The first blockchain application, Bitcoin gave new meaning to the concept of digital currencies. Similarly, the evolution of blockchain promises to redefine another industry: asset tokenization.

While the concept of tokenizing an asset has existed for a long time, there lacked a suitable tool to convert it into a practical reality. But now, with blockchain and smart contracts, the concept of tokenizing real-world assets into digital tokens has become a reality.

In this article, we look at what is asset tokenization on blockchain, which real-world assets can be tokenized in 2020 and how, and what is the market size and potential future of the asset tokenization industry.

What is Asset Tokenization?

Tokenization of an asset is converting a tangible or intangible asset into its digital counterpart which represents the underlying asset. The digital tokens, also known as security tokens, are raised and managed on a blockchain platform. These tokens can be transferred on a decentralized platform so that the inherent ownership is recorded on a transparent ledger.

Any asset can be fractionally divided and converted into security tokens so that each token represents a real-world asset. Unlike utility tokens, a security token represents the share in an asset. These digital tokens can now be traded on a secondary global platform. With the smart contract infrastructure, ownership of the underlying asset will automatically be represented on an indisputable blockchain ledger.

Similar to the functionality of Initial Coin Offerings (ICO) used to raise utility tokens, security tokens are raised by a mechanism known as Security Token Offerings (STO).

Asset Tokenization on Blockchain in 2020

The potential implications of tokenizing an asset range in multiple industries. But which assets can be tokenized?

Well, almost anything: real estate property, art, financial instruments like debt or equity, commodities, company stocks, and even a sports team. The concept of tokenization facilitates extracting the optimum value of an asset.

For a better understanding, let’s consider a hypothetical example. Say you need $10,000 for renovating your basement in a property that is worth $100,000. You can fractionally divide your property into 100 digital tokens, so each token is now worth $100. You can sell 10 security tokens on an online exchange platform to raise $10,000. The ownership of a fraction of the property is automatically transferred to the seller through the smart contracts infrastructure.

What are the assets that can be tokenized on a blockchain?

  • Company shares- Instead of buying one share worth $500, tokenization allows an investor to buy 1/5th of a share. This also allows an investor to diversify their portfolio.
  • Financial assets- Instruments like company equity can be tokenized on blockchain to enable efficiency, rapid settlements, and transparency in operations.
  • Commodities- Commodities such as coffee and salt can be tokenized to raise security tokens that represent the underlying commodity. This further enables real-time pricing to reduce fraud, and invites retail investors to participate in the commodity market.
  • Stablecoins- Fiat currencies can be tokenized into stablecoins that are regulated by a financial authority. This enables innovation with new models that include microtransactions, cross border transfers, and peer-to-peer payments.
  • Art pieces- Even art pieces can be converted into digital tokens. This removes intermediaries that levy a heavy charge and promotes inclusiveness to multiple investors.

Through asset tokenization on the blockchain, you can buy a fraction of a company share or convert your company’s debt into security tokens and raise immediate capital. The possibilities are endless.

Advantages of Tokenization of Asset

Tokenizing an asset on a blockchain-enabled ecosystem offers multiple advantages.

  • Fractional ownership- As we mentioned earlier, through tokenization, even a physical asset can be fractionally divided in the form of digital tokens. This lowers the barriers to investments in an asset.
  • Liquidity- Tokenization facilitates the buying and selling of security tokens on an international platform to a wider audience. An asset is not restricted to its geographical location or space. Moreover, fractional ownership and low capital requirement promote higher liquidity in any asset.
  • Accessibility- With low barriers to capital, even retail investors can participate in investments in prime assets. Tokenization allows a wider audience to access an asset like real estate, which was previously only accessible to prime investors due to high capital requirements.
  • Automation- With blockchain-enabled infrastructure, ownership and the transfer of security tokens are automatically recorded on a common public ledger. This removes any loopholes for disputes.
  • Regulation- Unlike the market of utility tokens and ICO, security tokens and STOs are considerably more regulated. This ensures an environment for trust and security.

Asset Tokenization Market Size

The concept of blockchain and STOs are gaining mainstream adoption. Although the concept of security token is relatively new, it has achieved an immense momentum in the last three years.

Since conception in 2017, two STO projects collectively raised around $22 million, according to the report by PWC. As per this analysis, in 2018, the number of STO projects increased to 55 and have collectively raised a total of $452 million. This report of 2020 clearly identifies major entities like the World Bank and the Austrian Government tokenizing financial assets on the blockchain.

Furthermore, the asset tokenization market is predicted to witness exponential growth this decade. According to this research, the global tokenization market is expected to grow at a CAGR of 22.45% from 2019 to 2025. According to this study, the tokenization market in Europe itself is predicted to reach $1.4 trillion by 2024.

While the concept of tokenization was indeed promising, merging of blockchain infrastructure facilitates endless possibilities.