Tokenization has enabled brands and businesses to unlock a myriad of benefits such as increased liquidity, fractional ownership, and enhanced security. At its core, it involves converting tangible or intangible assets into digital tokens. But what powers this transformative process?
The answer lies in blockchain technology. As the backbone of real-world asset (RWA) tokenization, blockchain not only ensures the authenticity and immutability of these digital tokens but also offers a decentralized and transparent ecosystem for their exchange.
However, with a plethora of blockchains available in the market, each with its unique features and capabilities, it’s challenging for brands to choose a blockchain.
This article delves into the nuances of blockchain technology, guiding brands on how to choose the right platform for their tokenization endeavors.
- Blockchain technology is pivotal in the asset tokenization process as it ensures authenticity and immutability.
- Brands must consider several critical factors like security, scalability, etc. when choosing a blockchain as it plays a significant role in ensuring a seamless and efficient tokenization process.
- Beyond blockchain selection, brands encounter myriads of challenges like technological complexities, which prevent them from successfully tokenizing assets.
Factors to Consider When Choosing a Blockchain
Here are some critical factors brands must weigh when making the pivotal choice of choosing a blockchain.
Security
Blockchains offer a high level of security due to their decentralized nature and the use of cryptographic techniques. However, they’re not completely foolproof and there have been instances of hackers exploiting blockchain vulnerabilities.
One of the most common attacks on a blockchain is the 51% attack where hackers control a majority of its computation power. It’s like when one person in a game gets more than half the group to change the rules unfairly during a vote, letting them cheat and take over the game.
This can compromise the integrity and ownership of assets and potentially lead to significant financial losses. Additionally, blockchain transactions are irreversible, which means fraudulent transactions can have permanent consequences and damage the brand’s reputation.
To address such challenges, it’s important to choose blockchains that have a large number of nodes participating from different regions as this would make it difficult for hackers to take control of the system. (The larger the number of players, the more difficult it is to convince more than half of them to change the rules).
Another factor to consider when it comes to blockchain security is the developer community. Blockchains with a strong developer community and support system are more likely to be updated regularly and have a quick response time to address security issues.
Scalability
Blockchain scalability ensures cost-efficiency, a smooth user experience, and broad market accessibility, making it an essential consideration for brands venturing into the world of asset tokenization.
If blockchains aren't scalable, transaction speeds would be significantly hampered and lead to delays. This would not only frustrate users but also hinder real-time or rapid transactions, leading to a poor user experience.
Also, the gas fees or transaction costs would skyrocket and make purchasing or trading tokenized assets prohibitively expensive. This will significantly limit the adoption and utility of tokenized assets and make them less attractive as an investment or utility tool.
For brands, these deterrents translate to reduced customer engagement, trust, and potential revenue. So, to mitigate these issues, they should explore and adopt scalable solutions like Polygon that enhance transaction speeds and reduce costs.
Interoperability
Blockchain interoperability refers to the ability of different blockchain platforms to communicate and share information seamlessly. For brands looking to tokenize real-world assets, this is a crucial feature as it leads to broader market access.
If the tokens representing the assets can be moved across different blockchains, brands can tap into a larger pool of potential buyers and sellers by making the tokens available across diverse marketplaces. Additionally, they can move their assets to a different blockchain platform if the current one becomes expensive to use.
Assets on interoperable blockchains can also be part of cross-chain events, exhibitions, or collaborations, increasing their visibility and appeal to a wider audience.
However, current layer-1 or base blockchains like Ethereum can’t facilitate cross-chain interoperability. So, brands need to use interoperable protocols like Polkadot or Cosmos or use sidechain solutions to transfer assets from one blockchain to another.
Smart Contract Capabilities
Smart contracts serve as the foundational pillars of RWA tokenization. These self-executing pieces of code not only facilitate the creation of tokenized representations for RWAs but also embed a myriad of functionalities tailored to the nature of the asset.
The efficiency and capabilities of these smart contracts, however, can differ significantly across blockchain platforms. So, it's imperative for brands to choose blockchains that allow a high-degree of smart contract customization.
For example, when tokenizing real estate properties, the blockchain should support smart contracts that enable fractional ownership. This not only democratizes asset ownership but also streamlines tasks like property rights transfer, thereby bolstering efficiency and curtailing operational costs.
Platforms like Ethereum have pioneered this adaptability, introducing various Ethereum Improvement Proposals (EIPs) that allow developers to craft bespoke smart contract functionalities, including those that facilitate fractional ownership.
Furthermore, when considering assets such as art or intellectual property, it's crucial for the smart contract to possess mechanisms that automatically allocate royalties or revenues to the appropriate stakeholders. This ensures that creators or rightful owners are remunerated fairly and transparently.
Lastly, given the sensitive nature of certain tokenized assets, smart contracts must be fortified with robust security and privacy measures. For instance, tokens representing real estate should be designed to encrypt sensitive information like users’ personal data.
Commonly Used Blockchains For Tokenization
Here are some popular blockchains that brands use to tokenize their assets:
- Ethereum: Ethereum's flexibility and widespread adoption have made it a preferred choice for many tokenization projects. But it lacks in terms of scalability, which may lead to network congestion issues and poor user experiences.
- Polygon: Polygon is a layer-2 scaling solution for Ethereum and has become a popular choice for projects requiring faster transaction times without compromising on security.
- Solana: Solana is a layer-1 blockchain that has become a popular choice for tokenization projects due to its fast settlement times, high transaction speed, and low gas fees. However, its occasional network outages have raised concerns about its scalability and reliability.
Challenges of Integrating Blockchain Technology
Even after choosing a blockchain, brands must navigate a myriad of challenges before they can begin the asset tokenization process.
- Technical complexity: Blockchain technology, being relatively new, requires a deep understanding of its workings. Brands may struggle to find or train personnel with the necessary expertise to implement and manage blockchain systems.
- Integration with existing systems: Integrating blockchain solutions with current IT infrastructure and business processes can be complex and may require significant modifications or overhauls.
- Cost implications: Setting up, maintaining, and scaling blockchain systems can be capital-intensive. Brands need to evaluate the return on investment and ensure they have the necessary funds for a long-term commitment.
Streamline RWA Tokenization with Dibbs
Blockchain technology serves as the foundational pillar for the asset tokenization process. But the journey of choosing a blockchain and tokenizing assets on it can be fraught with complexities.
But Dibbs removes all the hassles by giving brands the ability to mint tokens on any blockchain and list them on any marketplace. We take care of everything from the tokenization process to securely storing assets in vaults and distributing them to your customers. To learn more about how Dibbs can help you navigate the tokenization process, schedule a demo with us.
