What is asset tokenization and how does it work?

Speaking of asset tokenization, do you know what it is?

In the crypto ecosystem, new disruptive proposals aimed at improving the features and functionalities of blockchain technology are emerging every day.

With so much application and innovation, anyone would think that technological advances are something from another planet. The truth is that blockchain applications are revolutionizing project investment, financing, and real estate sales, among other things. It is an ecosystem that begins with the tokenization of assets. Do you know what it consists of and how it works?

Asset tokenization: concept

We understand tokenization as the issuance of blockchain tokens that represent real exchangeable assets. For example, works of art, real estate or shares of a company. From a technical point of view, in a blockchain, such as Ethereum, there is not only its primary currency, such as Ether in this case, but it allows us to create other digital tokens within the platform.

To tokenize is to issue a digital token within the blockchain, which can be transmitted from one wallet to another, and use this token to digitally represent securities (debt, real estate, shares, etc.). We create this token or digital token so that investors can access it. This token will grant a right or obligation over the company.

Characteristics of asset tokenization

Transforming a real-world asset, tangible, or intangible, into a digital asset with representation safeguarded by the blockchain is possible thanks to its characteristics:

  • Digital representation. Recreate any asset through its proportional and unique digital version.
  • Fractional ownership. One of the main characteristics of tokenization is the ability to own fractions of an asset, which facilitates its sale and the possibility of benefiting from price increases.
  • Speed. It allows transactions to be carried out much more quickly and economically.
  • Rights and properties. Tokenization makes it possible to transfer rights and properties to the digital representation.
  • Control. Provides greater control and security of rights and properties by the token owner.
  • Transparency. Tokenization platforms and blockchain technology guarantee transparency in investments.

Cryptocurrencies were the first application of blockchain, but its underlying technology is catching up with traditional markets. Is it the beginning of a new era?

How tokenization works

The asset tokenization process works as follows:

  1. Study feasibility. The asset is analyzed in detail, as well as its nature and general conditions. The objective of this phase is to check whether it is a feasible tokenization process or not.
  2. Specification. In this phase the type of token that will represent the asset is defined. The most common tokens are Utility, Security and Equity. In addition, the interaction platform of the asset is also studied.
  3. Creation of smart contracts. When the time comes to create the smart contracts, the terms that will control the tokenization process will be recorded in them.  At this stage it is important to determine the tokenomics of the token.
  4. Legal requirements. None of this would come to fruition if the legal and tax aspects of asset tokenization were not considered, so it is important to review the conditions in each country or region where the digital asset is issued.
  5. Launch of the token. Once the previous phases have been completed, it is time to launch the token and its platform, so users can now register on this to start operating.

Blockchain technology has infinite applications, some yet to be discovered, but what is the advantage of all this?

10 advantages of asset tokenization

Fairer, more transparent, active financial markets… Behind the great benefits of asset tokenization there are other advantages:

  1. Liquidity. By representing securities that can be moved from wallet to wallet, we can transfer ownership of that token and obtain liquidity more easily.
  2. Transparency. It is one of the most important technologies in terms of transparency, security, and immutability.
  3. Convenience. Gone are the days when the main means of communication between investors and market makers was the telephone. Tokenization platforms facilitate all operations.
  4. Ease. They facilitate the transfer of assets and their decentralization into real estate, debt, etc.
  5. Security. Tokenization runs on the most secure technology in the financial system today.
  6. Representation. They represent projects, products, or other assets, so they have real backing.
  7. Delivery. The great advantage of tokenization is that it allows something with a lot of value to be distributed among many people.
  8. Financing. It makes it possible to obtain financing much faster than with the traditional system.
  9. Peace of mind. Investors can be sure that their money will not remain leveraged for years.
  10. Visibility. Investors can apply for investment among hundreds of thousands of people, making their financial product available to anyone.

All clear so far? What’s the bottom line on all this?

Summary of asset tokenization

Advantages, features, functionalities… We’ve talked about a multitude of factors related to the world of blockchain and tokenization, but what’s the crux of it all?

The blockchain lays the solid foundations of a technology that is just spreading its wings to take flight in the complex sky of cryptocurrency.

Thanks to it, we can transform the way we invest and exchange assets. In short, it makes the impossible possible. If a couple of years ago it was unthinkable to divide a building into different parts, today it is possible with tokenization. Dividing a cake is easy, but how do you divide a banknote, a gold bar or a building?

Tokens are digital assets that represent these goods. Therefore, something with a lot of value can be distributed among many people, making it more liquid in the market, and getting funding faster than with the traditional system.

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