Blockchain is impacting the financial services space in many different ways, and one of the most exciting is the idea of tokenization, where physical, real-world assets are represented as digital tokens so they can be traded more easily.
Tokenization is more than just an idea and it’s most definitely not a fad, with some of the world’s biggest financial institutions, including BlackRock, BNY Mellon and JP MorganChase already sold on the concept. Those organizations, once wary of all things related to crypto, have been one over by the realization that tokenization promises to deliver tangible improvements in the way assets are traded, paid for and settled.
For the masses, the more significant benefit of tokenization is the way that it can potentially democratize finance, paving the way for everyone to become an investor and start building wealth through the concept of “fractional” investments.
What is tokenization?
Tokenization enables almost any asset to be traded on decentralized, peer-to-peer marketplaces. It can be thought of as a magic portal through which anyone can invest in anything, be it stocks and shares, commodities, forex, real estate, vintage wine or something else. What’s more, it can be accessed by anyone, with as little as just a few dollars. In this way, tokenization opens the door to financial opportunities that were once exclusively reserved for the wealthiest among us.
The magic of tokenization is that it becomes possible to buy a small share of a luxury apartment building, hotel or even a parking lot, or else own shares in a gold reserve or invest in a blue-chip artwork, with just a few mouse clicks from the comfort of your own home.
In terms of benefits, tokenization paves the way for faster trade settlements, with transactions processed in just a few seconds, and lower trade costs, as there are no more middlemen – except for the network “gas” fees, but they are generally minimal.
Tokenization also means more security thanks to the strong foundations and transparent nature of blockchain, greater accountability, transparent ownership tracking, and less reliance on custodians.
What assets can be tokenized?
Digital tokens live on the blockchain, where they’re minted to represent assets in the real world. By creating digital tokens that represent a precious metal such as gold or platinum, for example, that asset can then be bought and sold on-chain, with the tokens changing hands instantly, the moment a transaction is processed. There’s no way anyone can be excluded from the process, and there’s no limit to how many tokens can be generated per asset, which means they can be affordable enough that anyone can get involved with just a few dollars’ worth of crypto in their wallet.
The most exciting thing about tokenization is that it’s not just some kind of future possibility. Tokenized assets already exist, and there are dozens of decentralized marketplaces up and running that anyone can participate in if they’re interested in becoming an investor.
For example, if you’re interested in becoming a real estate investor, Blocksquare, through its Oceanpoint.fi marketplace, enables you to do just that, offering a wealth of real estate investment opportunities spanning penthouse apartments, hotels, and co-living spaces.
Blocksquare has been around for several years now and demonstrated its proof of concept as long ago as 2018 when it created the world’s first tokenized parking space that anyone can invest in. The parking space, which exists in a car park in the Slovenian capital city Ljubljana, was split into multiple digital tokens that all represent a fraction of ownership. Anyone who buys one of the tokens can earn regular dividends derived from the $90 per month in rental revenue generated by the parking space.
Since that first PoC, Blocksquare has evolved to become a much more comprehensive platform, offering white-label tokenization marketplaces for real estate operators to create their own markets. It also provides a way for real estate tokenization projects to attract community funding. For instance, a project called Pieme recently launched a Marketplace Pool campaign, seeking to obtain backing from Blocksquare’s investor community to help pay for its first tokenized hotel in Kampala, Uganda.
Other options for tokenized investments include commodities. For example, MANTRA has created a marketplace where users can buy tokens that represent ownership of physical gold and silver, which can be traded as easily as any cryptocurrency. It’s much simpler than the traditional methods of investing in precious metals, which involves buying physical bullion or coins and storing it securely, or purchasing shares in a gold exchange-traded fund. Mantra also enables investors to obtain a passive income by staking its native OM token to earn rewards for supporting its network.
If gold and silver aren’t your thing, perhaps you’ll be more interested in ArtFi, which owns a physical art gallery in Dubai where it showcases dozens of high-value artworks it has procured on behalf of token holders.
ArtFi operates by sourcing paintings, buying them and then tokenizing them so they can be bought and sold by investors. For each painting it owns, it creates 10,000 NFTs that represent a 10,000th of a share in that artwork. Those NFTs are auctioned off to ArtFi’s investor community, and after that they can be freely bought and sold on its community-operated peer-to-peer marketplace. ArtFi reserves the right to sell its paintings at any time, and if it does so it will reimburse token holders with their share of the proceeds from its sale.
Of course, we should point out that tokenization doesn’t exclude more traditional financial assets. For instance, if you’re looking to invest in government bonds (always seen as a safe and secure asset during times of economic crisis), you could do much worse than to look at Ondo Finance, which has created a thriving marketplace for tokenized bonds. One of its most popular offerings is the Ondo Short-Term U.S. Government Bond Fund, which provides a simple way for USDC holders to invest in tokenized short-term U.S. government bonds and trade them freely.
The future of investing
By now, you should be starting to understand why tokenization is such an exciting development in the blockchain world. It promises to transform the way people invest and build wealth, paving the way for everyone to get involved in real-time asset trading and diversify their investment portfolios with minimal hassle.
The underlying blockchain provides a secure, transparent and immutable ledger that can accurately keep track of the entire world’s investments, proving who owns what and facilitating rapid transfers when those owners want to sell up and cash out. With tokenization, investing becomes more accessible and cohesive, meaning everybody has the chance to strike it rich.