With the emergence of blockchain technology, smart contracts, and the popularity of digital tokens, asset tokenization has become an intriguing opportunity for organizations to pursue.
If you want to learn more about how to tokenize an asset and the benefits of asset tokenization, this post will explain everything you need to know to get started.
However, before diving into the process of asset tokenization, it is essential to explain what asset tokenization is and which assets can be tokenized.
What Is Asset Tokenization?
Asset tokenization is the process of creating digital tokens on a blockchain that represent digital or physical assets. These assets can then be sold on the secondary market like shares of a stock.
For example, if you had a painting valued at $20,000, asset tokenization could convert ownership of this asset into 20,000 tokens. Each token represents fractional ownership in the painting. In this example, it would require 20,000 asset tokens to own the painting fully.
What Assets Can Be Tokenized?
Almost any asset you can think of can become a tokenized asset. Traditional assets like property, bonds, and other commodities are commonly tokenized. Plus, exotic assets like racehorses, fine art, and sports teams are also regularly tokenized.
Asset tokenization is a great way to quickly get cash value for illiquid assets that are often difficult to sell for fair market value, such as ancient armor, rare collectibles, etc.
Beyond physical and digital items, services can also become tokenized assets. In these cases, each token represents a service that the token owner can redeem. This type of token is called a utility token.
How to Create Tokenized Assets
Now that you know more about asset tokenization, you are probably wondering how to tokenize assets and start selling fractional asset ownership to generate cash. There are several steps to asset tokenization; let’s briefly explore each step.
Choose an Asset to Tokenize
If you want to tokenize assets, the first step is choosing the right asset or assets for tokenization. Creating tokenized assets costs money, so you must choose assets people will be willing to purchase or invest in.
Analyze the market and the needs of your audience to ensure that there is an interest in asset ownership of the asset you want to tokenize before you spend time and money to tokenize an asset.
Choose the Right Token Type
Once you choose the right assets to tokenize, you must choose the proper token to represent them. There are several different types of digital tokens used for tokenized assets.
We have already discussed utility tokens, which represent a service. However, there are also security tokens, governance tokens, and non-fungible tokens. Security tokens represent an ownership interest in an asset.
Governance tokens are a utility token that grants the token holder the right to vote on the direction of the network or blockchain. Non-fungible tokens (NFTs) are unique and cannot be divided.
Blockchain and digital assets are not strictly regulated like other industries. However, you still need to ensure compliance with relevant regulations and authorities. For example, if you are tokenizing financial assets, you must adhere to SEC regulations.
Choose the Right Blockchain
There are several blockchain options for tokenized assets. Ethereum is the most popular and widely used, giving your organization more opportunities to sell. However, it is also the most expensive.
Weigh the pros and cons of each blockchain option before making a final decision.
Develop Smart Contracts
Once you choose a blockchain network, you must develop a smart contract to tokenize an asset fully. Smart contracts are computer code that is automatically executed when the appropriate conditions are met.
In the case of a tokenized asset, it executes on purchase and guarantees asset ownership for the purchaser.
Once smart contracts have been developed for your tokenized asset, it is time to issue the tokens on the blockchain. Most businesses launch tokens on third-party platforms like Ethereum, but your organization could also issue the tokens on its own blockchain network.
In addition, you can release tokens to third-party trading platforms to increase sale opportunities and generate additional revenue from your tokens.
The Benefits of Asset Tokenization
There are several benefits of tokenization for asset owners to consider, including the following:
- Greater liquidity
- Reduced asset management costs
- Better prices
Tokenizing assets gives asset owners greater liquidity. Whether you have illiquid assets that are difficult to sell or intangible assets like digital collectibles, tokenization enables an organization to have more liquidity with its assets.
Increased liquidity is also beneficial for larger traditional assets like real estate property that you don’t necessarily want to sell entirely, but you also want to access some of the property’s value.
Reduced Asset Management Costs
Managing assets can become costly, especially when selling ownership stakes. Tokenization reduces standard asset management costs by reducing or even eliminating the need for lawyers and other intermediaries.
By reducing costs, tokenization can help your organization get more money for its assets.
If you have illiquid assets that are difficult to sell, tokenization can help your organization get a better price. When there is an unestablished or scant market for an asset, owners typically have to discount the asset’s price to sell it.
Tokenization enables owners to fractionally sell ownership in an asset and thus eliminate the illiquidity discount and get a fair price for their asset.
Tokenization might not always be the best option for your organization’s assets, but it is an interesting approach. If you want to learn more about tokenization and blockchain technology, contact an experienced HiTech development partner with blockchain experience like Koombea.