What you need to know about asset tokenisation

Asset tokenisation is a groundbreaking financial innovation that bridges the traditional and digital worlds. It can transform tangible and intangible assets into digital tokens on a blockchain or distributed ledger. 

If you are new to this concept, asset tokenisation may seem overwhelming. What is asset tokenisation and how does it work? Here’s everything you need to know.

What is asset tokenisation?

Asset tokenisation refers to the process of representing real-world assets such as real estate, stocks, commodities, or artwork, as digital tokens on a blockchain or distributed ledger. It involves converting the ownership rights and features of an asset into a digital form which can be divided into smaller units and traded on a blockchain tokenisation network.

Tokenisation allows assets that are usually illiquid, costly to trade, or inaccessible to be represented as tokens with certain properties and ownership rights. These tokens are often created using smart contracts which are self-executing contracts with the terms of the agreement directly written into code.

The tokens representing the underlying assets can be bought, sold, and transferred on a blockchain network which enables fractional ownership and creates liquidity. Each token often represents a fraction or share of the underlying asset, allowing you to own a portion of the asset without having to purchase the entire asset.

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How to tokenise an asset

Asset tokenisation may seem overwhelming at first but it’s actually easy to do once you know how it works and where to start. To get you started, here's a general outline of how to tokenise an asset:

• Choose the asset → Determine the asset you want to tokenise. It could be real estate, artwork, stocks, commodities, or any other valuable asset.
• Select a blockchain platform →  Choose a suitable blockchain platform for tokenisation. Make sure the chosen platform supports the type of token you want to create.
• Definite token standards → Depending on the asset, choose the right token standard. ERC-20 tokens are commonly used for fungible assets like stocks while ERC-721 tokens are used for non-fungible assets like artwork.
• Develop a smart contract → Develop or use smart contracts on your chosen blockchain that conform to the selected token standard. You can also hire or consult with blockchain developers for this step.
• Legal compliance → To effectively tokenise your asset, ensure that the tokenisation process adheres to relevant legal and regulatory frameworks in your jurisdiction. You can always seek legal advice to ensure compliance.
• Asset valuation → Before tokenising your asset, determine the value of the asset and how you want to divide it into tokens. For example, if you tokenise real estate, consider dividing the property into 100 tokens, each representing 1% ownership.
• Token creation → Create the tokens using the smart contracts. This will involve defining token names, symbols, total supply, and possibly metadata for non-fungible tokens.
   

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Tips for tokenising an asset

If you're considering tokenising an asset, here are some tips to help you navigate the process:

Define your objectives

To effectively tokenise your asset, it’s important to clearly define your goals. Consider factors such as increased liquidity and efficiency. Understanding your objectives will guide your decision-making throughout the tokenisation process.

Choose the right asset

It’s important to evaluate the asset you want to tokenise and determine whether it’s suitable for tokenisation. Consider factors such as the asset's market demand, liquidity potential, and regulatory considerations. Certain asset classes such as real estate or artwork, may have unique challenges and legal requirements for tokenisation that you should know.

Determine the token standard

Select the appropriate token standard for your asset. Ethereum's ERC-20 standard is widely used but other standards like ERC-721 or ERC-1155 may be more suitable for unique assets. Consider the features and requirements of each standard such as divisibility and ownership rights.

Select the best blockchain platform

Choose a blockchain platform that aligns with your requirements. Ethereum is a popular choice but other platforms like Polkadot, Binance Smart Chain, or Stellar can also be suitable depending on your needs. When choosing a blockchain platform, consider factors such as security and community support.

Pros and cons of tokenising assets

Tokenising an asset poses various perks and chances but it also has its downside. To help you decide whether tokenising an asset is the best move for you, here are some of the advantages and disadvantages of tokenisation: 

Pros:

• Increased liquidity → One of the advantages of tokenisation is that it enhances asset liquidity by enabling fractional ownership. With this, you can buy smaller portions or fractions of an asset which lowers the barrier to entry and allows for greater market engagement. This liquidity can attract a broader range of investors and potentially increase the trading volume of the asset.
• More accessible and inclusive → Tokenisation has the potential to make illiquid assets more accessible to a wider range of investors. It can enable fractional ownership which lowers the minimum investment amount required to participate in certain assets. This balances investment opportunities and allows investors with limited capital to diversify their portfolios.
• Global market access → Asset tokenisation has the potential to unlock global markets by removing regional barriers and reducing the complexities that come with cross-border transactions. Investors from different countries can engage in tokenised assets, providing chances for more diversity and potentially increasing market efficiency.
   

Cons

• Regulatory challenges → Asset tokenisation is still a relatively new concept and regulatory frameworks are evolving. Depending on the jurisdiction, tokenised assets may face regulatory uncertainties making compliance with securities laws challenging.
• Liquidity risks → While tokenisation can enhance liquidity, it can also expose assets to a greater volatile nature of the market. Tokenised assets may experience rapid price fluctuations due to the risky nature of the cryptomarket which can affect investor confidence. If there is not enough demand or limited trading volume, liquidity can also be adversely affected.
• Lack of market maturity → Despite the growing interest in tokenisation, the market is still in its early stages of development. The infrastructure and marketplaces supporting tokenised assets are not as mature or established as traditional financial markets. This lack of maturity can create uncertainties including challenges in valuing tokenised assets accurately.

If you’re considering asset tokenisation, keep in mind that there are both pros and cons in doing so and it all depends on the specific asset and its platform. Asset tokenisation is also affected by several factors you need to consider.
 

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