What is tokenization? How it works and how to invest in it

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Discover how tokenization impacts the traditional financial ecosystem by digitizing assets.

As a researcher studying the digital asset market, I’ve come across a report published by 21.co, a reputable digital asset management firm. The report suggests an intriguing potential for tokenization, which could expand to reach a staggering $10 trillion market size by the end of this decade. This growth is largely attributed to the growing acceptance and implementation of blockchain technology within traditional financial institutions.

According to a study conducted by the Boston Consulting Group, the value of tokenized assets is anticipated to reach an impressive $16 trillion by the year 2030.

What is tokenization? How it works and how to invest in it

Tokenization’s ability to revolutionize financial structures is a significant factor fueling its expansion. By enhancing efficiency, decreasing expenses, and finessing supply chains, it offers a compelling alternative to traditional financial systems.

As a researcher exploring the realm of tokenization, I’m excited to share that its applications extend far beyond just financial instruments. In the not-so-distant future, we can anticipate an expansive array of assets being tokenized – from bonds and equities to art, automobiles, commodities, and even fine wines.

Expanding into novel asset classes can make investing more inclusive and inject fresh liquidity into markets previously known for their intricacy and sluggishness.

So, let’s find out what tokenization is and why it matters.

Table of Contents

Tokenization explained: what is tokenization in crypto?

As a crypto investor, I can tell you that tokenization is the process of transforming tangible assets like shares, debentures, property, or even tangible items into digital tokens, which are then securely stored and traded on a blockchain platform.

These tokens signify ownership or a share in the underlying asset, allowing for seamless and safe trading or transferal.

Tokenization serves to introduce fluidity into previously inflexible markets. By tokenizing assets, they become tradeable on digital platforms, enabling instant transactions at reduced costs and enhancing overall market effectiveness.

How does tokenization work?

Here’s a step-by-step overview of how tokenization typically works:

  • Asset selection: An issuer selects an asset to be tokenized. This could be anything from real estate to stocks, bonds, or commodities.
  • Tokenization process: The asset is divided into digital tokens, each representing a fraction of the underlying asset. This process is often facilitated by smart contracts, which are self-executing contracts with the terms of the agreement directly written into code.
  • Issuance: The tokens are issued on a blockchain, where they can be bought, sold, or traded. Each token is unique and contains metadata that describes the asset it represents.
  • Trading and ownership: Once the tokens are issued, they can be traded on blockchain-based platforms. Ownership of the tokens is recorded on the blockchain, providing a transparent and immutable record of ownership.
  • Redemption: Token holders may have the option to redeem their tokens for the underlying asset. This process is typically governed by the terms set out in the smart contract.
  • Regulatory compliance: Throughout the process, issuers typically ensure compliance with relevant regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.

Benefits of tokenization

Transforming tangible assets into digital tokens on a blockchain yields several advantages:

  • Increase accessibility: Tokenization allows for fractional ownership, enabling smaller investors to access assets that were once out of reach due to high costs or barriers to entry.
  • Enhance liquidity: Tokenization makes traditionally illiquid assets, such as real estate or fine art, more liquid by enabling them to be traded on blockchain-based platforms, thereby reducing transaction times and costs.
  • Improve efficiency: By removing intermediaries and streamlining processes, tokenization can increase the efficiency of asset transfer and management, reducing costs and administrative burdens.
  • Enable borderless transactions: Blockchain-based tokens can be traded globally, enabling seamless cross-border transactions without the need for intermediaries or complex regulatory processes.
  • Enhance security: Blockchain provides a secure and transparent ledger for tracking ownership and transactions, reducing the risk of fraud and ensuring the integrity of asset ownership.

How to invest in tokenization

For individuals aiming to broaden the scope of their investment portfolios, exploring tokenization presents various prospects. Here are some straightforward methods to invest in this innovative technology:

    Buy tokenized stocks: Purchase tokenized stocks of well-known companies like Google or Meta on crypto exchanges. These digital assets represent traditional stocks and offer benefits like 24/7 trading and fractional ownership.
    Invest in tokenization ventures: Consider buying crypto tokens issued by projects focused on tokenization. Research the project’s team, token liquidity, and progress before investing. Look for projects with a strong use case and potential for growth.
    Acquire layer-1 tokens: Look into purchasing layer-1 (L1) blockchain tokens of platforms that enable tokenization, such as Ethereum (ETH), Solana (SOL), Avalanche (AVAX), and BNB Chain (BNB). These tokens are the foundation of their respective blockchain networks and may see increased demand as tokenization grows.
  • Invest in exchange-traded products (ETPs): Some platforms offer ETPs that provide exposure to tokenized assets. These products can provide a convenient way to invest in tokenization technology.

Tokenization platforms

As a crypto investor, I can tell you that there are several platforms at my disposal which enable the conversion of real-world assets into digital tokens, thereby making them tradable and manageable on decentralized blockchain networks. Some prominent examples of such tokenization platforms include:

  • Backed: Backed is building on-chain infrastructure for capital markets, offering tokenized securities that represent real-world assets like bonds, stocks, and ETFs.
  • Maple: Maple is an on-chain marketplace focused on providing high-quality lending opportunities to institutional and accredited investors, catering to their liquidity, risk, and return requirements.
  • Matrixdock: Matrixdock is a digital assets platform that gives institutional and accredited investors transparent access to tokenized RWAs, ensuring an immutable record of ownership and daily proof-of-reserve.
  • Ondo: Ondo offers on-chain financial products such as tokenized notes backed by short-term US Treasuries and bank demand deposits.
  • Polymath Network: Polymath is a platform for creating tokenized securities, offering a streamlined process for issuers to digitize securities on the blockchain.
  • Securitize: Securitize is a compliance platform for digitizing securities on the blockchain, ensuring that tokenized securities comply with regulatory requirements.

Risks and challenges of tokenization 

As a financial analyst, I’d be thrilled to share my perspective on investing in tokenization. This innovative approach holds immense promise, yet it’s essential to recognize the inherent risks and challenges it presents. Here are some key considerations:

  • Regulatory risks: Tokenization is a relatively new concept, and regulations surrounding it are still evolving. Changes in regulations could impact the value and legality of tokenized assets.
  • Market volatility: The crypto market is known for its volatility, with token prices often experiencing wild fluctuations. You should be prepared for the possibility of sudden price changes.
  • Security risks: Digital assets are susceptible to hacking and other security breaches. You should take precautions to protect your assets, such as using secure wallets and exchanges.
  • Lack of liquidity: Some tokenized assets may have limited liquidity, making it challenging to buy or sell them at desired prices.
  • Technology risks: Blockchain is still evolving, and there are risks associated with bugs, glitches, and other technical issues that could impact tokenized assets.

Based on current trends, it seems likely that the tokenization market will persist in expanding, as more assets get tokenized and there is an increased usage of blockchain technology.

It’s important to approach investment in tokenization thoughtfully, taking into account the potential risks that come with it.

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2024-04-30 15:50