When someone talks about tokenization, they could be talking about lots of different things. For instance, data tokenization has been used for years to protect sensitive information like credit card numbers.

Now, in the crypto world, there are utility tokens like many ERC-20 tokens that make it possible to use of a certain network. These are different from security tokens, which are offered in security token offerings (STOs) during project fundraising, giving holders some investment benefit. I could go on, but let’s cut to the chase and talk about what I think is the most exciting kind of tokenization: asset-backed tokenization.

Why do you care about tokenization semantics and dry tech specifics when we can skip all the confusing stuff and just start leveling up our portfolios with fractional ownership of the Mona Lisa? Now, you may be scoffing at the idea that France would ever tokenize the Mona Lisa, but just think of it as a way to understand the concept of asset-backed tokenization (and maybe write to the Louvre and ask them to tokenize her).

What is tokenization?

Asset-backed tokenization means creating a digital representation of a real-world or intangible asset that is documented on the blockchain and can be bought, sold, or traded. In our Mona Lisa example, let’s say France created 100,000 Mona Lisa tokens, each representing .001% ownership of the painting. These tokens could then be bought and ownership would be immutably recorded on the blockchain, proving that whoever held the token was an actual owner of the real-world asset. Token holders can also trade assets that have, until now, been impossible to trade.

Tokenizing assets doesn’t only have to apply to iconic paintings, though that’s a pretty cool use when you think about it—better than buying a “plot of land on the moon” from some guy on the internet. Companies could tokenize shares, real estate ownership could be recorded on the blockchain, you could tokenize the title of your Lambo, gold ownership could be immediately sent to your wallet without having the metal shipped to you and then having to secure it in your safe. The sky’s the limit with asset-backed tokenization.

How does tokenization work?

illustration of a circle around a house surrounded by digital currency symbolsIn order to link an asset to a token that is then recorded on the blockchain, there are some legal hoops to jump through. For example, owning an asset traditionally requires KYC/AML and SEC compliance—this will have to bleed over into tokenization. While the goal of decentralization is to reconceptualize the need for those traditional security and protection measures, today there is some regulation adherence that must happen to link blockchain assets to real-world assets. Once an asset is successfully tokenized, however, users with access to the token can buy it much more easily and transparently than through traditional methods.

Another compelling aspect of tokenization is the option for fractional ownership. Like in our Mona Lisa example, you could also create thousands of fractional ownership tokens for, say, an apartment complex or a hotel. Multiple tokens are created, representing a percentage of the asset. Those tokens then incrementalize the larger value. In addition to fractional ownership of art and real estate, equity shares can give you partial ownership of a company or stake in a DAO.

Why tokenization matters

Now, you may be thinking that this is not a very new idea. Especially since people buy and sell assets on paper all the time without moving the Empire State Building into the new owner’s backyard. But there are lots of reasons that tokenizing on the blockchain has benefits over traditionally documented asset ownership.

  • Liquidity. Fractional ownership can make assets that are traditionally highly illiquid more flexible. You could sell fractional tokens of your rare Beanie Baby collection to get some liquidity out of it without losing the whole asset.
  • Investment Accessibility. If you could buy a fraction of a hotel instead of an entire hotel, you would obviously need less capital at your disposal. Fractional ownership lowers the barrier of entry for investors.
  • Speed. Have you ever tried transferring or liquidating assets using traditional financial services? It seems like every dotted I and crossed T takes at least three business days. Peer-to-peer wallet transfers can happen as fast as the network can verify the blockchain transaction.
  • Borderless. In traditional finance, it can be very difficult to own an asset if you live in the wrong place. While there are certainly jurisdiction and regulation questions that need to be ironed out, asset-backed tokenization could open assets to new geographies.

Plus, if you’re here, you probably know something about the concept of decentralization and the problems with trusted intermediaries. All of those benefits can apply to asset-backed tokenization as well.

5 Examples of tokenization

Now that you’re probably thoroughly excited about getting your hands on some tokenized assets, what are some specific examples of tokenization that everyone is buzzing about?

The digital NFT art that everyone is crazed about right now is only one use of tokenization. Music, movies, physical art, and other kinds of intellectual property could be tokenized and protected by the original owner. Blockchain documentation also makes attribution and royalties much easier and more feasible for artists.

Many investors are especially excited about the tokenization of real estate because it has traditionally been such an illiquid asset. Property asset-backed tokenization is highly anticipated as one of the most attractive use cases.

Private equity tokens can represent a stake in a company, which is an intangible asset kind of like stocks. There are also other intangible assets that can be tokenized like patents, copyrights, and carbon credits.

If you don’t want to store barrels of crude oil or tons of wheat or keep a lumber yard, tokenized commodities can open up a new kind of trading opportunity. Tokenization also works for precious metals like gold that you may not want to worry about personally storing somewhere secure.

What if you had bought the very first-ever ticket to Hamilton and you could prove it was the first one because it was issued on the blockchain? Or, imagine buying concert tickets on the secondary market and not having to worry whether they were counterfeit. Tokenizing tickets and experiences can secure a very insecure market.

Asset-backed tokenization is here to stay

Asset-backed tokenization is a really interesting and exciting new potential for blockchain technology. NFTs have already gone parabolic in popularity and expanding outside the metaverse to tokenize real-world assets is following quickly on the heels of digital collectibles and tokenized intangible assets. Like everything in the crypto space, it’s important to DYOR and keep up with new innovations. Keep reading more about the five tokenization trends to keep an eye on.

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Michael Hearne

Michael Hearne is the CEO of Decentral Publishing and the host of the Uncensored Crypto docuseries.