Tokenization is the process of converting real-world assets (RWAs) into digital tokens on a blockchain. This innovative approach allows for fractional ownership, easier transferability, and improved accessibility to assets that are traditionally illiquid or require large amounts of capital. Tokenization has become increasingly popular for assets like real estate, fine art, commodities, and even company shares. For investors, tokenized assets open up new opportunities for diversifying portfolios, while for asset owners, tokenization provides access to a wider range of investors and improves liquidity. Understanding the step-by-step process of tokenization can help in appreciating its impact on both businesses and investors.
Step 1: Identifying and Valuing the Asset
The first step in the tokenization process is identifying the asset to be tokenized. The asset can be any physical or tangible item with value, such as real estate, gold, artwork, or even high-value equipment. Once identified, the asset is appraised and valued to establish its worth. Accurate valuation is crucial, as it will determine the value of each token issued and influence investor confidence. Valuation is typically conducted by third-party professionals who specialize in appraising the specific type of asset to ensure transparency and accuracy.
For example, if a property is appraised at $10 million, the value will serve as a reference to decide the number and price of tokens that will represent fractional ownership of that property.
Step 2: Structuring the Token
The next step involves creating a token structure that aligns with the asset’s characteristics and the goals of the tokenization project. Token structuring determines how many tokens will represent the asset and what rights each token confers. In most cases, tokens represent fractional ownership, meaning each token is a share of the asset. However, the structure can vary based on factors like asset type, investment objectives, and investor preferences.
For instance, a real estate asset worth $10 million could be divided into 100,000 tokens, with each token valued at $100. In this case, purchasing one token would grant an investor a 0.001% share of the property. The token structure can also include specific rights, such as voting rights, profit-sharing, or access privileges, which are typically documented in a legal agreement.
Step 3: Setting Up a Legal Framework
Tokenization requires a well-defined legal framework to ensure compliance with regulations and protect both the asset owner and investors. This step is critical as tokenization involves
converting ownership into a digital form, and each jurisdiction has specific laws governing securities, property, and digital assets.
In many cases, tokenized assets are treated as securities, requiring compliance with securities laws. To address this, asset owners often collaborate with legal experts to create a framework that clarifies the rights, responsibilities, and legal status of each token holder. This framework might include contracts, shareholder agreements, or profit-sharing terms embedded in digital “smart contracts” on the blockchain, automating certain processes, such as payments and transfers, based on predefined rules.
Step 4: Issuing Tokens on a Blockchain Platform
Once the legal framework is in place, the asset is tokenized by issuing digital tokens on a blockchain. Blockchain provides a secure and transparent ledger where every transaction is recorded and cannot be tampered with. Several blockchain platforms, such as Ethereum, Polygon, and Binance Smart Chain, offer the infrastructure for token creation, issuance, and trading.
To create tokens, the asset owner or platform typically uses smart contracts, which are self-executing agreements that automate various aspects of token management. These smart contracts handle the issuance, transfer, and compliance requirements of each token. Each token is unique and traceable, ensuring that ownership is clear and that all transactions are secure and transparent.
After issuance, tokens are distributed to initial investors or made available on digital marketplaces. The blockchain’s transparency allows investors to verify their holdings and track the asset’s performance over time.
Step 5: Managing and Trading Tokens
Once issued, tokenized assets can be traded on secondary markets, enhancing liquidity. Traditional assets, like real estate or fine art, are often illiquid and challenging to sell quickly. Tokenization solves this problem by enabling investors to trade fractional shares of the asset, making it easier to enter or exit investments.
There are several options for trading tokenized assets:
→ Direct Sales: Investors can buy and sell tokens directly on the blockchain platform,
transferring tokens between digital wallets without needing intermediaries.
→ Digital Exchanges: Some blockchain platforms allow tokens to be traded on digital
exchanges or decentralized exchanges (DEXs), similar to how stocks are traded on financial exchanges. This adds an extra layer of liquidity and enables more dynamic price discovery.
→ Private Transactions: Investors may also conduct private sales, transferring tokens
directly between parties.
For real estate tokenization, for example, property tokens may be traded on a platform specializing in real estate assets. This setup allows for faster transactions and greater accessibility to the global investor market, which ultimately increases the asset’s liquidity.
Step 6: Managing Asset Income and Compliance
If the tokenized asset generates income, such as rental payments for a real estate property or profits from a business, the smart contract can automate payouts to token holders based on the percentage they own. This income distribution can be done in real-time, creating a more efficient and transparent way of handling asset-related earnings.
Compliance with regulatory standards is an ongoing requirement in tokenization. Many tokenization platforms implement measures to ensure that only verified investors can participate in buying or selling tokens. Compliance requirements can include Know Your Customer (KYC) verification, Anti-Money Laundering (AML) protocols, and security auditing. Through these measures, tokenization platforms ensure that investors and asset owners remain compliant with relevant regulations, providing a secure and legally sound investment environment.
Step 7: Transferring Ownership and Exiting Investments
Tokenization simplifies the ownership transfer process, as tokens can be easily transferred between buyers and sellers on the blockchain. This flexibility is particularly advantageous when compared to traditional asset transfer processes, which often involve lengthy paperwork, fees, and legal processes.
Investors looking to exit their investment can sell their tokens on a digital marketplace, either through a direct sale or an exchange. As tokenized assets gain popularity, more investors are expected to enter secondary markets, enhancing liquidity and creating smoother exit opportunities for initial investors.
Benefits and Future of Tokenization
Tokenization introduces several advantages for both asset owners and investors:
→ Fractional Ownership: Tokenization makes it possible for investors to buy small portions
of high-value assets, increasing accessibility.
→ Increased Liquidity: Digital tokens allow assets that were previously illiquid to be traded
more easily, creating new opportunities for both buyers and sellers.
→ Transparency and Security: Blockchain provides an immutable record of ownership and
transaction history, improving security and trust.
→ Global Access: Tokenized assets are accessible to investors globally, enabling a more
diversified pool of investors.
The future of tokenization is promising as blockchain adoption grows and regulatory frameworks evolve. Tokenization has the potential to transform asset ownership, making real-world assets more accessible, flexible, and efficient. Through these steps, tokenization is reshaping the traditional financial landscape, offering a more inclusive, transparent, and dynamic way to invest in and manage assets.
