Expensive artwork, real estate, commodities and other lucrative investment vehicles can be digitised and 'tokenized' on a blockchain to reach a broader pool of investors. Larry Fink, the CEO of the worlds largest money-management firm BlackRock believes tokenization will be "the next generation for markets".
You can represent real word assets on a blockchain by creating digital tokens that are linked or embedded with the economic value and rights for that asset. This allow investors to have ‘fractional ownership’ of an asset and also expand the global pool of capital to reach further into financial markets. Tokenization promotes universal access, transparency and authenticity of asset ownership while mitigating costs and settlement transaction fees.
Tokenization offers the following benefits to financial markets:
Fractionalisation - tokenization is enabling fractional ownership of assets. This means that instead of having to buy an entire property or artwork, investors can purchase a small fraction of it, lowering the barriers to entry for investment and democratising access to these assets.
Operational Efficiency - smart contracts automate many of the processes involved in managing fractional ownership and reduce administrative costs by streamlining the investment process.
Smart contracts conduct compliance checks and dividend distribution as each token can have specific qualities about the relationship between asset and ownership coded into it.
Reduced Settlement Time - transactions can be settled almost instantly due to the use of blockchain technology, which eliminates the need for intermediaries and vastly improves settlement times.
Data Transparency - tokenized assets on a blockchain offers immutability and resistance to cyber-attacks. This is because data is distributed across a network of participating nodes, rather than being stored in a single centralized database. Transactions are made trackable and auditable allowing the full history of the tokenized asset to be verified.
Liquidity - Tokenization increases liquidity in a market because investors can buy and sell fractional ownership of assets more easily. These tokens can be brought to markets a lot quicker without the need for intermediaries or complex legal procedures.
Assets like digital art, music or video etc, can also be represented on a blockchain as non-fungible tokens (NFTs). An NFT is a distinct token on a blockchain, completely unique and unlike any other in existence.
The difference between fungible and non- fungible is essentially the function of the token. For example Ethereums ERC-20 token, commonly known as ETH can be used as a medium of exchange and to pay gas fees due to its interchangeable nature. In contrast, an NFT is unique due to the individualised nature of its embedded digital content, be it a monkey picture, biometric identity, medical records, or any other digital asset.
