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INN4SCIENCE BLOG

INN4SCIENCE BLOG

Blockchain

Asset Tokenization: How to Convert Everything You Want Into Tokens

The World Economic Forum forecasts that 10% of global GDP will assemble into cryptographic assets in the next decade, comprising 10 trillion dollars. Thereby, tokenization market size will reach $2.67 billion in only four years from now, with North America predicted as the largest market, according to the recent MarketsandMarkets research. Transparency Market Research, in their turn, are forecasting the asset tokenization market to grow up to $6.9 billion dollars by 2026.

Such major solution providers as Visa and Mastercard, Dell Technologies, CipherCloud, TokenEx, Ingenico ePayments, Verifone and others are joining the tokenization wave.
Regardless of diversity in predictions, all the research companies and reports are pointing to the fact that this market s is the next big thing and one of the key fintech trends coming up.

So, what is the definition of asset tokenization, how to tokenize assets, and what are the pros and cons of this process? Find all the replies to these questions and more in this article, brought to you by blockchain experts from Inn4science.

What is Asset Tokenization?

In plain English, it is a conversion of ownership rights over an asset into a digital form of blockchain-based tokens. The tokenization allows you to transform your real-world item or object into a tradable form, and to transact its ownership in full or partially use the blockchain, which makes all such operations secure and immutable, and, if needed, anonymous.

Tokenization Flow — How it Works?

The blockchain tokenization of assets works as follow: one needs to create an adequate amount of reasonably priced digital shares, the combined price of which will be equal to the value of an object being converted and release them for trading, either on a specialized exchange or by direct sales, using a smart contract.

Anyone who is willing to fully or partially own your item will purchase some ownership tokens, and this will automatically make them a partial holder of it. This process can also be used for loans with a real-world item working as a guarantee or pledge.

From the technical perspective, the blockchain tokenization of assets requires thorough planning, choosing technologies to work with and replying to a range of questions, such as:

  1. A blockchain to issue your token on. Currently, Stellar and Ethereum blockchains are the top choices when it comes to asset tokenization. You may also consider developing a private blockchain.
  2. The token type. Having the project in mind, you can either select a utility token that allows accessing a product or service, or security token that provides ownership of it.
  3. The token standard. Speaking about utility tokens, ERC20 is a commonly used standard in the Ethereum blockchain development. However, it lacks some features requested by security tokens such as forced transfers or restricted trading. Therefore, developers mostly go for ERC-1400, or choose from a wide range of options such as ERC-1450 developed by StartEngine, SRC20 by Swarm Fund, ERC-1404 by Tokensoft, etc.

It is also critical to understand that this process goes beyond ordinary blockchain development but also includes integration of AML/KYC systems and payment gateways, security management, web and mobile apps, etc.

Tokenization Pros and Cons

Pros

  1. Immutability. As an asset on the blockchain, every transaction of it is stored forever and can’t be changed. It means that nobody ever will be able to steal your asset ownership if you follow all security measures.
  2. Transparency. Utilization of Blockchain technology allows swift and easy background check of any transaction and allows tracing the tokens to the issuer without any outstanding software, by use of a sole block explorer.
  3. Ability to divide. Tokens are not limited to real numbers, so any part of ownership can be transferred or traded. Not only this eliminates the need of having a minimum purchase amount, but also potentially significantly raises the token liquidity, and that is usually followed by the price growth of the tokenized asset.
  4. Accessibility. Transferring tokens is comparably easy. Usually, only a few actions in a smartphone app or a website are required, in comparison to composing, signing contracts and transferring the shares in the form of paperwork. Therefore, the tokenization of real-world assets is more accessible.
  5. Cost-efficiency. The need for any brokers or middlemen is eliminated, hence fewer commissions or money waste occur when trading such assets.

Cons

  1. The issue of redemption. If anyone buys all tokens issued for an asset, they become full owner of the latter. It is logical that the asset should be sent to them physically, which applies additional constraints: postage costs, import duties, etc. It is uncertain, how these should be paid. It is especially important to bear in mind for those who want to know how to tokenize physical assets.
  2. Lack of legal support. In case of a bigger amount, for example, in real estate, the procedure of changing ownership is much more complex and can involve proof of actual cash flow. Even the jurisdictions that would accept a cryptocurrency transaction as payment won’t accept the tokenization of asset’s value for now. The taxation issue is also present.
  3. Licensing. In lots of countries and territories, the owners (including partial) of certain assets should have certain licenses issued on their name, whereas token transfer is available for everyone. Thus, the process of acquiring 50% of a brewery is straightforward with ownership tokens, in reality, it is illegal, as the people who run a brewery, will most certainly be required to hold some license allowing them to produce alcohol, and this principle applies to many objects set for tokenization.
  4. Awareness. The world is only starting to learn about the blockchain teсhnology and cryptocurrency, so not many people even know what is asset tokenization.

Some Kinds of Assets You Can Tokenize

It is as simple as it sounds: almost anything valuable. The only thing is that this value should be conserved through time. Let’s take a glance at four types of assets to tokenize.

Financial Assets

Gold and other precious metals, stones and gems, commemorative coins, all kinds of monetary vessels like shares can be tokenized. And any real-world shares may become tokens, and have the same features as they were initially made to have, like in case of Mt Pelerin company.

Private Assets

While they assume the personal use by an individual or a family, you can also freely tokenize them and offer to an open market. It can be used for fast loans, let’s say, by selling 10% of the tokenized value of a house, with an intention to repurchase it later on. In the real estate, Tokenestate project is an example of such technology. You can use this technology for any private asset: it can be luxury cars, yachts, aircraft, whatever has a provable value that can’t suddenly disappear. The Luxury Blockchain, for instance, is going to serve as a service for buyers to jointly invest in luxury assets utilizing tokenization, and Maecenas invites people to participate in blockchain-based auctions of fine art and buy shares of famous paintings.

Intangible Assets

Intangible assets are the things of a measurable value that don’t exist as physical objects. Those can be trademarks, patents, carbon credits, copyrights, etc., that can easily be tokenized as well. These are believed to be the easiest to process as they omit the problems of duties during transfer, storage, security, an so on. A use case in this field would be NPER project, for example, which provides economic value for the intellectual property to protect the rights of creators.

Fungible Assets

Fungible assets are also quite easy to tokenize as they suppose lots of equal and identical items, that are easy to measure in value and quantity, and that have a logical subdivision on these items. For instance, it is easy to logically split and tokenize a ton of gold in small ingots. In this case, one token may correspond to an ingot, and everything will be somewhat clear to everyone involved: you purchase a token, and you become the owner of an ingot. For comparison, it would be much more unclear to divide the ownership over one large ingot. Ekon and GoldFinX projects are having gold as a fungible item to tokenize at.

How To Tokenize Physical Assets?

Now when you know what is asset tokenization and how to tokenize an asset, you might want to get directly to the business. And this is where the need in the experienced developers rises.

As soon as you have a product, object, or service, and you want to tokenize them, just contact Inn4Science to do the rest. Not only we do know how to tokenize physical assets but also have real experience in doing this. We will tokenize and help to trade on an open market anything you wish in concise terms and on a cost-efficient budget, as our team of developers has all possible smart contracts frameworks ready for the popular blockchains. It never will be easier than that, get in touch to start with asset tokenization right away.

DO YOU HAVE ANY QUESTIONS?

LET'S DISCUSS! BOOK A CONSULTATION WITH OUR SPECIALIST


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