Asset tokenization is a term for the use of blockchain technology to represent ownership or rights to an asset as a tradable, on-chain token. Though it most commonly refers to the tokenization of financial or fungible assets, such as shares in a company or a quantity of gold, asset tokenization can hypothetically refer to the tokenization of any material or nonmaterial thing possessing monetary value: everything from a piece of art to a patent to an hour of a skilled worker’s time. As such, asset tokenization is among the most promising use cases for blockchain, with the upper bound of its growth potentially encompassing nearly all of human economic activity — a dollar number estimated to be worth well over a hundred trillion annually.
Perhaps more impressive than the long-term promise of this use case are the strides towards adoption already being made today. In the past year alone, major enterprises such as Deloitte, BNY Mellon, and EY have studied asset tokenization and concluded that it possesses the capacity to disrupt multiple industries, specifically the 9 trillion- dollar annual global securities industry and the 9.6 trillion-dollar global real estate industry. Additionally, Microsoft, Vanguard, and Sotheby’s have announced or gone live with projects tokenizing industrial assets, securities, and real estate, respectively. By these metrics, asset tokenization is already among the most popular blockchain use cases currently achieving real-world enterprise adoption.
At the heart of both the current success of asset tokenization and its long-term potential is the remarkable number of advantages and additional utility that comes with tokenized assets relative to non-tokenized ones. Tokenization can allow for increased liquidity of traditionally illiquid assets; greater accessibility and ease-of- access for otherwise cloistered investment opportunities; greater transparency regarding ownership and ownership history; and a reduction in administrative costs associated with the trading of these assets, including management, issuance, and transactional intermediaries. Finally, tokenization allows for assets which previously could not access the DeFi ecosystem a path towards doing so, unlocking a whole new realm of potential through asset-backed composability.
Suppose you have a property worth $200,000 in San Francisco, California. Asset tokenization could convert ownership of this property into 200,000 tokens — each one representing a tiny percentage (0.0002%) of the property. Let's say you need to borrow $50,000; it wouldn’t make sense to sell your property, because you need somewhere to live, but you still need the money. So instead, you issue tokens on a public distributed ledger like Binance Smart Chain which allows people to freely buy and sell on different exchanges. When someone buys a token, they buy 0.0002% of the ownership in the asset. 200,000 tokens to become 100% owner of the property. Since distributed ledger technologies are immutable, no one can erase the ownership of the investor who has bought the tokens, or in this matter, shares of a property.
If we zoom in on how tokens are built, it becomes apparent that two kinds of cryptographic tokens exist: fungible and non-fungible.