Defi can revolutionize the financial industry by making financial benefits more accessible,
transparent, and secure. It has the potential to democratize admission to financial services,
especially in areas where traditional economic organizations are scarce or unreliable. On the
other hand, the global tokenization market value is expected to increase from $1.9 billion in
2020 to $4.85 billion by 2025, at a CAGR of 19.5%. This means that the global tokenization
market is rapidly expanding and shows no signs of stopping. But what does tokenization in the
crypto world suggest?
Tokenization is the method of defining a real-world asset using a digital token on the
blockchain. In the context of Defi, tokenization can guide the design of digital tokens that
represent assets like commodities, real estate, or even art. These tokens can then be sold by
decentralized businesses, allowing for more efficient and transparent buying and selling of the
underlying assets. Tokenization can also allow the design of new types of financial
tools, such as stablecoins (digital tokens pegged to the value of real-world assets, like the US
dollar), to deliver a stable store of value. This allows the use of crypto currencies in more
mainstream financial applications, such as the payment of statements and making investments.
What is Asset Tokenization?
Blockchain stands to revolutionize the economic world by allowing support to be turned into
tokens and traded on crypto trading platforms. Besides delivering exclusive ownership, it
enables the democratization and inclusion of historically illiquid assets to set fairer markets.
Everything can be tokenized through a distributed ledger, regardless of whether it is images,
digital media platforms, real-estate properties, company shares, or collectibles. Now, to
support tokenization, an issuer makes digital and physical tokens against some assets.
Blockchain guarantees that your request for an asset is immutable after you have purchased its
tokens.
Suppose you own a property in New York worth $500,000. Asset tokenization could make this
property's ownership fractionalized, making it more affordable by changing it into 500,000
tokens. Let's assume you require $50,000 in loans. Marketing the property would not make
financial sense because you still require money. Instead, you issue tokens on a publicly
distributed ledger such as Hedera
Hashgraph, allowing anyone to purchase or trade them on different exchanges. A token
allows someone to buy ownership of the asset. To become a 100% owner of the property, you must
purchase 500,000 tokens. As distributed ledger technology is immutable, no one can take away the
ownership of an investor who bought tokens or shares in a property.
Types of Tokenized Assets
Fungible Asset Tokenization
Two major factors make up a fungible asset:
- Interchangeable: Each division of the tokenized assets has the same market price and
facts. For instance, all divisions of one $BTC have the same market value and can be
exchanged.
You don't need to understand from whom you purchased a $BTC, as all BTC units have the same
functionality and are part of the same network. Your $BTC's 1% can be exchanged for any
other's
1%.
- Divisible: A fungible cryptocurrency may be separated into as many decimal issues as
were
set up during its distribution. Each team will have the same importance and validity.
Non-fungible asset tokenization
- A non-fungible
token
is:
- Non-interchangeable—NFTs cannot return tokens of the exact type because each token
has a
unique value.
- Non-divisible—Although NFTs are infrequently divisible, F-NFTs offer fractional
ownership
of NFTs such as commercial real estate or expensive fine art.
- Unique-Each token is special and different from other tokens of the same type.
Benefits of Asset Tokenization
There is a large difference between traditional digitalization and asset tokenization on
the blockchain, primarily due to how they are used. Retail investors and industrial sectors can
reap huge advantages from asset tokenization on the blockchain, which gives assets a unique
essence. These are just a few of the reasons why asset tokenization is so important.
High liquidity
The first and most significant advantage of asset tokenization on the blockchain is better
liquidity. It provides a forum for users to make smart contracts, manage
transactions, and provide clarity. Token holders can trade their tokens on the secondary market,
so they don't have to worry about redemption or the associated fees. This allows anyone with a
significant net worth to trade and invest in personal company securities. Tokenization allows
agents and individuals to contribute to the creation of a global market for personal securities
trading and investing.
Higher efficiency and automation
Smart contracts are quite helpful in automating the tokenization procedure. They eliminate the
requirement for mediators and reduce the costs involved. This also eliminates the requirement
for extra effort in controlling and regulating the whole process, which enhances overall
efficiency.
Transparency
The tokenization of assets delivers greater transparency for users. They can entrench their
rights and obligations and explain the token attributes to reflect the right record. It also
lets the user see who they are dealing with, what words and conditions they have to accept, and
where their purchase came from. This openness enhances transparency in transactions.
Enhanced accessibility
Asset tokenization also delivers greater accessibility for the user. A user can also use asset
tokenization to convert a part of an asset into as many tokens as possible. Asset tokenization
allows potential investors to own the minimum share in different investments. This lets any
retail investor, financial institution, or company join the asset management field with enough
flexibility in terms of investment amount and duration.
Endnote
DeFi asset tokenization is the next big phase in the evolution of securitization, made possible
by blockchain technology. Distributed ledgers authorize unprecedented transparency,
transactional efficiency, and hazard management. It can also liquidate previously unavailable
asset classes, thereby significantly improving financial involvement and communication
efficiency in these markets. We can hope to see more innovative and value-creating tokenization
apps in the future, particularly for earlier, unavailable assets or assets known only to a small
number of investors.
FAQs
What is Defi tokenization?
It allows users to easily obtain a loan with their cryptocurrency as collateral from someone
else in an investor pool. The whole process takes place on a Defi platform, run via smart
contracts, without any intermediaries.
What problems can DeFi solve?
Defi eliminates the fees that banks and other financial companies charge for using their
services. Individuals hold money in a secure digital wallet and can transfer funds in minutes,
and anyone with an internet connection can use Defi.
Why is Defi staking at high risk?
Like all software, Defi-Protocols have two main software risks: coding errors, or "bugs," that
may cause the software to malfunction, and security vulnerabilities that allow thieves, or
"hackers," to break in and steal funds from the protocol.
Is DeFi the future of money?
The general idea is to decentralize financial activities and bring financial control to
individuals. Defi has been reshaping the financial world, so many analysts and participants in
the financial space consider the network to be the future.
