What is tokenization? How it works and how to invest in it

Learn how tokenization impacts the traditional financial ecosystem by digitizing assets.

According to a relationship from digital asset management company 21.co, tokenizationThe market for could expand to $10 trillion by the end of the decade, driven by the growing adoption of blockchain by traditional financial institutions.

Likewise, a relationship of the Boston Consulting Group predicts that the market for tokenized assets could reach $16 trillion by 2030.

Source: Boston Consulting Group

One of the key drivers behind the growth of tokenization is its potential to transform existing financial infrastructure, increasing efficiency, reducing costs and optimizing supply chains.

However, the potential of tokenization goes beyond traditional financial instruments. In the future, we could see a wide range of tokenized assets, including bonds, stocks, art, cars, commodities, and even fine wines.

This expansion into new asset classes has the potential to make investing more accessible and bring new liquidity to markets that have traditionally been complex and slow.

So, let’s find out what tokenization is and why it matters.

Tokenization Explained: What is Tokenization in Cryptocurrencies?

Tokenization in cryptocurrencies refers to the conversion of real-world assets, such as actionsbonds, real estate or even physical assets, into digital tokens on a blockchain.

These tokens represent ownership or a stake in the underlying asset and can be exchanged or transferred easily and securely.

What is the purpose of tokenization? Typically, tokenization aims to introduce liquidity into traditionally illiquid markets. Assets that were once difficult to buy or sell can be instantly traded on blockchain-based platforms through tokenization, reducing transaction costs and increasing market efficiency.

How does tokenization work?

Here is a detailed overview of how tokenization typically works:

• Resource selection: An issuer selects an asset to tokenize. This could be anything from real estate to stocks, bonds or commodities.
• Tokenization process: The asset is divided into digital tokens, each representing a fraction of the underlying asset. This process is often facilitated by smart contracts, which are self-executing contracts with the terms of the agreement written directly in code.
• Emission: Tokens are issued on a blockchain, where they can be bought, sold or traded. Each token is unique and contains metadata describing the asset it represents.
• Trade and property: Once issued, tokens can be traded on blockchain-based platforms. Ownership of tokens is recorded on the blockchain, providing a transparent and immutable record of ownership.
• Redemption: Token holders may have the option to redeem their tokens for the underlying asset. This process is generally governed by the terms set out in the smart contract.
• Regulatory compliance: Throughout the process, issuers typically ensure compliance with relevant regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.

Benefits of tokenization

By converting real-world assets into digital tokens on a blockchain, tokenization offers the following benefits:

• Increasing accessibility: Tokenization enables fractional ownership, allowing small investors to access assets that were once out of reach due to high costs or barriers to entry.
• Improve liquidity: Tokenization makes traditionally illiquid assets, such as real estate or fine art, more liquid by allowing them to be traded on blockchain-based platforms, thus reducing transaction times and costs.
• Improve efficiency: By eliminating intermediaries and streamlining processes, tokenization can increase the efficiency of asset transfer and management, reducing costs and administrative burdens.
• Enable borderless transactions: Blockchain-based tokens can be traded globally, allowing for cross-border transactions without the need for intermediaries or complex regulatory processes.
• Improve security: Blockchain provides a secure and transparent ledger to track ownership and transactions, reducing the risk of fraud and ensuring the integrity of asset ownership.

How to invest in tokenization

Investing in tokenization offers a range of opportunities for those looking to diversify their portfolios. Here are several practical ways on how to invest in tokenization technology

• Buy tokenized shares: Buy tokenized shares of popular companies like Google or Meta on cryptocurrency exchanges. These digital assets represent traditional stocks and offer benefits such as 24/7 trading and fractional ownership.
• Invest in tokenization initiatives: Consider purchasing crypto tokens issued by tokenization-focused projects. Research the project team, token liquidity and progress before investing. Look for projects with a strong use case and growth potential.
• Acquire Tier 1 Tokens: Consider purchasing layer 1 (L1) blockchain tokens from platforms that allow tokenization, such as Ethereum (ET), Solana (SOL), Avalanche (AVAX) and BNB chain (BNB). These tokens form the foundation of their respective blockchain networks and could see increased demand as tokenization grows.

• Investing in Exchange Traded Products (ETPs): Some platforms offer ETPs that they provide exposure to tokenized assets. These products can provide a cost-effective way to invest in tokenization technology.

Tokenization platforms

These platforms provide the infrastructure and tools needed to tokenize real-world assets and facilitate their trading and management on blockchain networks. Here you are Some Important tokenization platforms:

• Claimed: Backed is building an on-chain infrastructure for capital markets, offering tokenized securities that represent real-world assets such as bonds, stocks and ETFs.
• Maple tree: Maple is an on-chain marketplace focused on providing high-quality lending opportunities to institutional and accredited investors, meeting their liquidity, risk and return requirements.
• Matrixdock: Matrixdock is a digital asset platform that offers institutional and accredited investors transparent access to tokenized RWAs, ensuring an immutable record of ownership and daily proof of reserve.
• Ondo: Ondo offers on-chain financial products such as tokenized notes backed by short-term U.S. Treasury securities and bank demand deposits.
• Multifaceted network: Polymath is a tokenized securities creation platform, offering issuers a streamlined process to digitize securities on the blockchain.
• Securitise: Securitize is a compliance platform for digitizing securities on the blockchain, ensuring that tokenized securities comply with regulatory requirements.

Risks and challenges of tokenization

Investing in tokenization offers interesting opportunities, but it also comes with risks and challenges that you should be aware of:

• Regulatory risks: Tokenization is a relatively new concept and the regulations surrounding it are still evolving. Changes in regulations could impact the value and legality of tokenized assets.
• Market Volatility: The cryptocurrency market is known for its volatility, with token prices often experiencing wild fluctuations. You should be prepared for the possibility of sudden price changes.
• Security Risks: Digital assets are subject to hacking attacks and other security breaches. You should take precautions to protect your assets, such as using secure wallets and exchanges.
• Lack of liquidity: Some tokenized assets may have limited liquidity, making it difficult to buy or sell them at desired prices.
• Technological risks: The blockchain is still evolving and there are risks associated with bugs, anomalies and other technical issues that could impact tokenized assets.

Going by the hype, the tokenization market could continue to grow, with more tokenized assets and greater blockchain adoption.

However, you should proceed with caution and carefully consider the risks involved before investing in tokenization.

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