows you to trade goods and services that are actually not amenable to simple negotiations.
It also has many advantages over so-called traditional paper markets, such as the stock market, especially in terms of speed, security and accountability.
Blockchain’s ability to tokenize assets is almost limitless, but we can divide these assets into three large categories. We will consider them in the order of innovations, or how they improve the ability to transfer these assets through the blockchain. These categories are intangible assets, interchangeable and non-interchangeable assets.
Intangible assets are the most common assets in the blockchain world because they don’t really exist, at least in a tangible form. It may seem a little strange, but it’s true. Intangible assets are ideas or concepts rather than physical assets, so they are more common in intangible markets, whether traditional or blockchain.
The most well—known intangible assets that are most likely familiar to you are copyrights, patents, brand awareness and goodwill (so characteristic of balance sheets).
One of the most important characteristics of intangible assets is that they do not have an easily identifiable value. If we create something, have an idea, or just sell a company with a great brand, then it is difficult to set a price for it.
But, these concepts can be reliably represented by one token, or by many of them on the blockchain. They can be assigned a unique identifier, and then we trade them, getting a price according to the desires of the market.
Creating a token for intangible assets gives you important transfer support and security guarantees regarding their legitimacy. On the other hand, there is no need to physically store or move intangible assets. There are only two ways to transfer ownership of an idea to another person: either with the help of a notary for processing legal documents, or by exchanging a digital token with a unique identifier representing an intangible asset.
Let’s imagine for a moment that company A wants to transfer the design of a certain product to company B. Both companies are not physically located in the same place. These two companies are not physically located next to each other, which makes the traditional method of processing legal documents very expensive and complicated due to the peculiarities of handling patents in each country.
Now, if Company A manages to tokenize its development, which is a relatively simple process, it can transfer it to Company B, wherever it is, completely transparently and using smart contracts, agreeing on a price for this idea. The transaction occurs almost instantly, depending on the blockchain on which it is carried out. The token, receiving a unique identification, allows you to prove that it is the original, not a copy, it is the patent itself.
The next category of innovation comes in the form of interchangeable assets. An asset is interchangeable if it can be exchanged for another asset of identical or equal value. The most well-known assets in this category are raw materials. One barrel of oil is equal to another, just as one liter of water is exactly the same as the other.
Even shares can be considered interchangeable if they are combined into identical packages. Easily realizable assets are usually backed up by a physical resource that is stored somewhere, for example, gold or wheat in a warehouse, water or oil in a pipeline.
These details make it difficult to trade them, which becomes even more difficult as the number of transactions increases. Consumable assets are usually sold in bulk and cannot be shipped immediately. A batch of pipes weighing 10,000 tons is quite cumbersome.
The transfer of ownership of these assets involves the transportation of these 10,000 tons of steel or the creation of a paper trail, in which the steel is transferred through a trusted third party, such as a bank, to the new owner before it is physically moved.
You can imagine the consequences of tokenization in this sector, which will eliminate a huge amount of work. The digital representation of this steel can be exchanged between the two parties using smart contracts.
There are no intermediaries in this process, no exchange agents, customs officials, governments or warehouses. Steel is transferred with unambiguous identification in the blockchain, instantly transferring ownership from the seller to the buyer, as well as any auxiliary information, for example, about the cargo or the warehouse where it is located.
The sale is recorded on the blockchain, so it acts as a permanent form of a verifiable receipt. Replacing the traditional paper system, they allow for a more accurate and detailed exchange of interchangeable goods on a large scale.
Non-interchangeable Assets (NFT)
This is the most interesting example of the three for the practical application of blockchain for asset tokenization. It allows you to digitize short-lived goods into “stocks” that can be bought, sold and exchanged on a full or limited basis publicly.
The two most telling examples of this allegory are art and real estate. There is only one “Mona Lisa” in the whole world, a one-of-a-kind painting, and it can only be bought or sold in a single copy. This is the minimum multiple unit for this beautiful work of art, the Mona Lisa.
Moreover, the Mona Lisa is very different from the millions of other existing printed or digital copies. In other words, a photo of the Mona Lisa is not the Mona Lisa, and therefore it does not have the same value as the original.
Tokenization of a work of art introduces a digital signature that cannot be changed. The digital token is a unique Mona Lisa, which is not a copy. But the token can be divided into parts, or sub-tokens, each of which has its own signature. Thus, it is possible to exchange “shares” representing unique works of this art that can be sold to the general public.
This can also be applied in real estate, and there are already several projects working in this area. The possibility of unique tokenization of a short-lived asset means that ownership can be distributed. In this way, it is easier to raise funds and assign responsibility for care and maintenance to a group of people.
Each owner of the Mona Lisa NFT token does not have a copy of the Mona Lisa, but actually owns a part of the work of art itself, which he can keep while it grows in price to sell to another interested buyer.
Also, the situation is with the confirmation of the authenticity of the documentation. A striking example of this is the Decimal Chain (DEL) project, which tokenized the authenticity of diplomas, and found application in the world of Russian painting, at the Crisis Design exhibition in Moscow.
Tokenization promises a very significant change in how we perceive reality at the moment. Allowing you to buy and sell all kinds of assets, democratizing the process of owning ideas or works of art.
Blockchain offers a very interesting alternative to the traditional market and a unique way of owning a part of an object, for example, a piece of real estate or a painting. Gradually, this will be changing our attitude to things.