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What are tokenized assets?

19.07.2021 Michael Golikov Michael Golikov

The process of tokenization of assets continues to gain momentum. Binance, the largest cryptocurrency exchange, already has 5 tokenized stocks that are traded as a pair to BUSD. These are large and well-known companies: Apple, Tesla, MicroStrategy, Microsoft, and Coinbase. Another exchange, FTX, already works with tokenized futures on GameStop, AMC, and BB shares. Of even more interesting examples, Commerzbank and Deutsche Borse are working together to create a tokenized marketplace for real estate and arts.

But what are tokenized assets, and why have they become so popular?

In simple terms, tokenized assets are digital security tokens that are linked to the value of a certain asset, such as a company share, an ounce of gold, or a barrel of oil. The price of a single token always equals the value of the linked asset.

But why not buy the assets themselves instead of their digital counterparts?

The answer is very simple - you can conduct any transactions with tokens much faster, more convenient, and secure. Since tokens are issued on the blockchain, users get a high level of protection against token loss. In addition, a tokenized asset can be purchased by almost anyone, regardless of their country of residence. It is enough to have an Internet connection and an account at the exchange where the asset is traded. Well, in the case of digital shares, you will also be entitled to receive dividends.

It should be noted that buying, selling, and transferring such tokens is much easier. For example, to buy a real gold bullion, you have to go to the bank, register an account, and fill out a number of forms. In the case of a tokenized bullion, you simply buy the token on an exchange. You can then send it to another person, sell it, or leave it as collateral by literally making a few clicks.

All of these advantages have led to the rapid growth of the tokenized asset market. Digitalization has now spread not only to the stock and precious metals markets but also to real estate and art objects.

What standards are used to create tokenized assets?

Depending on their goals, the creators of tokens choose different standards, but the Ethereum blockchain is the most commonly used. At the same time, interchangeable tokens, such as the ERC-20 standard, are useful for ordinary shares, while the ERC-721 standard is suitable for creating non-fungible tokens of unique collectible art objects.

How are tokenized shares of companies issued?

Let's look at an example of the digital issuance of an asset such as company shares. This area is monitored by global regulators, including the Securities and Exchange Commission (SEC). In order to conduct the procedure of placing tokenized shares legally, companies usually use the STO (Security Token Offering) model. This is very similar to a classic IPO but is much cheaper and faster for companies because of the elimination of intermediaries. At the same time, it is possible to attract more private investors due to the convenience of buying shares and the possibility to split them into fractional parts (which is not possible in traditional markets). In most cases, trading in digital stocks, gold or oil is no different from trading in any other asset on an exchange. Users can buy and sell tokens, exchange them, send them to other people, pledge them, etc.

Speaking of tokenized assets, today's NFT boom, which continues to gain momentum, should also be mentioned. NFTs (non-fungible tokens) give their holders the ownership of certain items, such as digital paintings or collectible cards issued by top soccer clubs or show business stars. Anyone can issue their NFT on the blockchain, further popularizing the very idea of asset tokenization.

Summing it up

In the near future, almost all areas of our lives could be tokenized, from real estate ownership documents to personal valuables, bank deposits, and purchased paintings by famous artists. Blockchain technology makes the tokenization process transparent and fair, greatly simplifying the interaction between all parties. And benefits such as reduced costs and the ability to make token purchases available to a large number of private investors can be an outlet for both private businesses and public corporations.