This is an Explainer Article
- In this article I explain what this word TOKENIZATION means and how it is being used to create a new asset class for investors, and why.
Background: First lets attack the word Tokenization and then I will explain the background of the words.
- From Token comes the term “Tokenization”.
- Tokenization is a new word, which describes a new way to raise money using cryptocurrency, during which the Project creator creates tokens which represent a share in a real world asset like U.S. Treasury Bonds in the BlackRock Fund, or it can be real estate, art or other real world assets which are expected to either appreciate in value, produce income or both. Next investors trade fiat or cryptocurrency for these Tokens to secure partial ownership of the asset like U.S. Treasury Bonds, real estate, art or other real world assets .
- This type of ownership is also called fractional ownership, which isn’t new, but the process which creates the fractional ownership is new.
- In a nutshell, tokenization is one way to represent ownership of real assets on a blockchain or Digital Ledger, by using nonfungible tokens.
Synonyms you should know.
- This process “Tokenization” is also called “Digitization” to mean the physical assets are represented in the virtual world or blockchain by digital representations on a digital ledger.
- This is an important point, because these assets are on an open digital ledger, ownership can easily be validated and transactions involving the tokens and transfer of ownership is transparent to all and easily trackable
- Tokenization is also called “securitization”.
- To securitize an asset means to secure the ownership of this asset within the tokens which represent it.
- A token can represent the whole value, but more commonly represents a fraction of the entire value.
- These non-fungible tokens securely represent an ownership of a asset, and they are sometimes called “security tokens”.
- These tokens are also tradeable via special cryptocurrency exchanges, which trade only this type of token and use special rules for listing the tokens and special rules to allow traders to buy and sell these tokens.
The Why is complicated, but involves increasing the size of the market, diversification and transparency.
The First Aspect of of tokenization is reaching a larger market by increasing the geographic reach of your product or services.
- One reason a lot of countries sell their products in other countries is to access a bigger market. If you live in a country of 100,000 people and only sell your products in that country, you will only every have 100,000 potential custormers. So if your product is only needed by ten percent of the population you will never sell more then 10,000 units of procust, limiting your potential profits and limiting the number of people who benefit from your product.
- But if you are able to sell your product in a county of one million people, your potential market is now ten times larger, and so are the number of potential units sold, and correspondingly your profits can increase by a factor of ten also.
Second tokenization allows fractionalization and fractionalization allows investors to invest smaller amounts of their total capitol to diversify their investments, so this increases the size of the potential market also.
Smaller bites are less risky
Fractionalization is amazing because instead of looking for a buyer who can pay ten million for a product, you are looking for ten buyers who can pay one million a piece, or 20 buyers who can pay 500k a piece or 100 buyers who can pay 100k a piece. As you can see by reducing the price of the set by selling it in pieces you get a larger market. In fact this could be carried to the extreme of ten million buyers paying one dollar a token.
Fractionalization also increases the size of the market by facilitating diversification. By allowing smaller investments it increases the buyer market by reducing risk and increasing investment diversity. It is important to remember that diversity when it comes to investments ireduces risk. So if you have one million USD of investment capitol, your advisor will tell you to not put all of the money in one investment, they will probably diversify your investments amongst multiple non-correlated assets, things unrelated to each other so if one asset drops in privce because of a draught in Europe the other assets won't be affected because they are in a different asset group and they are unaffected by the weather in Europe. So fractionalization of the asset, as in allowing people to buy fractions of it, instead of the whole thing, helps people diversify.
If your asset is ten million dollars, they don't want to invest the whole ten million of their investment capitol in your asset. But if you tokenize the asset they can buy a fraction like 1/10th of the asset with one million dollars and still have nine million to invest in other assets. Thus tokenization allows fractional sales, which increase the pool of buyers further by allowing fractional purchases, which allow buyers to better diversify their investments.
Example
Investor wants to diversify one million dollars of investment capitol. They can buy a fraction of ten items, so that no more then 10 percent of their capitol is at risk in anyone investment. So they invest 100k. So there are more buyers at the 100k proce then the one million dollar price for multiple reasons.
Transparency and Tracking, along with efficiency
- One thing blockchain afficianados have been saying for ten years is that if real world assets were on the blockchain you could track them in real time and both forward in backward in time. Once an asset is tokenized and on the blockchain it becomes a token whose location is forever known. It's ownership is known, it's sale is public, it's transfer is public, so trnsparency, tracking, ownership are all simplified. And once an asset is tokenized and digitaized all transactions are simpler. No title searches and other procedures normally required are necessary because once ownership is established during the tokenization process it is forever recorded on the blockchain and all can see it. Plus you don't need a transfer agent to secure the property and exhcnage money for the title. You buy it like you buy a candy bar from a candy machine, only here you buy it from a platform run by a smart contract. You put in your money and the smart contract transfers the token to you. The token conveys title and ownership in a single transaction.
Summary
- Tokenization is a new word, which describes a new way to raise money using cryptocurrency, during which the Project creator creates tokens which represent a share in a real world assets.
- The reason asset owners and managers may want to tokenize their assets for sale include increasing the size of the market, efficiency and transparency.
- The first large Real World Asset tokenization has taken place with Blackrocks tokenized U.S. Treasury Bonds iFund of 100 million U.S. Dollars worth of treasury bonds for sale to qualified and whitelisted investors. Which will be available in smaller denominations in the secondary market.
- This is the first of what will undoubtan\bly be many such funds and tokenized investments involving real world assets from Financial instruments like Treasury Binds, Art, Real Estate and other I haven't mentioned here.
- Keep your eyes and ears open for the sound of opportunity, as knowledge gives you the power to make money and earn your financial freedom.
About me.
I am a writer who has focused on cryptocurrency, the blockchain, non-fungible digital tokens or NFTs, and decentralized finance for over six years. But I also like to write about life, my garden, my island home and other stuff.
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