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Blockchain and finance in 2019
The Benefits of Tokenizing Real World Assets
Blockchain technology has taken the world by storm, with an ambitious promise to disrupt current systems for a more transparent and equitable world. In 2015, the World Economic Forum (WEF) identified blockchain technology as one of the megatrends as the world moves towards the digital world, predicting that 10% of the global gross domestic product (GDP) would be represented through blockchain technology. The origin and advancement of this nascent technology comes at a time where countries are looking towards integrating with the digital world to facilitate efficiency through automation, for which blockchain could be the enabler.
What is Tokenization?
Tokenization refers to the digitization of an asset that is thereafter represented in a digital token on the blockchain, which is a public ledger of records. More specifically, tokenization entails the conversion of rights to a real-world asset into digital tokens that can be easily recorded, moved, traded and stored in a public ledger. It is important to note that the tokens themselves have no intrinsic value on their own. Rather, they are a representation of an asset and derives their value from the underlying assets.
Benefits of Tokenization
There are various potential advantages that can be derived from tokenizing real-world assets:
Illiquid assets are defined as assets that cannot easily be bought or sold for physical cash without a substantial loss in the underlying value. Assets that were previously illiquid, and could not be traded on secondary markets will benefit from the digital nature of this representation. Illiquid assets are caused by the lack of a robust marketplace, since few buyers or traders are willing to purchase the asset. This results in a large discrepancy between the the ask price (the price at which a seller is willing to sell) and the bid price (the price at which a buyer is willing to buy). This lack of depth is common across assets that are highly-valued and private in nature, such as real estate, antiques, fine art, private company interests and certain financial instruments.
Tokenization of assets that were previously illiquid facilitates greater liquidity to these markets and offers participants fairer price discovery. Greater depth of trading activity would reduce the cost of trading across the board due to reduction of the bid-ask spreads in the marketplace.
2. Fractional Ownership
Tokenization enables fractional ownership, in other words, owning a fraction of an asset instead of the asset in its entirety. Enabling tokens to be broken down into smaller denominations is advantageous and facilitates greater trading, since the mass market can now access these assets. The costs of such high-value assets as real estate or a company share represent a natural barrier to the majority of the population, since an individual must possess a certain benchmark of wealth in order to participate in owning high-valued assets. With fractionalization, assets can be subdivided into smaller units, making such an investment more accessible and affordable. This means that a retail investor would be able to own 0.1% (for example) of an asset with ease. Fractionalization is a natural trait of tokenization given its digital nature, and this facilitates greater liquidity and moveability of assets in the secondary markets. More importantly, fractional ownership fosters global financial inclusion, allowing anyone to participate in the markets with few barriers.
Fractional ownership also allows investors to achieve greater asset allocation, due to the greater variety of available assets. The enhanced exposure to digitized assets that once warranted a high-ticket price contributes to the price discovery process of the markets in a more optimal manner, as well as enhancing market efficiency.
3. Round-the-Clock Markets
The borderless and global nature of tokens and coins means that the cryptocurrency market is open 24/7, enabling anyone to participate in the trading of cryptocurrencies at any time. This is perhaps one of the defining traits of the cryptocurrency market as compared to the traditional financial markets, which has a defined set of daily operating hours. The static nature of traditional financial markets prevents global and timely access if needed, especially when relevant news happens while the market is closed.
The possibility of around-the-clock trading grants total access for investors at any time, regardless of the differences in time zones. Investors have the ability to react immediately to sudden news and better manage their asset portfolio at any time.
4. Reduction of Costs
Traditional financial markets are riddled with costs along the issuance and supply chain, with intermediaries taking a fee for services each step of the way, including origination, underwriting, custodian, payment and a host of other related charges. Tokenization by way of blockchain technology streamlines the entire process by eliminating or reducing the intermediaries involved, due to blockchain’s traits of decentralization, transparency and immutability. Tokenization facilitates the representation of an asset in digital form, where all transactions are visible on the public ledger and can be executed with speed and efficiency. This simplifies the entire process and reduces the need for a huge network of intermediaries, thereby reducing the costs associated with asset movement within the supply chain. In fact, the whole reason why Bitcoin was created in the first place was to eradicate the function of intermediaries, and to facilitate a trustless financial system based on transparency and accountability.
Perhaps the core differentiator that asset tokenization brings is the use of smart contracts, which are pre-programmed, self-executing lines of code, without the need of intermediaries. Smart contract functionality allows automation, reducing costs yet further.
Applications of Tokenization
There are several industries that tokenization is likely to disrupt, across numerous industries, and these are the top three industries in which tokenization development is taking place.
Perhaps the oldest asset class still relying on legacy and manual systems, the real estate industry is ripe for disruption, since it is such a cumbersome asset to own and trade. Entry to access the real estate market has a significant barrier due to its high-value nature, and the fact that very few (including only accredited investors) are permitted to delve into the market. The fractionalization of real estate through tokenization would open up access to a much wider retail audience, and likely create a depth of liquidity that the real estate market is not known for.
Various projects are and have been leveraging blockchain technology in the real estate markets. In 2018, Elevated Returns tokenized shares in a luxury hotel chain in Colorado, raising an impressive $18 million.
Commodity tokenization is a common asset class that has garnered tremendous traction. Commodities have always been used to store wealth and retain some degree of economic value, encompassing assets such as precious metals, grain, and energy. Digital representations of commodities eradicate the complexities surrounding actual ownership, storage and administration of the real-world versions, and benefit from receiving spot prices that enable immediate trade and execution.
The most popular tokenized commodity thus far is gold, which is used as the underlying asset for numerous stablecoin projects. Several prominent projects include Digix (DGD) and Hellogold (HGT).
Rising global healthcare costs is an increasing concern faced by governments and society. Following the risk of data centralization, rising costs, and a currently fragmented data structure across the healthcare hierarchy, there have been several calls towards leveraging blockchain technology to empower patients and allow them access to basic healthcare. More focused towards the digitizing of patient data, tokenization could be a reliable solution for the storage of sensitive patient data while reducing overhead costs of the healthcare system. Data tokenization provides patients with a unique personal identifier that safeguards their sensitive information, recorded and stored in a decentralized network across the globe.
Various projects in the market are currently integrating the advancement of blockchain technology with healthcare-related services, prominent among which are Medical Chain and Nebula Genomics, who have raised tens of millions of dollars in funding.
The advent of blockchain technology offers tremendous promise, and disruption that will facilitate efficiency and streamline traditional processes for the better. Tokenization holds the potential to deliver new asset classes that can be accessed by anyone. The global nature of cryptocurrencies and tokens offers a host of benefits that could bring real change, including market liquidity enhancement and a significant reduction in transaction costs.