Tokenization is an opportunity to reshape the world of finance in a way that is more affordable, more secure and more accessible. What is tokenization and how does it work?
What is Tokenization?
To understand what tokenization is and its potential, we must first understand blockchain and the benefits it offers. The basis of the blockchain is a ledger. But what makes the blockchain special is that this ledger is distributed across multiple systems. This protects against a host of bad things that could happen, data loss, manipulation and hacking among them. This is why blockchain is often called Distributed Ledger Technology (DLT).
The blockchain allows for a system to be trustless, verifiable and immutable. It gets rid of middlemen who drive up costs and increases access to many people who are left out by the legacy financial system. If we could build more of society upon this model, it would quite literally change the world.
If you like this article, check out one of our previous in-house articles, “Is Bitcoin Really Fiat?” by Census Open Finance.
As it relates to the world of business, the blockchain has many benefits to offer. Businesses would also like to sidestep the middleman and many also see value in being more accessible. Security, privacy and resistance to tampering are all music to a businessman’s ears.
The process of constructing a layer of protocols for applications and business logic to be automated using smart contracts is the basis for tokenization. Tokenization has the ability to convert a tangible asset into a digital one. Through the digital token that represents the physical one, you can assign properties like value, rights, ownership and many others.
Furthermore, the tokens that represent physical objects can be tracked, quantified, fractionalized and monetized in ways that their physical counterparts can’t. For example, you could own a fraction of a company, a house or a car. You might say you can own shares in a company or a share of a house or car today. And that’s true, but this process can be digitized and automated to extend to millions of different kinds of assets.
Barriers to Tokenization
Many people have hangups about cryptocurrency and have beliefs that “it’s worthless” or that it’s a scam, bubble or illusion. The fact is that fiat currencies are just as much an illusion. Without the trust that people put into these national currencies, they would be found to be supported by nothing but air.
Is it wise to trust fiat currency? As far as being legal tender, perhaps so. Most Western democracies are very stable and there’s little doubt that these governments will honor their currencies and debts with their trading partners and their own citizens. But doing so means that you tolerate a lot of funny business.
Central banks can print more currency anytime they like on the slightest whim. They print money when the economy slows down and they stop printing money when they think the economy is growing too fast. In essence, governments and central banks use fiat currencies to manipulate consumer behavior.
Accepting cryptocurrency and tokenization would free assets from a lot of this manipulation. But only by accepting that there is nothing more inherently valuable about fiat currency than cryptocurrency can this be done. In fact, fiat currency is a sort of token itself. It is a token representing value that central banks manipulate to shape consumer behavior.
Future of Tokenized Assets
Institutional research from the likes of the Deloitte and McKinsey project as much as 10% of the global GDP will be stored and exchanged using blockchain technology by 2025-27. Finoa, a company that provides digital asset financial services to professional investors, projects that the tokenized asset market will reach into the neighborhood of $24 trillion by 2027.
It is believed that equity and bonds will be affected by tokenization first, leading to lower costs for issuing and transacting them. More illiquid and non-fungible assets like small and medium-sized businesses, cars, debt and real estate will soon follow.
Tokenization is the application of the blockchain to assets. It brings all the security, privacy and convenience of the blockchain to stocks, bonds, real estate, cars and any asset you can imagine, tangible or intangible. Middlemen are removed from the process, increasing the affordability and the accessibility of the process. The legal and financial requirements are automated, opening up the potential to replace human judgment with smart contracts that lay down the law in executable and verifiable code.
The primary barriers to cryptocurrency and tokenization are the mindset of many people who faithfully chase dollars and pounds decreed by central banks to have value, but scoff at Bitcoin and other cryptocurrencies as scams and frauds. If the existence of scams and frauds were indicative of the nature of an asset, people would have stopped buying stocks or investing in private companies long ago. The only value that fiat currencies hold is that which the consumers who use that currency trust it to hold.
The tokenization of assets will accelerate in the coming decade, reaching into the trillions of dollars. From there, the uses of tokenization will continue to grow—likely into areas that the most creative of today have not yet dared to imagine.