Beyond Bitcoin (BTC), asset tokenisation is a use case for blockchain technology that makes it possible to buy, sell, and trade digital assets on the distributed ledger. For instance, digitising real estate assets helped create less liquid assets that allowed immutable transactions. But what does tokenisation in cryptocurrency mean?
Issuing security tokens, a form of blockchain token, to represent tangible digital marketable assets is known as asset tokenisation. Security tokens are issued through a security token offering (STO) mechanism, similar to an initial coin offering (ICO), through which investors can purchase payment, equity, or utility tokens.
Tokenisation, as opposed to the securitisation of assets, must be understood to be distinct. For instance, the securitisation procedure entails grouping particular illiquid asset classes to repackage them as securities. We should note that every asset, whether digital or physical, can be tokenised into digital tokens. Security tokens created through the STO process, for instance, could stand in for shares in a corporation, real estate, or an investment fund.
This process can convert the ownership rights and economic value of off-chain real-world assets into tokens based on blockchain technology. Given the quick transition of infrastructure to intelligent systems and the need to unlock efficient finance, asset tokenisation may also aid alternative financing models in overcoming infrastructure development obstacles.
How Does Asset Tokenization Work?
Understanding the function of smart contracts in converting physical assets into digital assets is the first step in learning how to tokenise an asset. Smart contracts are helpful in controlling and carry out the operations of digital tokens backed by underlying assets. The terms of the parties’ agreement are incorporated into existing lines of code on the blockchain network, resulting in a smart contract that is self-enforcing and self-executing.
A smart contract that makes contractual terms and historical data publicly available allows for the direct delivery of tokens to investors once they meet the contract’s parameters. It increases efficiency and transparency for all parties involved.
Asset tokenisation, as it is known technically, is the process of creating an informatics code that highlights the critical components of the asset and offers a few ways for the user to interact with the asset’s digital representation. Developers used Solidity to build this computer code for the Ethereum blockchain.
Steps Of Asset Tokenization
The asset tokenisation process can often go through the following steps:
1. Choosing Asset Tokenization Model
To represent different asset kinds, the Ethereum community has created several token standards. These standards enable compatibility between various blockchain projects, simplifying the adoption of distributed digital assets.
A token standard is a group of pre-defined functions that can represent the distinctive properties of an item. The essential characteristics of the asset, such as its fungibility or nonfungibility, should be considered before choosing which token standard to employ.
2. Modelling The Asset
Before implementing the token model chosen for representing assets, you must consider certain factors so that it is obvious which data will be saved on-chain and off-chain. When creating precise code and token behaviour, you must consider factors like the level of data trust, regulatory limits on data privacy, and scaling requirements.
3. Review The Informatics Code’s Technical And Security Aspect
It is essential to carry out a smart contract audit using standardised procedures or mandating that knowledgeable outside parties evaluate and validate the informatic code before making it available online.
4. Deployment Of Informatics Code
Depending on the use case and the large perimeter, developers can put the code on the blockchain after a security evaluation has been completed, publicly or privately. After the deployment of the informatic code, users ought to be able to transfer and store these tokens.
Benefits Of Asset Tokenization
The difficulty associated with issuing, buying, and selling securities is reduced for digital token issuers thanks to the token economy. For instance, illiquid tangible goods like fine art or illiquid intangibles like real estate can be traded on the secondary market, giving buyers and sellers more liquidity.
In addition, the token itself has an immutable record of ownership and the rights of the relevant parties, which enables sellers and investors to learn information about the token’s initial owner, the current dealer(s), etc. Furthermore, by lessening the administrative load of evaluating and validating transactions, automated smart contracts contribute to lower transaction costs and faster transaction processing.
The lower minimum investment requirement makes tokenised assets more accessible to a broader range of investors. Startups using asset tokenisation can now access tokenised funds directly, thanks to blockchain technology. Additionally, because of the liquidity feature of security tokens, investors can trade them around the clock on international secondary markets.
Risks Of Asset Tokenization
Despite the benefits above, there are risks associated with asset management in the token economy. For instance, illiquid or poor liquidity assets may result in significant losses for investors since market prices can fluctuate wildly and materially from the actual value of a business or investment opportunity.
Regulation changes, cyberattacks, and cryptocurrency heists increase the volatility risk of virtual assets.
Payment, utility, and security tokens are also subject to valuation risk. For instance, it is difficult to identify the objective worth of payment tokens because these prices are decided by global supply and demand dynamics rather than by conventional asset valuation methods, like discounted cash flows (DCF). The term “DCF” refers to a method of valuation that determines an investment’s present value based on its projected future cash flows.
How To Invest In Tokenized Assets
Investing in tokenised assets is likened to the process of crypto trading. Below are the few steps to take in tokenised asset investment:
1. Find a centralised or decentralised exchange that provides your preferred tokenised asset.
2. Create an account on the exchange of your choice and complete the onboarding process.
3. Fund your account with either a fiat currency or cryptocurrency to buy tokens at your risk-tolerance level.
Asset Tokenization Vs. Securitisation
Asset securitisation is refinancing assets through a particular purpose vehicle (SPV) on the capital market. Since an SPV’s activities are restricted to purchasing and funding specific investments or initiatives, it may be eligible to be classified as a bankruptcy-remote entity. Asset tokenisation, on the other hand, is the process of developing a distinctive digital representation of an asset.
Securitisation differs from tokenisation in that it makes use of smart contracts or programmability. Since an Ethereum token can include up to 18 decimals, investors can trade tokens in fractions. Instead of storing assets indirectly, a buyer can keep tokens directly in their wallet.
A logical next step in the development of securitisation made possible by blockchain technology is tokenisation. Unparalleled transparency, transactional efficiency, and risk management are made possible by distributed ledgers. Additionally, it can make asset classes previously untradeable liquid, thereby boosting financial participation and information efficiency in these markets.
Future tokenisation applications should become more creative and valuable, especially in previously unavailable assets or only accessible to a local group of investors.