Tokenizing Real World Assets | Trillions of Dollars to Blockchain
Investing, Real World Assets, Security Tokens - August 25, 2020
Tokenizing real-world assets on the blockchain is one of the most important features of DeFi. But you might remember it through the ICO craze. But let’s back up for a moment, what are ICOs, and what is an ICO token?
Put simply, an ICOs is a method of tokenizing a real-world asset. A company, a product, a service, or anything else that is valuable, has growth potential and is tradeable, can be denoted in a token, and offered to investors. Despite the concept of ICOs being evolutionary, it left a bad taste in the mouth of the crypto-industry. A lot of them turned out to be duds, losing millions, many even were outright scams.
But while ICOs have been given the wrap over the years, we think, they were just ahead of their time. Back then the infrastructure required to tokenize real-world assets wasn’t strong. Now, with the growth of decentralized finance and the maturation of cryptocurrencies, real-world assets are more important than ever. These real-world assets are more than just blockchain stocks or ICO tokens.
Tokenizing real-world assets work best with assets that are highly illiquid. Illiquid assets refer to those assets which cannot be easily converted to cash.
Think about real-estate, a large piece of land, or a constructed office building cannot be easily sold for cash when required. What if it was tokenized and put on the blockchain?
Tokenizing real estate
If an office building was worth $100,000, it could potentially be split into 100,000 real estate tokens, call them RETs, and sold to various investors. The value of these RETs would be dependent on the price of the land, the income received from the occupants of the building, the economy of the city, the development of the neighborhood, and other factors determining the property value. The holders of RETs would receive regular income from the landowners, they could sell them to other investors who would be willing to buy these tokens at a higher price. Simply put, these tokens would behave like digital assets, but represent real-world assets.
Here, real-world assets (in this case an actual building built on an actual piece of land) are denoted as tokens, put on a blockchain, and bought and sold through digital wallets.
Think about what other ‘private-assets’ could be denoted on a blockchain? Bonds, hedge fund investments, foreign currencies, cryptocurrencies, and other assets could be put on a blockchain. Investors could buy and hold them or transfer them between each other as its value changes over time.
It doesn’t just end there either. When you have assets that have real value and that are transferable, a whole world of financial options is available. As a start, these assets can be put up as collateral to secure loans. Since these assets can be locked up and will remain valuable i.e. can be sold for cash, they can be pledged for borrowing purposes.
This is where real-world tokenized assets meet the decentralized finance world.
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