What Is Asset Tokenization? Transform Your Financial Portfolio

Real-world assets like real estate or art don’t come cheap. The barrier of entry is sometimes extremely high, which makes people shy away from owning a piece of them. 

Asset tokenization solves this and creates digital tokens of physical assets you can easily trade and store. These tokens are on blockchain, making the transactions transparent and secure. Asset tokenization platforms let businesses and individuals manage these assets and trade them freely without any brokerage involved. 

Asset tokenization not only democratizes investment but also delivers an easy way to manage assets since you don’t have to manage them physically.

It makes it more affordable for investors to trade tokenized assets, as the barrier to entry isn’t as high as it is when buying the entire asset. Each token represents a piece of ownership you can easily track on a blockchain. There is no need for physical certificates or lengthy verification processes. 

Asset tokenization opens up investment opportunities for people. More people can afford to invest in high-value assets like art or rare collectibles. Moreover, there’s no significant cost of investment since there’s no broker in the middle.

Types of asset tokenization

There are two main types of asset tokenization: fungible asset tokenization and non-fungible asset tokenization. 

Tokenizing fungible assets

In fungible asset tokenization, all units are of equal value and function. They have similar market value and can be exchanged freely. For example, Bitcoin. All Bitcoins work the same way and are a part of the identical blockchain. 

You can split fungible cryptocurrency into smaller parts up to the number of decimal places set when it was created. Till that minute part, the value of the asset will be the same while it functions as a whole unit.

Tokenizing non-fungible assets

In non-fungible asset tokenization, each unit represents something unique. You can’t swap NFTs since the value of the tokenized asset can be different. Moreover, you can’t divide NFTs into smaller parts. A few fractional NFTs let you own a part of an expensive art or commercial real estate. 

Non-fungible assets are unique and have individual features and information. 

What assets can be tokenized 

Below are some common types of assets you can tokenize.

• Real world asset tokenization involves turning buildings, land, or machinery into digital tokens. Each token represents a share of the asset, making investing in and trading some parts easier.
• Debt tokenization converts loans and bonds into tokens. Investors can buy these tokens, representing a part of the debt, and receive interest payments.
• Equity tokenization turns company shares into digital tokens. Trading these tokens is like trading stocks, but since it happens on the blockchain, there’s no heavy brokerage involved.
• Commodity tokenization creates tokens of commodities of physical assets like gold, silver, or oil. Each token represents a certain amount of the physical commodity; you don’t need to worry about physically handling it. It makes the commodity more investible.
• Intellectual property tokenization converts music, books, or patents into tokens. It lets creators and inventors sell some of their rights to others, helping them raise funds.

Tokenization of assets

Smart contracts turn assets into digital tokens. These tokens are backed by real assets managed through a smart contract. The agreement conditions are put into code on the blockchain network. It makes a smart contract that is self-enforcing and self-executing. Let's take a  look at how to tokenize an asset.

Below are the primary steps involved in tokenizing an asset. 

Choosing an asset representation model

Begin by identifying the asset (real estate, artwork, or commodities) to tokenize and selecting an appropriate representation model. A collection of established functions called token standards represents an asset’s unique characteristics. Before deciding on a token standard, you should evaluate its fundamental properties, such as whether it is fungible or non-fungible. 

Consider using technologies like zero-knowledge proofs in private blockchains for use cases needing privacy. Not every sector can embrace blockchain’s transparency. 

Modeling the asset

When you have chosen the model to represent assets, the next step is to develop specific code and token behavior. Make it clear what data will be saved on-chain and off-chain. For example, you must consider legal and regulatory restrictions on data privacy, scaling, and the degree of data needed to design token behavior. 

To tokenize financial assets, you’ll need a term sheet that details token behavior, as regulators may require it to issue digital assets. 

Deployment of code and post-tokenization management 

After proper security checks, you can deploy the code on a public or private blockchain. Once the code is deployed, users can transfer and store the tokens. Tokenizing assets may take three to six months, with asset tokenization platforms charging between $30,000 and $100,000 or more. 

Based on your tokenized assets, you’ll receive future dividends and interest payouts in cryptocurrency or fiat money. Those who issue digital tokens are also responsible for accounting and taxation and filing them in financial reports.

Source: Antier Solutions

Benefits of asset tokenization

Below are the benefits of asset tokenization for owners and investors. 

• Easier access to capital. Owners can quickly sell shares of their assets to get faster access to money. It’s useful for high-value asset owners who can raise funds without selling the entire asset.
• Increased liquidity. Asset tokenization creates smaller, more manageable parts that you can sell individually. It reduces the entry cost to invest, helping owners find buyers easily.
• Increased efficiency. Blockchain manages ownership records while streamlining and automating transactions. It reduces administrative costs and burdens.
• Lowered entry barrier. Asset tokenization breaks expensive assets into smaller, affordable pieces. This means that investors can easily trade high-value assets and, at the same time, have opportunities to diversify their portfolios.

Challenges of asset tokenization

While the benefits show a bright side of tokenization for investors and owners, there are also a few catches. 

• Legal frameworks. Regulations vary from country to country. Certain jurisdictions sometimes have unclear or varying regulations that raise questions about whether your token transaction is legal. On the other hand, partial ownership rights to assets might be interpreted differently by different legal authorities.
• Compliance cost. The nature of legality imposes extra costs as legal fees to set up and maintain proper regulatory frameworks.
• Market’s skepticism. Many users are reluctant to trust tokens in their investment strategies despite asset tokenization's benefits. It still needs infrastructure and traditional institutions to drive its adoption.
• Security. Although blockchains are secure, they’re not immune to risks. Malicious hackers can pose a threat if security protocols aren’t properly implemented. 

Current asset tokenization projects

Tokenization is transforming the financial space one asset at a time. Here are some active asset tokenization projects.

• Securitize: A well-established player in the space that uses the Ethereum blockchain to issue various security tokens.
• Ondo Finance: Provides access to tokenized traditional finance assets, such as short-term U.S. Treasuries through the Ondo Short-Term US Government Bond Fund.
• Centrifuge: A specialized blockchain platform that bridges the gap between traditional finance and DeFi by enabling individuals and businesses to use their assets as collateral for loans on decentralized lending platforms.
• Pendle Finance: An innovative protocol that turns future DeFi yields into tradable tokens, helping users improve their earning strategies.
• Polymesh (POLYX): A public, permissioned layer 1 blockchain designed for the tokenization of securities, addressing challenges like governance, identity, compliance, confidentiality, and settlement.

Make better investment decisions

Asset tokenization enables fractional ownership, opening up new opportunities for investments. You can easily manage these assets as they’re on the blockchain while taking pride in owning those pieces you have always admired. 

As technology evolves and regulations streamline, the market will have more liquidity for digital tokens, notably at lower transaction fees or brokerage. 

Explore 21 asset tokenization statistics to get a glimpse of the investment future.