Real World Asset Tokenization: What It Is & How it Works?
Tokenisation transforms real-world assets into dynamic digital tokens. Achieved through blockchain technology, this process ensures secure, transparent, and tamper-proof record-keeping. Imagine the possibilities—tokenisation can revolutionise a wide array of assets, including, but not limited to:
- Physical assets such as commodities, art or real estate
- Intangible assets such as intellectual property or loyalty points
- Financial assets such as stocks, bonds or derivatives
Tokenisation, in the context of rental real estate, refers to the process of representing off-chain assets as on-chain digital tokens. This transformation allows these assets to be traded on token marketplaces, providing increased liquidity and accessibility, particularly for high-value assets. Tokenisation enables fractional ownership, dividing real estate assets into digital tokens that can be sold to investors, granting them a partial ownership stake in the property. As a result, the real estate market becomes more democratized and liquid, allowing investors of all levels to participate and benefit from the advantages of real estate investment.
Tokenisation presents numerous advantages over traditional methods of asset ownership and transfer. Primarily, it can substantially reduce the cost and time associated with transactions. Tokenised assets can be traded around the clock on a global market, eliminating the need for intermediaries such as brokerages or banks. This not only enhances liquidity but also facilitates the seamless conversion of assets into cash or other forms.
Furthermore, tokenisation significantly bolsters security and transparency. Assets are stored on a blockchain, a secure and immutable digital ledger, ensuring constant traceability and reducing the risk of fraud and corruption.
In addition, tokenisation unlocks a wealth of new investment opportunities. For example, tokenised real estate can be fractionalised, enabling individuals to invest in property irrespective of their financial standing. This democratizes investment, broadening access to lucrative opportunities for both individuals and institutions.
Asset tokenisation stands as a transformative application of blockchain technology, revolutionising our approach to asset trading and ownership. It promises to streamline and simplify numerous aspects of our lives, from financial transactions to the management of physical and intangible assets, heralding a new era of efficiency and accessibility
Upon completion of the modelling and code review, the asset is deployed onto the blockchain. This involves creating a unique token for the asset and associating it with the corresponding smart contract. The smart contract governs the ownership, transfer, and trading of the asset tokens. Asset tokens can be backed by various types of assets, such as real estate, art, or commodities, and conform to token standards like ERC-20 or ERC-721.
How Real World Asset Tokenization Works:
Tokenisation of real-world assets is facilitated by the use of smart contracts, which are self-executing agreements with terms directly embedded in the code. These contracts are built on the blockchain and automatically carry out transactions once the predefined conditions are satisfied. In asset tokenisation, smart contracts are pivotal in converting physical assets into digital tokens
The tokenisation process starts with selecting an asset representation model, which determines how the asset will be depicted on the blockchain. Common models include fractional ownership, where the asset is divided into smaller units, and whole ownership, where each token represents the entire asset. After choosing the representation model, the asset is modelled and the informatics code is thoroughly reviewed to ensure both technical and security requirements are met.
Role of Smart Contracts:
- Enable the creation of digital tokens that represent real-world assets on the blockchain.
- Automate the execution of transactions and enforce the terms of the agreement.
- Provide a transparent and tamper-proof record of ownership, transfers, and transactions.
- Facilitate fractional ownership and enable the division of assets into smaller tradable units.
How Avant-Garde Capital utilises technology:
Avant-Garde capital’s idea is to create a platform for Real Estate rental business where all properties are tokenized, and those who purchased tokens could receive proceeds from rental activities and property sale. This idea is based on the fractional ownership business model, where a group of investors pools their funds to purchase a high-value asset, and the revenue and expenses associated with such assets are shared among the investors. Fractional ownership allows creating an additional source of passive income without the need to maintain properties and be involved in rental operations.
Revolutionizing Real Estate Investments:
Transforming Access and Ownership:
The democratization of real estate investments represents a groundbreaking shift, enabling individuals to invest in assets that were traditionally illiquid. This innovative approach breaks down barriers to entry and allows for fractional ownership, opening up new possibilities for investors.
Unveiling Market Potential:
The market for real estate tokenization is currently experiencing remarkable growth and is projected to be valued in the trillions of dollars by 2030. This presents a substantial opportunity for players in the blockchain industry to explore and capitalize on.
Financial Industry Focus:
The tokenization of financial assets, particularly real estate, is gaining momentum due to its potential to revolutionize the digital representation and trading of these assets. As a result, it has become an attractive proposition for participants in the financial market.
Efficiency and Transparency at the Core:
Tokenized real-world assets offer a range of benefits, including enhanced efficiency, transparency, liquidity, and decentralized ownership. These advantages streamline asset management processes and improve accessibility for investors.
Regulatory Clarity:
Regulatory frameworks have evolved to accommodate the tokenization of real-world assets over the years, providing a more conducive environment for companies entering this space. This clarity helps foster a more robust and secure ecosystem for tokenized assets.
Technological Advancements:
Advancements in blockchain technology, scalability, security, and interoperability are simplifying the process of tokenizing real-world assets efficiently and securely, paving the way for further innovation and development in the industry.
Innovation Opportunities:
The development of infrastructure for real estate tokenization presents a wealth of opportunities for founders to capitalize on the increasing demand for tokenized assets and to create innovative solutions in this dynamic and evolving market.
Technical reference architecture for tokenized asset:
To Prepare and launch security tokens Ethereum is the blockchain of choice specifically the ERC-3643 protocol that will help the expansion of security tokens thanks to its interoperability. With a standard interface, all relevant parties can exchange and use security tokens.
The ERC-3643 token shares many of the same characteristics with fungible tokens (like the ERC-1400, ERC-20) and non-fungible tokens (like the ERC-721).
ERC3643 is ERC-20 compliant, allowing it to take use of Ethereum’s current ecosystem and infrastructure. Decentralized exchanges or lending platforms, for example, may interact with ERC-3643 tokens as well as other protocols and programs that allow permissioned tokens.
ERC-3643 makes sure that only authorized users are able to store and transfer tokens by comparing their on-chain identities and credentials to preset regulations. This lowers the possibility of breaking the law and improves investment safety.
As historically Ethereum established base foundational layer for security tokens—smart contracts—making tokens programmable and automated.
But, there are more foundational layers required to ensure regulatory compliance and institutional confidence, better enabling security token creation, issuance, management, and liquidity. That’s the main reason to look into usage of a purpose-built blockchain for security tokens like Polymesh. Polymath Capital Platform has all required tools for tokenization: from Token Studio to Broker-dealer toolset, including ability to integrate corporate governance requirements, identity&confidentiality tools and ensuring compliance on all stages of security token lifecycle.
Polymath easily integrates into larger bespoke ecosystem with regulated custody; regulated exchange, KYC/AML regulated providers, tax and Legal.
It streamlines outdated processes and opens the door to new financial instruments by solving the challenges inherent in public infrastructure around governance, identity, compliance, confidentiality, and settlement.