Recent estimates put the value of global physical assets at around $256 trillion. This is a staggering figure, but at the same time very misleading: most of these assets, in fact, are not fungible, i.e. they are very difficult to exchange for money or other assets.

Let’s take a hypothetical €100,000 house as an example. Now let’s say you need 10,000 euros in cash to carry out a renovation and thus increase the value of the property. If the house were a fungible asset, you could easily sell 1/10 of it to get 1/10 of its value, i.e. the 10,000 euros you need. Unfortunately, things don’t work that way: most likely, you would have to go to a bank that would offer you that amount in exchange for an interest rate on the loan. And that’s not all: the timeframe is generally very long, the amount of paperwork you have to sign is always overwhelming and the risks – such as foreclosure – are the order of the day.

Now let’s assume instead that you are in possession of a work of art of great value, in the order of magnitude of tens of millions of euros. Like Picasso’s painting Les femmes d’Alger, sold at auction for the modest sum of 179.4 million dollars. Finding a buyer able to afford a similar amount of money is very rare, and this involves very long waits and possible devaluations.

For the last few years, a new technology has made its way into the world of assets, offering the possibility to make them fungible and ensure significant benefits to both buyers and sellers: we are talking about tokenization via blockchain. In this article we will talk about the benefits of tokenization of a physical asset: if you are interested in knowing what a token is, click here to read the dedicated article.

1. The steps of tokenization of a physical asset

Digital tokens are a very recent technology, and as such they require an equally innovative process to be implemented.

Here are the steps that usually involve the tokenization of a physical asset:

  1. Asset selection. The first step involves choosing the asset you want to tokenize. Real estate, works of art, precious gems, antique collections: the only condition is the ability of an asset to be legally owned. One thing to keep in mind is the value offered to the buyer of the token: does its profit margin depend on the change in value of the asset – as in the case of works of art – or is there a form of gain inherent in the asset, such as rents derived from real estate?
  2. Economics of tokens. Tokens are divided into two macro-categories: initial coin offerings (ICOs), which represent shares in a company/company; and security token offerings (STOs), which are instead tied to a physical asset. In the case of physical assets, security tokens are generally the most used for the economic management of the asset. At this point, all that remains is to define the method of exchange of the tokens: will they be sold directly on a dedicated site, or will they be inserted in an exchange? How many tokens will be put into circulation? Each choice has its pros and cons, and the final decision will fall to the company.
  3. Technical Requirements. To work, tokens must be based on an existing blockchain. So far, more than 80 percent of tokens are hosted on the Ethereum platform, which therefore offers additional security due to the shared nature of the blockchain.
  4. Legal Requirements. Depending on the type of asset being tokenized, there will need to be some research work inherent in your country’s laws regarding digital tokenization of physical assets. This step is generally handled by a team of professionals who can ensure the legality of the process.
  5. Writing the white paper. The white paper is a publicly available document that explains how the project works from every angle: administrative, legal, economic, technological, and every other possible aspect. The purpose of the white paper is twofold: to create transparency and to attract buyers.
  6. Start of the project. At this point, all that remains is to buy the physical asset, tokenize it, and sell it to buyers.

2. The benefits of tokenization

Once the steps to tokenize a physical asset are clear, the only question that remains is: what advantages does it bring to the seller and the buyers?

The first benefit is obvious: increased liquidity of otherwise illiquid assets, such as large real estate holdings. Dividing into tokens makes it possible to buy and sell ownership of an asset that would otherwise be indivisible.

This increased liquidity leads to two other benefits: accessibility to an otherwise privileged market, such as real estate; and the acquisition of new buyers, attracted by the possibility of owning fractions of an otherwise inaccessible asset.

Other values, however, are inherited directly from the nature of the blockchain:

  1. Transactions are handled automatically by an unalterable code that can be viewed by anyone, thus removing the need for third-party oversight of transactions;
  2. Every transaction on the blockchain is public, as are the smart contracts that manage the transactions: this transparency greatly increases security, as an attack on the blockchain is nearly impossible and, in the case of tokens, easily repairable.
  3. The automated nature of the transactions transforms time-consuming and expensive procedures into instant and inexpensive transactions, which help maintain the value of the tokenized asset.

These benefits apply to both the seller of the asset and the buyers, as both parties receive a substantial gain from using tokenization on blockchain. To conclude, we can compare tokenization to