In this article, you will learn:
- What asset tokenization is and how it works
- The uses of tokenization
- How tokenization can help investors
What does asset tokenization mean?
In our article ‘An introduction to blockchain and cryptocurrency’, we look at blockchain and how it uses a distributed ledger to track financial transactions. This is where an exact copy of all the transactions on a blockchain are held by every participant in the network. It is sometimes known as Distributed Ledger Technology (DLT).
Tokenization uses this technology. Tokenized assets are existing real assets that are digitally represented in a blockchain. The tokens held on the blockchain represent ownership of a fraction of the actual underlying asset, such as shares in a company.
In theory, any asset could be tokenized, and its rights represented in a distributed register. The diagram below illustrates the tokenization of various assets:
Are tokenized assets the same as cryptocurrencies?
No. Tokenized assets are often confused with digital assets, such cryptocurrencies like bitcoin, which also use blockchain technology. But cryptocurrencies only exist in the digital world. They acquire value in and of themselves and are not usually backed by another asset. They reflect the features, such as security and transparency, of the blockchain on which they exist.
Tokenized assets are digital representation of assets that exist in the ‘real’ world, or assets that already exist in the digital world. It includes, for example, company shares, units in investment funds, art or real estate.
Are tokenized assets the same as NFTs?
You may have heard of ‘non-fungible tokens’ or ‘NFTs’. These are related to tokenized assets, but they are not the same.
Tokenized assets are ‘fungible’. This means that each token is interchangeable with another token of the same type and value. For example, if you tokenize shares of a company, each token representing a share is identical. Tokenized assets also usually have a clear monetary value, tied to the value of the underlying asset it represents.
NFTs are, as the name suggests ‘non-fungible’ meaning each NFT is unique and not interchangeable with other tokens on a one-to-one basis. Each NFT has characteristics that make it different from any other token. They are typically used to represent ownership of unique digital or physical items, such as digital art, virtual real estate, or in-game items. NFTs prove the authenticity and ownership of these items on the blockchain. The value of an NFT is often determined by factors like scarcity, demand, and the uniqueness of the item it represents.
In summary, tokenized assets are generally fungible tokens that represent ownership of real-world or digital assets with clear monetary value, while NFTs represent ownership of unique, indivisible digital or physical items. Both use blockchain technology but they serve different purposes and have distinct characteristics.
Why is tokenization important?
Asset tokenization has some important advantages that increase access to investment opportunities for potential investors, especially small investors. Here are some of the key benefits:
- Fractional ownership. This means an investor doesn’t have to buy all of an asset, such as a company share or property. This makes it easier for small investors to own more expensive assets.
- Increased liquidity. Illiquid assets such as art or real estate are difficult to buy and sell. Tokenising these assets makes it easier to trade ownership.
- Efficiency. Because it uses blockchain technology, the process for transferring assets is highly efficient, reducing paperwork and keeping transaction costs to a minimum.
- Security. Again, because of the cryptography and distributed ledger technology of blockchains, transactions are secure and transparent. The lack of a single “point of failure,” can also improve the resilience of the market.
Tokenization of financial assets
Tokenization allows for the division of assets into smaller, more affordable units. This enables fractional ownership, meaning that individuals can invest in high-value assets with smaller amounts of capital. For example, one Tesla share (in September 2023) is about US$245. Tokenization enables investors to buy a fraction of Tesla share for a much lower amount of money. It therefore lowers the entry barrier, enabling people to invest with amounts that match their financial capacity.
Because many different types of assets can be tokenized, retail investors are able to access asset classes that might otherwise be beyond their reach. In this way, investors can diversify their investment portfolios to include certain asset classes that usually require larger investments, such as real estate, private equity, or new forms of digital investment such as intellectual property rights. The efficiency of the process also means that transaction fees are lower, making it possible for small trades to be cost-effective.
Tokenization also means that investors don’t necessarily require a traditional bank account. As long as individuals have access to digital wallets and an internet connection, they can participate in tokenized asset markets, making it more inclusive for people without easy access to traditional banking.
This is the basis of how Tukki works. By tokenizing assets such as company shares and units in investment funds, investment opportunities are made more accessible to everyone.
Interested in Investing and want to know more?
Investing can be daunting but also rewarding if you do your research before leaping in.
Tukki’s innovative use of tokenization technology can help you get started with investing. Have a look at the other articles in our Investment Academy to learn more.