A large portion of the world’s wealth is locked up in illiquid assets like real estate and commodities. While these provide long-term value and stability they also come with some glaring disadvantages. For starters, the illiquid asset class remains largely inaccessible to the average investor.
In addition, the user journey to obtain access is complex; buyers and sellers need to perform due diligence and deal with tons of paperwork. This also increases settlement times. On-chain asset tokenization removes most of these barriers and makes the process of finding and matching investors very easy.
This article will explain asset tokenization, why it matters, and how it's reshaping the way we perceive and interact with assets.
Traditionally, tokenization is the process of converting a high-value asset into smaller units called tokens. It facilitates shared ownership by enabling multiple investors to collectively own a portion of the asset. That means instead of a single investor bearing the entire cost, multiple investors pitch in to get smaller allocations of the asset.
Some of the best examples of traditional tokenization methods include Real Estate Investment Trusts (REITs), Exchange Traded Funds (ETFs), and mutual funds. All of them operate within established regulatory frameworks and are overseen by regulatory authorities. However, a key limitation is that they work efficiently only in public markets and not in private markets.
While public markets are easily accessible to a large pool of investors, private markets include assets like art, antiques, vintage items, and memorabilia which are limited in supply and not publicly traded. In addition to this, the transfer of ownership includes manual steps like appraisal and verification which add to inefficiencies and delays in the process. This is where on-chain asset tokenization comes in.
Real-world asset (RWA) tokenization refers to the process of converting the ownership rights of physical assets into tokens that are recorded, stored, and managed on a blockchain network. These tokens can be fungible or non-fungible and they can be stored, traded, and transferred between counterparties on the blockchain. This helps overcome the limitations of traditional fractionalization or tokenization and offers various benefits.
Here are some of the most prominent benefits RWA tokenization offers:
Settlement is the final step in the transfer of asset ownership where the buyer makes the payment in exchange for ownership. Currently, settlements can take two days or longer to complete, depending on various factors like the parties involved and the complexity of the transaction. This leads to counterparty risks where one party will suffer a financial loss if they back out of the transaction. To prevent this, the buyer or seller must maintain a certain amount of collateral.
Another potential risk the buyers and sellers must deal with is foreign exchange risk. If a settlement involves different currencies, potential fluctuations may cause the value of the settlement to change and affect the profits associated with the transaction.
On-chain tokenization eliminates these risks as smart contracts automate manual processes and enable instant settlement.
Private markets are highly inaccessible and offer very limited investment options for the average investor because of the high entry barrier. On-chain tokenization solves this problem. Once the ownership rights are minted on the blockchain as tokens, collectors can purchase a portion of the tokens and partially own an asset. This makes the asset more liquid and lowers the entry barrier, which attracts more investors and enables them to diversify their portfolios by giving them exposure to a wide range of assets.
Private markets have limited transparency when compared to public markets. This makes it challenging for investors to conduct due diligence and evaluate the opportunity. But tokenizing physical assets solves this problem. Once an asset is tokenized, investors can examine its ownership records and transaction history.
In addition, smart contracts automate certain aspects of due diligence like compliance checks, which enables investors to accurately evaluate an investment opportunity.
It’s possible to transform virtually any physical asset into a token on the blockchain. Here are some assets that can be tokenized:
Dibbs is a leading platform for tokenizing real-world assets into digital tokens. With Dibbs, you can create new revenue streams by monetizing collectibles or intellectual property, and acquire sales data. In addition to this, you get detailed provenance and authentication information for each collectible, comprehensive insurance, and professional auditing. Plus, your assets are kept secure in a vault.
All in all, Dibbs helps your business create tokenized assets, secure them, and generate a new income stream. To learn how you can start tokenizing your assets with Dibbs, schedule a demo today.