Understanding the Rationale Behind Tokenization

The world of blockchain and the wider cryptocurrency ecosystem as we currently see it, continues to drastically evolve at an exponential rate – but why is this? Well firstly, we should understand that the current infrastructure could be viewed as the “Wild Wild West”, whereby anything and everything goes, within reason of course.

When compared to the more recognizable and traditional financial industry, the cryptocurrency market is far inferior and more illogical and the vast majority of its participants aren’t traditionally trained in the field of finance or economics. However, this has also given rise to the cultivation of a breeding ground that garners an abundant amount of new and upcoming projects, particularly when a new utility ideology emerges through the ashes. In fact, the number of new projects being launched particularly during bull markets is astonishing, coupled with interestingly new and arising utility cases, alongside a flurry of innovation.

Today’s Crypto World

In today’s crypto world one can now earn as they play, earn as they move, execute crypto-related derivative trades, and devise complex high-leverage yield farming strategies. This is clearly a reflection of the blossoming and expanding cryptocurrency market we face, and it’s fair to say that the originality we see throughout the industry is particularly impressive. One area of this innovative market that has come to light more recently is that of tokenization, and although the concept might sound inherently intuitive, the reality is most people aren’t familiar with what it actually is.

So What is Tokenization?

Well, let’s look at this from a different perspective using traditional financial markets as a working example. Historically speaking, companies that wanted to raise additional funds in order to finance expansion efforts, grow their operations, or whatever it may be, could typically issue equity or debt to the public. Taking the simplest example of issuing equity as a working scenario, this merely meant that Company X would issue a portion of their company to the public in the form of shares, via an Initial Public Offering or an IPO (which may sound familiar to many of you). In doing so, the company sells its shares in the open market, and voila, capital is raised.

Now, what if Company X wanted to remain “private” and not have a free-market price or valuation for its stock? Well before blockchain, this was generally only available to accredited and institutional investors. However, together with blockchain technology comes a plethora of never-before-seen opportunities – including the ability to tokenize a company, asset, or anything else for that matter.

In its simplest terms and within the context of blockchain technology, tokenization is the process of converting something of value – such as an asset, or a portion of Company X in the abovementioned example – into a digital token that's usable on a blockchain application. We can therefore think of these digital tokens as representing an individual’s holding of the particular asset in question.

Theoretically speaking, this then means that if a company wanted to raise money but was either too small to carry out an IPO or wanted to avoid their shares being traded on a stock exchange, they could instead tokenize a portion of their business (the asset) and issue/sell these tokens in exchange for cash from investors. In theory, the investors of this token could literally be anyone, as capital requirements can easily be put very low by the issuer.

Tokenization Usecases

The number of tokenization use cases within the context of the real world is absolutely staggering. One prominent industry that’s taken a liking to the tokenization theme, is the real estate market. At the time of writing, it’s estimated that the current market capitalization of tokenized real estate is currently sitting at $210 million, while this figure is expected to grow at a significant rate. The primary source of this stems from the United States, as there’s been a keen shift to democratize the ability to invest in real estate, particularly while real estate prices continue to rise relative to other asset classes.

So let’s think about what this actually means. Essentially, tokenization is now even providing the ability to fractionalize real estate into smaller pieces (represented by the digital tokens), so that a larger number of investors with a smaller capital outlay, can afford to invest in a single property – together! Overall this process improves liquidity, removes barriers to entry, eliminates third-party agendas, democratizes the investment process, and increases transparency and security to name just a few “land-moving” factors (pun intended). As a result, the investor’s ownership of the digital tokens in question would contractually represent their share of the rental income due from the tenant of the property!

The investment opportunities available as a result of tokenization don’t end there. Imagine being able to co-invest in pieces of notable art that are known to originally sell for millions of dollars – well fractionalizing the artwork into smaller tokens would allow this. In fact, the numerous opportunities presented by the tokenization process stretch as far as one’s imagination.

Conclusion

Brickken is leading the frontier of the tokenization ethos. Specifically, Brickken provides a streamlined Tokenization Protocol that brings companies equity on-chain. The intrinsic complexities of doing so, are alleviated by using Brickken as the go-to decentralized tokenization dApp. Previously we would see companies twiddling their thumbs or hitting roadblocks when figuring out a low-cost way to raise funds for their business, and more importantly without losing control of their company. In a best-case scenario, a company would likely employ large teams to help them deploy onto the blockchain as a solution, but again this is at a considerable cost. Now, however, this is no longer the case when entities such as Brickken are at the forefront of simplifying this process in its entirety from start to finish, providing the infrastructure necessary for companies to transfer their assets on-chain and thus self-fund themselves via the likes of security token offerings. Need we say more…?

Author - Matthew Romu

Published On: August 29, 2022Categories: Legal0 Comments

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