Tokenizing Real-World Assets: Understanding the Concept

• When a real-world asset is tokenized, its economic value and ownership are also transferred to the token.
• The tokenization of assets is done with the help of smart contracts.

What Does Tokenization of Real-World Assets Mean?

The main idea behind the tokenization of real-world assets is to create a virtual investment vehicle by leveraging blockchain technology. These virtual investments can be linked to various real-world assets like real estate, art, collectibles, and precious metals. 

To understand more clearly, instead of storing a house deed in the form of a physical piece of paper, storing it on a blockchain is more viable. This allows a smooth transfer of ownership between two individuals or it can also be fractionalized and distributed among more individuals.

It is worth noting that the tokenization of real-world assets is different from the securitization of assets. The securitization of assets requires the pooling of specific liquid assets so that they can be repackaged into securities. As discussed above, nearly all types of assets can be converted into tokens, be they virtual or physical.

Through tokenization, the economic value of real-world assets and their ownership can be transferred to blockchain-based tokens. Given a shift in financing infrastructure to a more advanced version and the desire for untethering more efficient finance, asset tokenization can help financing models overcome the hurdles of infrastructure development.

All things considered, blockchain technology and the tokenization of real-world assets are still in their nascent stages and face significant challenges. These challenges must be mastered for the wider adoption of real-world asset tokenization. 

How does Real-World Tokenization Work?

It’s important to understand the concept of smart contracts to understand the tokenization of real-world assets. Smart contracts are used to control and execute underlying digital assets. The terms and conditions of both parties are written in code and inserted into the blockchain network. The contract is automatically enforced and executed when contract conditions are fulfilled.

Upon completion of contract conditions, the tokens are automatically delivered to the investors with the help of a smart contract. This ensures the transparency of transactions and participants, the accuracy and efficiency of the contract, and the disclosure of the information to the public to ensure further transparency.

In technical terms, asset tokenization is termed as creating an informatic code while underlining mandatory elements of the asset while simultaneously enabling the user to interact with the digital form of that asset. Most of the time, this informational code is created using Solidity for the Ethereum blockchain.

Future Scope of the Tokenization of Real-World Assets

Traditional finance companies are excited about the idea of tokenizing assets that they already deal in, i.e., gold, stocks, and commodities. Franklin Templeton, an investment giant, launched the Franklin OnChain US Government Money Fund in 2021 on the Stellar network, which was later shifted to Polygon in 2023.

This makes the fund the first-ever fund to be registered on a public blockchain to process and record transactions as well as record shared ownership.

The Bank of America believes that the tokenization of real-world assets is the key to the adoption of digital assets. Their report suggests that the digital form of gold has already attracted investments of over a billion dollars. The report also claims that there is a growing demand for tokenized US Treasury bonds.

All in all, it is safe to say that the future of tokenization of real-world assets is bright and could reach $16 Trillion by 2030, as reported by the Boston Consulting Group.