What is tokenization? What are its impacts on our society?

Day after day we are entering into a tokenized economy, but what is it exactly? How tokenization powered by blockchain technology can revolutionize our way to exchange value, our approach to property, to investments? This is what I will try to explain through this article.

What is tokenization?

Definition

Tokenization is the process of converting any real-world asset such as houses, paintings, businesses, financial titles… into a digital token, thus creating digital property based on real-world asset. These tokens can be stored, transferred and traded on a blockchain network (which acts a trust party) through a marketplace.

Why are the main benefits of tokenization

Tokenization has a wide variety of benefits, here are for me its main benefits :

1. Liquidity : On contrary to real-world assets, tokens can be easily sold, traded on marketplaces or exchanges. It allows more flexibility for the owners.
2. Accessibility : Investors from all over the world can access any types of markets like real estate, private funds or art which used to be reserved only for an elite or private funds. The disintermediation of notaries & lawyers allows individuals to invest more capital as it is less diluted.
3. Reduce transaction costs : As tokenization eliminates intermediaries such as banks, brokers or notaries, it reduces drastically the transaction costs as the cost of buying or trading an asset on a blockchain corresponds to a transaction fee and perhaps a marketplace fee.
4. Investments diversification : Investor can access more markets that were not accessible or not liquid enough.
5. Increase transparency : As tokenization is using blockchain to register transactions, it brings transparency and reduce the fraud risks.

These are the main capabilities of tokenization, now let’s go through this notion of token and what can be done with them.

What are the different types of tokens ?

Tokens are used to represent a fraction of a physical or digital asset. The most common types of tokens used for asset tokenization are:

1. Property token: They any types of property titles (tangible or non-tangible) such as a building, an art piece, or financial titles. The token holders gain ownership rights over these assets.
2. Participation Token: They represent a stake/share in a company or project. The holders gain rights such as dividends or can vote on the company’s governance system.
3. Debt token: They represent a debt or a loan. The holders are entitled to interest on the debt or loan.
4. Income token: They represent future income, for example royalties on a work of art or rental income on a property. The holders are entitled to regular payments from these revenues.

Tokens can represent different types of assets. They can be designed to have multiple properties. This list is not exhaustive and are just a few examples of what can be done.

Tokenization examples

Real estate

The company “RealT” offers house ownership tokens in the United States. The token owners’ obtain ownership rights and receive rental income from them. Tokens can be bought and sold on an open platform so that investors can easily enter or exit the market. Their real estate investment becomes highly liquid.

ART

The platform Rubey is launching a project aiming to tokenize an art masterpiece from James Ensor estimated at a bit more than 1 million though the issuance of Art Security tokens (entry price : $150). The idea is to lend the artpiece to museums or other entities and when according to the experts the right time comes, put it into sales so that token owners can get back their investments with the added value (if the art piece is sold at a higher price)

These examples illustrate how tokenization can allow you to diversify your portfolio by investing in real estate or art assets. Markets which are historically not accessible for the personal investors.

This sounds beautiful, but tokenization has its parts of risks as well…

What are the risks of tokenization

These are the main point you need to consider before investing to token linked to real world:

1. Regulatory risk: Regulations around tokens vary from country to country and can change rapidly.
2. Volatility risk: Tokens can have large fluctuations in value due to the decentralized nature and speculation in the markets, which can lead to significant losses for investors.
3. Fraud risk or scams: Tokenization is a new technology, risks of fraud or malicious projects exists. It is important for investors to do their own researches before investing into a tokenization project (I’ll create an article on criteria to take into account before investing into a project).
4. Liquidity Risk: This is not because a market issue a token that it would automatically become more liquid and attractive. Like any investment, due diligence on the market is key.

These risks can vary between projects and contexts, and you should do your own research before putting money into a tokenization project. Accessibility is great, but it also exposes you to risks. Keep that in mind.

What are the impacts on our society?

I believe tokenization will have a strong impact on our economy and society, as it can enable us to create a co-ownership and sharing-economy models.

• New business models will be created and have an impact on both the individuals and the businesses.
• Efficient asset management will be created as owners will be enabled to monitor and manage their investment in real time and without intermediaries.
• Tokens also allow ownership of these assets to be fragmented, divided, allowing multiple people to own them, which can make ownership accessible for all at a very low cost.

Tokenization of the economy is tomorrow’s economy, as it is suited to our digital world. The revolution is happening, I strongly believe that we will see companies tokenizing the industries one by one, block by block.

A tokenized economy means that a new era of exchanging value will take place. Our current economic framework is not build or was not created for this token revolution. As a new field is being created, a new science called token engineering is emerging, it focuses on building and designing economic systems based on tokens. My next article will cover it.

S.