Blockchain has propelled the decentralization movement, introducing revolutionary technology and distributed ledger functionalities. The advent of Bitcoin unlocked numerous investment and asset management opportunities. In this context, 'assets' refer to the digital representation of anything valuable that can be shared, utilized, or traded electronically. Before delving into the main topic of "Asset Tokenization," it's worth noting that our previous article provided a comprehensive exploration of "Blockchain on Digital Identity," accessible for a quick read here.
What is Asset Tokenization?
Asset Tokenization is the process of issuing digital tokens to represent tradable assets, encompassing both physical and non-physical entities such as finance, art, healthcare, or real estate. The central idea behind this concept ensures ownership of an asset that no authority can erase or steal. To illuminate Asset Tokenization on blockchain further, let's consider a real-life example.
Imagine you own a property valued at 50 lakh INR, constituting your asset. Through Asset Tokenization, the ownership of this 50 lakh property can be converted into 50 lakh tokens. In practical terms, if you require a home to live in and simultaneously need 50,000 INR, selling the entire property might not be the most sensible option. This is where asset tokenization comes into play – it involves breaking down an asset into fragments of ownership. The buyer of the token then becomes the exclusive owner of that specific fragment of the asset. In the example above, if someone purchases 25 lakh tokens of the given asset, they become the owner of 50% of the asset. Further points elaborate on the two types of tokenized assets.
tokenization vs Securitization:
When comparing tokenization to securitization, tokenization involves transforming real-world assets into highly liquid digital tokens, while securitization converts low-liquidity assets into higher-liquidity security instruments tradable in markets and over-the-counter.
Tokenization vs Fractional Ownership:
In contrast to tokenization, fractional ownership facilitates the collaboration of unrelated parties, allowing them to engage in trading within the digital realm.
With a clearer understanding of the basics of tokenizing commodities, let's explore the types of tokens operative in the blockchain environment.
Types of Tokens Circulated and Used in the Blockchain World:
To optimize the benefits of investing effort into the development of tokenized assets, tokens are broadly categorized based on two criteria.
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On the Basis of Nature:
Tangible Assets: Representing assets with monetary value, typically in physical form.
Fungible Assets: Digital assets where each token is equivalent to the next, making them interchangeable.
Non-Fungible Assets: Uniquely designed tokens that are non-interchangeable.
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On the Basis of Speculation:
Currency Tokens: Tokens representing digital currencies.
Utility Tokens: Issued to fund cryptocurrency development, later usable for purchasing specific products or services offered by the cryptocurrency issuer.
Security Tokens: Digital representations of traditional securities, reflecting a notable trend in the cryptocurrency space.
Now that we are acquainted with the types of tokenization of assets through distributed ledger blockchain technology, it's time to explore the benefits of this process.
The Evolution of Asset Tokenization on blockchain:
Asset tokenization is on the brink of revolutionizing contemporary asset management practices. This transformative process democratizes market access, ensuring equity and security. The primary challenge currently lies in legal constraints—how significant this impediment proves to be depends on the nature of the asset earmarked for tokenization. Establishing a network for trading basketball cards, for instance, presents fewer obstacles than creating a platform for high-value paintings.
The establishment of a legal framework bridging assets and distributed ledger technology necessitates the expertise of legal professionals to address tax-related and cross-jurisdictional concerns. Nevertheless, ongoing developments are expected to introduce new solutions that will gradually resolve these issues in the years ahead.
