What is Tokenization or Democratising the Ownership of Digital Assets on the Blockchain
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What are digital assets and what is tokenization? An email I got last week from a german consulting company made me think about to write some lines to shed some light on that expanding topic.
It is necessary to occasionally step away from the individual cryptocurrencies and focus on the big picture. Today, blockchain technology shows a lot of promise especially in changing the technology and finance paradigms. Blockchain technology is uniquely transparent. It is distributed in structure, and it is immutable. Blockchain can restore liquidity into cumbersome markets or into illiquid markets.
Let’s take a look on tokenization and three main classes that will benefit from adopting the use of blockchain technology.
What Is Tokenization or a Digital Assets?
Tokenization converts a valuable asset into a digital token that will be stored on the blockchain system. This sounds a little bit complicated.
In simple terms, tokenization is meant to convert the value that has been stored in a physical object, for example, a painting or even an intangible object, into a form that could be easily moved or stored in a blockchain system.
A good example of tokenization is Bitcoin. Many industries still don’t understand the idea but Bitcoins involve tokenization of computing power into forms of exchange.
It gives us a base with which we can work. The important fact to remember is that blockchain is a platform or network that allows trading of different items that are not usually easy to trade. It has numerous advantages over the conventional paper markets especially when it comes to accountability, security, and speed.
The ability of blockchain to tokenize an asset cannot be measured. However, it’s possible to group assets into 3 categories. They have been outlined below in the order of innovation. These three categories are fungible assets, intangible assets, and the so called non-fungible assets.
What are intangible assets? Intangible assets are very popular in the blockchain sphere because they do not technically exist in the traditional markets.
That sounds a bit absurd, trading something that does not exist, but it is true. The intangible assets are ideas and concepts. They are readily available in the markets- both blockchain markets and traditional markets that use paper. Some of the popular intangibles are copyrights, goodwill, patents, and brand recognition. These are items that you are familiar with, and you have probably heard of them being sold in the paper markets.
Amongst the important things to remember about intangible assets is that these do not necessarily have a fixed value. Take for example, what price would you put for the design of your microchip? Or how about the price of your business model? To help you even get the picture, what price would you put for the value of the Coca Cola’s association with Christmas polar bears?
Through the blockchain system, these concepts can be represented as tokens.
They could be given a unique code or identification and then traded, which allows them to gain more value from the digital market. Creating a token for an intangible asset helps to secure their legitimacy and gives them a stable backing. This way, they are available for transfer. So how exactly will an idea be traded, in a legal and financial sense of course? There are two methods: you can either go through the huge chunk of paperwork or trade using a token that has a unique identifier representing the asset.
A good example is that company A would like to trade the design of a new widget to company B. The challenge is that they are on opposite sides of the globe. Another challenge is that there are huge differences in how copyrights are handled in their countries. The legal paperwork makes the transaction very expensive and nearly impossible. However, if company A tokenizes the design, then Company B can make the trade in a transparent way. All they have to do is agree on a set price and execute the transaction through a smart contract. The transaction is instant and can be verified almost immediately. The token’s unique identification ensures that the patent is original, and it is not a copy.
A fungible asset is an asset that could be exchanged with another asset of equivalent value that is identical to it. An example of fungible assets is normal day-to-day commodities. One barrel of oil can be exchanged for another barell of oil, or a litre of water can be exchanged for another litre of water or gold exchanged for another gold bar. Even the stocks can be exchanged as a fungible asset if they’re grouped in identical packages. The fungibles assets are usually kept in a physical location; for example, a warehouse can be used to store gold, or oil can be stored in some pipeline.
The fungibles are usually items that are difficult to trade physically. This difficulty is usually because of the transaction’s scale. The fungible assets are traded in bulk, and delivery is not instant. A shipment of, say, 10,000 tons of steel is difficult because it is bulky. Usually, the trade involves moving the 10,000 tons of steel from one location to another and creating some paper trail. A third party, usually a bank is involved in this transaction.
Blockchain system removes this unnecessary work out of this transaction. A token representing the steel, for example, can then be traded on blockchain using the smart contracts.
There will be no thirds parties involved, no exchange rate agents, no warehouse officials, no government check, and no port officials. The steel, which is now tokenized, is then moved from buyer to seller together with the warehouse information and any other auxiliary details.
The sale is then documented on the powerful blockchain and a permanent receipt is kept. The receipt is verifiable instantly. There is no need for the traditional record keeping system or storing of receipts in a safe. The smooth exchange of the fungible asset can now be done on a large scale with all the details.
This is the interesting part of blockchain technology. Through the blockchain platform, non-fungible assets can be put into digital shares that can be traded and transferred just like the traditional paper markets.
The most common fungible assets are art and real estate. In the entire world, there’s only one true Mona Lisa. The physical painting is priceless and one of a kind. The painting is divided into very small units and sold as units just like shares of a company. This means that the token will hold the value of the smallest divisible unit of the painting.
The digital signature of the artwork cannot be altered. It is one of a kind. However, the token can be broken down into subtokens that have the same digital signature. The ‘shares’ of the painting or the priceless artefact are traded. The same is applied in real estate.
Tokenizing valuable non-fungible assets distribute the ownership of the asset with the public. The funds could be raised easily if need be. A small group of the entities is responsible for the upkeep and the maintenance of the item.
A person with a sub-token of Mona Lisa does not necessarily have a copy of the Mona Lisa. They own a small part, just like shares, and they are free to sell or keep it until the value goes up.
I hope I could explain easy and simple what digital assets or tokenization are all about. One thing is for sure – Tokenization is changing the world. It is changing the way large assets and priceless assets are traded. It is democratizing ownership of ideas, concepts, goods, and priceless artefacts.
The blockchain is offering a unique and better alternative to the traditional markets. The public can now share ownership of distinct objects like a famous painting or real estates.
Ownership is getting a new meaning through blockchain. In a few years time, maybe all transactions will be made through the blockchain system, and there will be no need for paper work anymore. In fact this topic brings some very interesting investment opportunities but of course also many open questions we be confronted with in a near future.
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