Tokenisation of assets: principles and benefits

18 Nov 2022

What is called asset tokenization?

Tokenization is the process of digital representation of real assets. It uses blockchain technology, which creates conditions for the secure storage and sale of tokens, similar to cryptocurrencies. At the same time, digital tokens act as an expression of ownership of a real asset.

If you want to sell the created non-interchangeable token of a real asset, you need to place it on the NTF exchange. It is possible to directly tokenize liquid objects with a clearly understood market value (antiques, paintings, digital trading cards). However, tokenization of other objects (e.g., real estate) requires an appraisal and audit with a financial institution or law firm.

A digital twin has many of the benefits of blockchain - security, no intermediaries, and transparency while retaining the parameters of standard assets.

What assets can be tokenized

It is possible to create digital tokens for any asset, but it is better to prefer those that can retain their original value for a long time. This explains the presence of a large number of works of art on the NFT market. Some of the objects that are most commonly tokenized include:

Precious metals (platinum, gold);
Gemstones;
Commemorative and anniversary coins;
Shares of leading companies;
Musical works;
Articles of fine art;
Antiques;
Patents;
Trademarks;
Sports collectibles.

Premium cars, aircraft, pet images, carbon credits, copyrights, yachts, cottages, and private homes can be tokenized without restrictions.

What is real estate tokenization?

Tokenization is becoming an increasingly popular tool used in the real estate market, due primarily to tokenization's many benefits to property owners and investors who plan to profit from the property.

For example, back in 2019, the Massachusetts Institute of Technology's Digital Currency Initiative published a study titled "Tokenized Securities and Commercial Real Estate," which pointed out the main benefits of real estate tokenization, which can include:

- affordability: even a small amount can be invested,

- increased liquidity due to affordability,

- usability: you can buy a property located in another city or even another country.

A token is a blockchain-based digital share of an asset. In real estate tokenization, the underlying asset of the token is real estate.

The process of real estate tokenization includes the following aspects:

● Formal initial actions: first of all, it is necessary to choose a suitable jurisdiction, create a legal entity, open a bank account and perform other actions in order for the company to be able to function within the selected jurisdiction.

● Formation of the legal structure.

● Selecting the right technology: In order to create a token, a suitable blockchain technology must be selected.

● Creating and distributing tokens.

One of the factors affecting the tokenization process (including the legal structure) is the purpose of the tokenization. In this article, let's look at real estate tokenization on specific cases for the purpose of selling, attracting investment in a completed property, or attracting investment in a property under construction.

Objectives of tokenization

Real estate for sale
Attracting investment
Investment in real estate under construction

About the benefits of tokenization

One of the main benefits of tokenization is the quick settlement of transactions, as the exchanges on which tokenized securities are traded operate 24/7. Tokenized securities allow fractional ownership, which will help them displace legacy mutual funds.

Tokenization could revolutionize the real estate market. This approach offers token issuers and investors significant advantages over existing investment vehicles and could attract a large number of investors to the market. The main benefits of tokenization are increased liquidity

Real estate tokenization provides additional benefits to investors and issuers, the means of which are:

Transparency
Security
Immutability
Simplified management

Smart contracts

Smart contracts are computer code that exists in a blockchain that enables the automatic execution of agreements between users without interference. Due to the fact that smart contracts operate in a blockchain environment, these algorithms cannot be changed once launched. Accordingly, launching smart contracts, which define the characteristics of tokens and enable their sales, requires careful preparation and analysis.

Smart contracts must implement the characteristics of the tokens as planned by the issuer. For example, if token holders are expected to receive dividends or otherwise participate in profits, this option must be implemented in smart contracts. In order to implement this, the following questions need to be addressed:

Will the funds be paid mandatorily or at the discretion of the issuer?
How will the payout amount be determined?
What is the length of the period from the time the tokens are purchased to the time they become eligible for cash payments?
On what dates is the right of token holders to receive cash payments verified?
What is the procedure for making deductions?

The optimal solution is for blockchain experts to perform technical development and technical verification of smart contracts for security gaps in the code.

This service is provided by the Rock’n’Block company with many years of experience in blockchain development of commercial and corporate projects since 2017.

Learn more about property tokenization on the website and leave a request for special terms of reference for your question.

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