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In the fast-evolving world of modern technology and finance, the concept of tokenization has emerged as a groundbreaking force with the potential to reshape industries worldwide. From traditional finance and real estate to digital art and supply chain management, tokenization offers a new paradigm that is changing the traditional ways. By representing real-world assets as digital tokens on a blockchain, this innovative approach brings forth a myriad of advantages that were once unimaginable.
In this article, we’ll see some game-changing advantages of tokenization that are revolutionizing aspects of various technologies and industries.
Before we delve into the benefits of tokenization, let’s see what tokenization is.
What is Tokenization?
Tokenization refers to transforming ownership and rights of specific assets into a digital format. This process essentially transforms previously indivisible assets into tokenized representations.
For example, consider the iconic painting, Mona Lisa. To sell it, you’d typically need to find a buyer who has sufficient financial resources required for such a purchase. This limitation narrows the pool of potential buyers significantly.
However, through tokenization, the painting’s ownership can be divided among numerous individuals, enabling fractional ownership. Imagine one person owning a 1/25th share of the painting. Tokenization makes this fractional ownership feasible, providing an innovative alternative to conventional methods.
In the blockchain space, tokenization introduces an array of fresh opportunities for both individuals and businesses. It’s important to note that tokenization isn’t entirely novel; it has been evolving for several decades.
Now let’s focus on the amazing benefits of this novel concept with respect to blockchain technology.
5 Advantages of Tokenization
#1 Enhanced transparency
One of the foremost benefits appreciated by digital token holders is the increased transparency that comes with them. Blockchain networks, as open-source systems, grant users access to the very source code that underpins the blockchain. Tech-savvy users can harness this feature to continuously verify the authenticity of the software, ensuring its integrity and freedom from bugs.
Tokenized assets furnish investors with comprehensive contracts outlining token attributes and ownership records. These contracts carry the rights and responsibilities bestowed upon token holders, including insights into the identities of fellow traders within the platform. Moreover, the blockchain serves as a repository of all transactions, providing users with a complete trading history linked to any specific asset.
Enhanced transparency introduced by tokenization not only nurtures trust among stakeholders but also serves as a powerful aid against fraud and the loss of assets to unscrupulous actors.
#2 Increased level of liquidity
There are inherent limitations when it comes to breaking down real, valuable assets into smaller parts. For instance, selling a small part of an apartment or a fraction of a share is usually impossible. This is where the concept of tokenization steps in.
Through tokenization, this barrier of limitation is dismantled, allowing the trading of tokens that represent fragments of ownership. Tokenization opens the door for more investors to engage with assets, leading to a marked increase in market liquidity. This increased liquidity has proven especially valuable in ending the liquidity challenges tied to investments like real estate, which often require significant time and effort to sell.
#3 Reduced costs
When it comes to selling high-value assets, the usual scenario involves the engagement of legal professionals and intermediaries to facilitate transactions between sellers and buyers. These services, however, come at a price, and they’re far more expensive. Yet, with the implementation of tokenization, investors can engage in trading the same asset without the need for intermediaries.
The blockchain contains all the pertinent information related to the tokenized asset, eliminating the necessity for voluminous paperwork. This streamlined approach greatly enhances the efficiency of administrative processes linked to asset sales, such as buybacks and profit sharing, ultimately leading to significant cost reductions.
In direct contrast to traditional methods of private placement, the adoption of blockchain tokenization has brought about a gradual reduction in costs. A prime example is the realm of bond issuance, where costs have been trimmed by up to 90% through blockchain tokenization. Furthermore, the automation facilitated by tokenization not only results in cost-effective transactions but also accelerates the process, enabling traders to execute transactions promptly at their convenience.
#4 Capability to divide the assets
A notable benefit of tokenization is the capacity to break down assets into multiple digital segments that are symbolized by tokens. This capability transforms assets into fractions, significantly improving the potential for liquidity when it comes to owning fractional portions of assets. The division of assets paves the way for the flourishing of shared ownership among users, where numerous individuals jointly acquire a single asset.
Shared ownership becomes particularly advantageous in scenarios where the utilization of an asset takes precedence over complete ownership.
For instance, consider shared vacation homes, where users collaborate to determine when each person will use the property. Additionally, the divisibility of assets eliminates the entry barriers for multiple investors. This allows individuals to buy and sell valuable assets in smaller portions, ensuring that no one is excluded due to the steep cost.
Unlike conventional databases, a significant advantage of using blockchain technology lies in its resilience against easy correction, deletion, or modification once data is stored. Blockchains organize data into secure blocks through cryptography, which explains the growing popularity of this technology in corporate databases and online banking systems. Unlike ordinary databases, which are susceptible to hacking and unwarranted third-party access, blockchain is decentralized, providing access solely to authorized users.
In tokenization, immutability has even greater importance as it facilitates precise tracking of digital tokens. Users can ascertain details about token issuers and creation timestamps. Furthermore, information regarding the sale of specific tokens, including the time of sale and transaction amount, is readily available. Clear historical data on tokens significantly enhances investors’ confidence, increasing their likelihood of engaging in trading activities.
The concept of immutability alleviates traders’ concerns about potential losses due to fraud, assuring them that tokens remain traceable and are guaranteed to be returned to their rightful owners in cases of theft.Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.