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A Guide on Tokenization: Meaning, Use Cases, and Benefits

Tokenization is the process of representing rights, valuable items or a unit of asset ownership with blockchain-hosted tokens.

Emmanuel Alonge
Emmanuel AlongeDec 08, 2022
A Guide on Tokenization: Meaning, Use Cases, and Benefits

The peculiarities of blockchain technology have positioned it as a leading tool transforming several industries. Although it started out with offering new investment opportunities marked majorly by cryptocurrencies, several more blockchain use cases continue to surface, including tokenization.

Across different sectors, tokenization continues to provide faster, more profitable and secure ways for businesses to raise funds, drive adoption of investment opportunities, enable and execute other business operations including recordkeeping by leveraging blockchain. But as with much of the blockchain’s use cases, tokenization is still gathering steam and is yet to see widespread adoption.

If you’re wondering what tokenization is and ways businesses can integrate it into certain processes, then you’ve come to the right place. This piece gives an overview of tokenization, its use cases and benefits to businesses, corporations and individuals.

What is Tokenization?

Tokenization is the process of representing rights, valuable items or a unit of asset ownership with blockchain-hosted tokens. For example, an asset worth $200,000 can be split into 200,000 digital tokens which will be available for sale and issuance on the blockchain. Each token represents a percentage of the asset’s value which is then owned by every token holder.

Tokenization can be applied to financial instruments including bonds and equities, tangible possessions such as real estate, artwork, precious metals and even the tokenization of copyright ownership. Let’s delve a little further into some of these use cases.

Top Tokenization Use Cases

1. Real Estate

One of the big ideas behind tokenization is improving the investing landscape involving assets that are typically difficult to trade due to their low-liquidity status. For example, with real estate, converting properties to cash takes longer than with say, stocks. The reason is properties are more expensive and so require more cash to acquire, narrowing the total addressable market.

With tokenization, any asset’s value can be divided into any number of shares or in this case, blockchain-hosted tokens. This can also be effectively applied to real estate. It can play out by enabling investors to jointly own properties by buying portions of real estate represented by tokens. In that case, the total value of the tokens investors own could represent the value of the portion of the property that’s theirs. And if the property can be owned in portions, it can also be traded between investors in fragments, thus improving liquidity.

This form of tokenization can also be applied to other assets such as art, antiques, and collectibles.

2. Securities

Securities are fungible and tradable financial instruments or assets with financial value sold by an issuer. They include stocks, bonds and options, so for instance, shares issued by a company to the public are securities.

The earlier mentioned securities are typically traded through traditional financial systems with ownership records stored on centralized databases and ownership rights certified on paper certificates. But with tokenization, the blockchain can be used to manage the issuance, ownership verification and transfer of securities issued as digital tokens.

Equity tokens issued by a company, for example, would function similarly to traditional stock options. Investors would still have voting rights and be entitled to the company’s profits, only that the blockchain would house ownership records and facilitate faster ownership transfer.

3. Digital Currencies

Tokenized currencies whose value is backed by an external asset, such as fiat currency or gold, also fall under tokenization use cases. These digital tokens are called stablecoins.

The value of a stablecoin is usually pegged to that of the underlying and considerably stable asset like real-world currencies, which makes stablecoins less volatile than cryptocurrencies such as Bitcoin and Ethereum. Fiat currency-backed stablecoin issuers usually hold reserve funds equivalent to the value of the total number of tokens issued.

Stablecoins are facilitating fast and secure blockchain transactions. From enabling lower-cost and faster payments to offering liquidity to DeFi projects, stablecoins have simplified transacting on the blockchain and have also driven crypto adoption.

4. Logistics and Supply Chain

Asset tokenization can also be useful in logistics and supply chain management. In this case, companies can create digital tokens representing trade assets or items to be shipped. Each physical item would have a token that will be transferred on the blockchain across the stakeholders that will take custody of the item till it reaches its final destination.

Transferring the digital token as the item moves from one checkpoint in the supply chain to the next will create transparency in the delivery process and a tamper-proof record of custody.

With regards to supply chain management, tokenization can also be a tool to create more liquidity in the market. For instance, a company could issue tokens that would enable distributors purchase products before they are manufactured. Distributors could also in turn sell such tokens to customers. In this case, the tokens would act as channels to raise funds quickly while offering tamper-proof evidence of the holders’ right to the number of products they represent.

Benefits of Tokenization

1. Asset liquidity

Asset liquidity refers to how easy it is to exchange an asset for cash without it losing value. Typically, the shorter the time it takes to sell off an asset, the more liquid the asset is considered to be.

Although cash is the ultimate liquid asset, other assets such as stocks, bonds, bank fixed deposits, treasury bills, mutual funds and money market funds are also very liquid. As you may have already deduced, liquidity is a spectrum and it varies across assets, meaning some are less liquid than others. These low-liquidity assets include real estate, some debt instruments, art and other collectibles.

Tokenization can boost asset liquidity by improving specific liquidity indicators. As earlier mentioned, the time taken to sell an asset is an indicator of the asset’s liquidity. Tokenization improves this quality by enabling fractional ownership which lowers the amount required to own an asset, ensuring investors can easily find buyers.

Another metric for measuring an asset’s liquidity is how easily its ownership is transferred. With tokenization, asset owners can transfer ownership of their assets to buyers almost immediately depending on the efficiency of the blockchain network facilitating the exchange.

2. Wider Appeal

Savvy investors will likely try to create a balanced portfolio with high-liquidity and low-liquidity assets, however the improved liquidity that tokenization offers will likely make any asset, regardless of its prior liquidity status, more attractive. This would create heightened investor and trader interest and more capital and or revenue for the issuing company or business.

But beyond the attractiveness of liquidity, tokenization also enables fractional investing. In this case, investors can own a fraction of an asset instead of the full unit which would be pricier. This lowers the market entry barrier and expands the total addressable market.

3. Greater transparency

Tokenization introduces transparency to business operations, asset and investment management, and more by leveraging some of blockchain’s advanced functionalities. For instance, smart contracts can guide the transactions between token issuers, buyers and sellers, such that once pre-agreed stipulations are fulfilled, for instance, payment confirmation, the desired responses are automatically triggered, in this case, that could be token issuance or transfer.

The blockchain’s immutability also adds a layer of security and transparency to business proceedings involving digital tokens. Approved transactions involving the transfer of tokenized assets, for instance, cannot be reversed or edited in any way and their records remain permanently on the blockchain. This means that businesses have a reliable and tamper-proof archive of transactions to reference for various purposes.

4. Faster and cheaper transactions

With smart contracts governing transactions involving tokens, several aspects of the procedures will be automated. Selected actions will be triggered based on the fulfillment of previously agreed terms written into smart contracts. This means aspects of the transaction such as issuance, approval, settlement and more can occur faster and without human oversight or several intermediaries.

The removal of multiple intermediaries in the settlement of deals automatically speeds up the rate at which actions are approved and reduces the cost of engaging such intermediaries.

Future-Proof Your Business

Tokenization offers a unique way for businesses to leverage blockchain in growing their revenue and creating more seamless operations. It’s only a matter of time for more organizations to explore the possibilities tokenization offers, meaning businesses that choose to ignore this technology may be left behind.

At Bitpowr, we are building easy-to-deploy web3 infrastructure that ambitious businesses can utilize to securely and reliably execute and manage their tokenization operations. More details to follow soon.

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