Blockchain and tokenization hold potential in real estate investing, particularly because the technology helps mitigate many hurdles and obstacles of traditional real estate.
Our question for today is on the tokenization of assets, and how exactly they function.
So what is tokenization, and what are tokenized assets?
Tokenization is a solution that divides the ownership of a physical asset (such as a building) into digital tokens. These tokens can be thought of as “shares”, in the same way that non-fungible tokens (NFTs) function. The difference here, however, is that the tokens are fungible and they are actually tied to the value of the asset.
The tokenization of assets is based on blockchain technology, which forms the foundation of crypto assets like bitcoin, tether or ethereum. However, the technology can also be used to tokenize assets; with tokenization, the value and rights of assets can be linked to digital tokens.
The tokens can then be bought, sold and traded on different blockchains. In addition, tokenization allows ownership of assets to be divided into multiple units. The asset’s sub-units are then represented by a digital token. Ownership rights to basically anything can be tokenized and stored on the blockchain. From music, real estate to various kinds of financial securities.
For tokenization, we must distinguish between two groups of assets: real-world assets such as property, which continue to exist outside the blockchain, and native assets which exist on the blockchain such as cryptocurrencies.
What are the benefits of asset tokenization? The tokenization of assets could provide several benefits for companies, investors and financial institutions. Tokenization can improve accessibility for investors in developing countries and give them better access to the investment market due to the combination of highly automated token issuance and management process and a high transaction speed, which reduces investment costs. Tokenization could also give investors in developing countries better access to the financial market by eliminating intermediaries.
Furthermore, tokenization allows fractionalization of ownership. The transaction history of tokenized assets is transparently and securely recorded on the blockchain. The security of a distributed blockchain network and the immutability of the record of tokenized assets which makes it easier for market participants and regulators to track past ownership.
How does tokenized real estate work? Tokenization can convert ownership of estate into any number of tradable tokens. Together with additional information about the piece of real estate such as location, potential buyers on a crypto exchange can get a transparent picture of the value of the tokens.
Overall, asset tokenization is at an early stage of development, but the value and advantages of transparency and efficiency of real estate tokenization, and tokenized assets, is very clear.