Blockchain technology has revolutionized the traditional way of investing to a more digital one. It has made it easier and more convenient to invest in several lucrative investments irrespective of a person’s geographical location.
Tokenization of assets is one of the types of investment rapidly growing in the industry.
Therefore, read on if you are wondering what it is all about and how to invest in tokenization. This article will break down all the technical jargon about tokenization and simplify your understanding.
What Is Tokenization
Tokenization is converting ownership rights or valuable assets into digital units. The term tokenization is commonly used in blockchain technology, referring to the ownership of valuable assets.
Tokens can represent ownership of tangible assets, such as art, or intangible assets, such as voting rights and company shares. The tokens can transfer the asset’s ownership, complete financial tasks, or make payments. One significant example of tokenization is Bitcoin. The cryptocurrency uses tokens to represent how much Bitcoin you own.
Types of Tokenization in Blockchain
There are four types of tokenization in the blockchain. They include platform tokenization, utility tokenization, governance tokenization, and non-fungible tokenization.
1. Platform Tokenization
This refers to creating tokens for blockchain platforms to develop decentralized applications. One of the standard platform tokenization is DAI which helps users facilitate smart transactions. It draws benefits from the blockchain network that acts as the foundation supporting transactional activity and improved security.
2. Utility Tokenization
In utility tokenization, the tokens are created using a specific protocol that allows access to several services. There is no direct investment in creating utility tokens. They provide the required platform to improve the platform’s economy.
3. Governance Tokenization
Governance tokenization focuses on the blockchain voting system. It helps in refining the decision-making process on a decentralized protocol. The tokens allow for on-chain governance, which helps all stakeholders to collaborate, discuss, and vote on system management.
4. Non-Fungible Tokens
Non-fungible token (NFT) is one of the most popular tokens in the blockchain. It represents a digital form of a unique asset. The assets do not have a predetermined value, so they are non-fungible. They can be used as proof of ownership, authenticating sales, or letting people trade various items. NFTs can be in the form of digital arts, real estate, or games.
Benefits of Tokenization
1. A more extensive Investor Base
There is a limit to how much you can fractionalize a real-world asset. For instance, Selling a twentieth of an apartment or a percentage of a company stake is currently impractical.
Therefore, tokenization makes buying or selling a fraction of the tokenized asset easier. Thus, removing this restriction opens up participation to a much broader investor base.
The fine art market serves as a good illustration of how tokenization could alter the dynamics of many assets. Due to the prohibitive prices certain artists demand at auction, only a few extremely wealthy people can invest in this asset, making it impossible for the great majority of retail investors to participate.
2. Enhanced Efficiency
By doing away with traditional intermediaries, using blockchain technology speeds up settlement times and reduces costs for issuance and other activities (i.e., corporate actions, reconciliation)
3. Cost-effectiveness
The infrastructure available in blockchain has a digital ledger that helps in the record-keeping of all shareholders. For the issuer, it reduces the cost they could have spent manually creating this data. It also supports several administrative processes such as buy-backs, profit sharing, and the distribution of voting rights.
Automation, open record keeping, and reliance on the internet significantly contribute to cost savings.
4. Better Compliance
Blockchain technology enables the direct programming of compliance standards into each token. Using blockchain lowers the chance of error and simplifies and reduces the cost of managing complex compliance needs.
5. Increased Transparency
The blockchain aims to give all stakeholders a single, undisputed source of truth to rely on, which helps maintain transparency and minimizes record-keeping disputes.
6. Facilitated Innovation
Using programmable contracts and shared ledgers makes it possible to develop unmanageable products. For example, managing fractionalized real estate, liquid revenue share agreements, dynamic ETFs, etc.
7. Global Geographic Reach
Tokenization enables people from any part of the world to own cryptocurrency. Since no external barrier prevents the worldwide population and investors from using them, public blockchains are essentially global.
The Tokenization Process
There are several ways to create a token. One rule governing the process is that the token should be transparent, simple, and innovative. Polymath technology facilitates the whole process of tokenization and management of those assets. Here are the five steps of tokenization.
1. Ecosystem Assembly
The process begins with the issuers, ensuring they have all they need for the digital journey. A complete tokenization process will require a KYC/ AML provider, custody agents, legal representatives, brokers, management providers, and advisory partners.
2. Security Token Creation
After preparing everything required for the life cycle, it is time to create the security token. No matter the type of asset, the configuration should be intuitive and straightforward.
Moving securities on the blockchain should also streamline existing procedures rather than completely replace them or add new layers of complexity. They should also be able to enforce jurisdictional regulations through blockchain.
A polymath simplifies configuration, allowing issuers to create tokens with few easy, vital clicks. With polymath, issuers can develop assets without codes, thus making the whole process seamless.
It also allows allocation to benefit from the immutability and efficiency of the blockchain. It goes a long way in streamlining the creation and issuing process.
The process starts with two main steps, mainly the reservation of the TICKER symbol and the naming of the token. Registration of the ticker is vital because it represents the token in the security market. It is its unique identifier. You can reserve a ticker name for a limited period, create the token, or cancel the reservation.
3. Compliance Setup
Since tokenization introduces many investors and new products in the market, issuers must ensure that the token aligns with the regulatory environment. Security token issuers must ensure that their token and future transfers comply with the complicated regulatory environment in which securities operations operate.
The issuer has to ensure that their token has, at a minimum, KYC/AML requirements and the securities regulation of the jurisdiction it will be Jo4
Token Distribution
The token distribution involves two steps: minting and sending the token to investors. Polymath technology is also used to mint this token to control its supply.
The minting process will vary depending on the jurisdiction it is supposed to perform. In some cases, the issuer can handle the minting by themselves. However, the custodian, transfer agent, or registrar sometimes handles the process.
After the minting process, the tokens are ready for distribution. An organization or an individual can do this. The distribution agent will hold the tokens until the transfer process is complete.
The transfer process begins with an investor sending money to the distribution agent. Then, the agent holds the amount until the raised limit is available. Lastly, the distribution agent sends instructions for payment and delivery of the tokens.
5. Corporate Action
Polymath technology helps in corporate action for the issuer. Blockchain technology simplifies the execution and management of all needed corporate activities by automating the whole process and transparent record keeping.
It will create receipts for corporate activities, such as addressing rights issues, distributing dividends to asset owners, or carrying out stock splits.
How Can You Be Part of the Tokenization Market
Buy Tokenized Stocks
Multinational companies such as Tesla, NetFlix, Apple, Facebook, and Amazon publicly trade their tokenized stocks. You can therefore decide to be part of it by buying some of these stocks.
A tokenized stock is a digital representation of company shares in publicly traded companies in crypto exchanges such as Bittrex. They can be of the same value as the traditional stocks or may use a decentralized price oracle, allowing them to perform similarly to the conventional stock.
One of the advantages of a tokenized stock over traditional stock is that you can access the market 24/7, a feature that traditional stocks do not have. Besides, the tokenized stock makes it possible to own a conventional stock fractionally.
Buy Layer-1 Tokens from Tokenization Blockchains
You can also add Layer -1 tokens to your investment portfolio. Layer-1 tokens are an initial layer of a cryptosystem. They act as the infrastructure or incentive for other applications, networks, and protocols to build upon.
Some well-known layer-one cryptos include Bitcoin, Ethereum, Hedera, Algorand, and Cardano. Research each platform and choose one you feel is more secure before investing.
Buy Crypto Tokens of Tokenization Ventures
You can also buy crypto tokens of a tokenization project. You, as an investor, can benefit from the project more so if it is a token of a valuable asset.
Before investing in a token project, do extensive research about the project. Check on the token’s liquidity, the token holder benefits, the project team, and progress.
FAQs
Why are crypto tokens important?
Crypto tokens are important because they are digital currencies that have value. You can easily buy or sell tokens on blockchains or crypto exchanges. They can also represent real-world or conventional assets serving a given service or utility.
What is the future of asset tokenization?
Tokenization will likely change how people invest and manage their assets in the future. The future is digital, and with trustworthy systems that govern tokenization, people may prefer investing in tokens to traditional investing methods.