Prospects and benefits of DeFi as a viable investment, when compared to traditional investments.
How Tokenization Will Fundamentally Change The Way We Invest In Assets
Tokenization is the process of digitizing assets, dividing them into tokens and typically selling them to investors. This innovation has the potential to disrupt industries all over the world.
The emergence of blockchain technology is already changing the way millions of people live their lives. Payments, remittances, lending, gambling, identity management and even gaming are seeing an efflorescence of innovation thanks to this revolutionary new technology.
At first glance you might be wondering what all the fuss is about. Blockchain technology seems a lot like a standard database or even an excel sheet. Transactions are recorded in real-time and stored in “blocks”. Once one “block” is full, another is created and linked to the previous one. So what?
Well blockchain technology is special because it is decentralized and trustless, meaning that it can operate without an organization (like a bank) on a purely peer-to-peer basis. This is revolutionary because it removes many of the barriers which currently exclude people from modern life.
You do not need a bank account to receive KEY tokens just like you don’t need a home address to receive an email. Blockchain empowers individuals and moves previously unattainable services into the realm of possibility.
And the best may be yet to come.
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What Is Tokenization
In the blockchain space, tokenization refers to the issuance of digital tokens which represent shares or ownership over a specific asset or organization. In many ways it resembles traditional securitization, with a modern twist that any asset can be digitized, divided and sold in the form of security tokens.
These are typically sold in Security Token Offerings and must abide by national securities regulation, unlike Initial Coin Offerings which sell utility tokens rather than security tokens.
Tokenization Empowers Individuals
In Germany, a lending platform called Bitbond managed to receive regulatory approval from BaFin – the German regulator – to offer their BB1 security token as tokenized debt.
Each BB1 token represents a share of a portfolio of loans, which entitles the token holder to a portion of the generated returns. Therefore money is leant out a fixed interest rate and tokenization allows for that loan to be digitized, divided and sold to investors from around the world. This tokenized debt is not simply within the remit of institutional investors but instead is available to smaller investors with much less capital available.
The median American household has $4,830 in savings, and much less than that available for spending. As a result, many attractive investment opportunities are simply not available. Tokenization has the power to divide large sums of required capital into much smaller chunks, making them available to lower income households.
This example showcases how tokenization is already being used to dismantle barriers and make previously unattainable services available to people from all economic backgrounds.
How Tokenization Will Provide Liquidity For The Real Estate Market
Taking it a step further, tokenization has the power to make previously illiquid assets, liquid. To understand this point, imagine buying real estate. Initially you might be delighted by the price and location of your new property. However, it quickly dawns on you that making such a capital-intensive investment harbours certain dangers, especially if the local economy collapses and the number of people with the financial means to purchase the property declines rapidly.
Trying to sell your property now is going to be incredibly difficult. If you can’t turn an asset (in this case real estate) into cash then you have an illiquid asset – a huge problem in modern economies. Tokenization promises to change this forever by creating a global secondary market with the ability to trade security tokens representing small shares of the property.
Now instead of trying to sell a €500k property during an economic downturn, tokenization allows you to divide your property into 500k (arbitrary example) security tokens and offer them to a global audience. Of course your chances of selling the property now go through the rough and you have a liquid asset.
Although this is not yet a reality, there are platforms that are getting close to such a service.
What Is A Non-Fungible Token?
One key concept that we haven’t discussed yet is fungibility. This term is used in the blockchain space to describe if a token is interchangeable or not. Bitcoin for example, is a fungible token because one Bitcoin can be happily exchanged with another Bitcoin – all Bitcoin’s are the same.
Non-fungible tokens however are not interchangeable as each token has unique properties. These are still relatively new because the Ethereum standards they rely on – ERC-721 and ERC-1155 – have only just been developed.
That being said, non-fungible tokens are already widely used with the leading example being CryptoKitties. CryptoKitties is one of the most popular games in the blockchain space and centers around unique, collectable and tradable tokens (called “kitties”). Since its release in 2017, the game has become one of the most popular decentralized applications on the Ethereum network and gives a first glimmer of the potential of this new type of token.
Of course, gaming is just one of the industries that will be affected by non-fungible tokens. Company shares, University degrees, luxury items, real estate and many other markets will experience a radical shift in the wake of this breathtaking innovation.
What Are The Benefits Of Tokenization?
We’ve mentioned many of the benefits above but have missed out some others:
- Transparency – Individuals are often dependent on lawyers to draw up sophisticated securities contracts and have little transparency as to what is really going on. Security tokens can be set up so that the token holder’s rights are embedded within. Therefore the blockchain acts as an immutable ledger of – not just transactions – but also permissions and legal responsibilities.
- Accessibility – We briefly touched on this point above, but it is worth going into in more detail. Many modern financial instruments are currently out of reach for the vast majority of people. Few of us can afford to buy a property for example. Tokenization empowers the individual by removing barriers and dividing typically large capital investments into much smaller ones. Just like during the Bitbond STO for example.
- Liquidity – This is key benefit brought by tokenization. Dividing and digitizing physical assets and making available on a global secondary market is the biggest benefit Tokenization has to offer. If it fulfils its promise, we will see billion dollar industries experience a radical transformation.
These advantages apply to all types of assets but make particular sense for big ticket items such as real estate or fine art. These are typically inaccessible to most individuals, offer little to no transparency and are illiquid. Tokenization would solve all three issues.
What Are The Challenges Of Tokenization
Up until this point we have primarily focused on the benefits of tokenization. Some obstacles need to be overcome; however, in order for tokenization to impact the broader economy.
The biggest challenge that we face is slow or harmful regulation. Blockchain based platforms are typically decentralized and operate internationally. This could mean that platforms fall under the full and varying scope of international securities regulation. For any company to abide by a multitude of different – and sometimes contradictory – laws is close to impossible, especially if governance is decentralized.
In order for tokenization to reach its full potential we need a coherent international framework which allows for security tokens to be traded, controlled and issued in a compliant manner.
Another important challenge involves the linking of security tokens with real world physical assets. What, for example, happens if you own a fraction of 10 gold bars in Fort Knox, and 2 bars are stolen? How this kind of scenario would impact the value of the token is absolutely crucial, since the value of the token would collapse if it can not reasonably be linked with the physical asset.
A final point worth considering is governance. This is a tricky topic in decentralized organizations because ownership is typically split across hundreds or even thousands of people. In such a situation it often unclear who carries the costs associated with maintenance and operations.
If we imagine a tokenized property which is collectively owned by thousands of investors, it is not immediately clear who would be responsible for collecting rent, finding tenants and paying for renovations. Although much bigger challenges have already been overcome it is important to understand that tokenization is still at the beginning and has significant problems to face.
Conclusion – The Impact Of Tokenization
Despite the challenges listed above tokenization represents a groundbreaking innovation with the potential to disrupt industries all over the world.
With greater transparency, accessibility and liquidity, previously unattainable assets would become available to regular people all over the world. This in turn has the power to create and build wealth, and consequently improve people’s quality of life.