How Asset tokenization on Blockchain can address Liquidity Issue


How Asset tokenization on Blockchain can address Liquidity Issue

With the development of blockchain technology, there are promises to change many old technological and financial paradigms due to its unique, transparent, immutable, and distributed structure. These advantages can be classified into a few big categories. Tokenization is one of these; the blockchain is in a position to inject liquidity into preceding illiquid and otherwise exhaustive markets. The recording of financial transactions in a public ledger rather than a single institutions’ database is referred to as the blockchain. 

Tokenization is the act of changing some form of asset into a token that can be shifted, recorded, or kept on a blockchain system. It converts the value stored in some object into a token that can be manipulated along with a blockchain system. Tokens on a blockchain can represent either a digital or real-world asset. There are different kinds of tokens for different purposes namely; payment tokens, utility tokens, and asset-backed tokens.

Payment tokens were started to be a form of payment over the Internet. Examples of such tokens are bitcoins, etherium, and other cryptocurrencies. Utility tokens are only intended to allow owners of those tokens access to the services of a particular blockchain platform. Lastly, Asset-backed tokens are tokens that represent real-world or digital assets. This one represents possession of interests in real estate, individual property, and equity in businesses. Asset-based tokens are extremely compelling because it has the most instant use cases given the current state of blockchain technology and the current state of business and regulation.

Tokenization has lead to market liquidity in the current world. It has the greatest impact when it is used to bring liquidity to assets that are illiquid or non-transferable. There are certain areas where tokenization can prove to be of extreme value; social media is one of them. YouTube and Twitter are some of the platforms that can gain extreme benefits from it. Users, publishers, and advertisers exchange tokens between themselves without the presence of middlemen but tokenization of every real-world asset might not prove to be a great thing because of the transparency required with the use of public ledgers. The public ledger is a record of all the activity of a network which is visible to everyone who is a part of that network. Public ledgers ensure that a transparent fabric of operation is established. This makes the asset owned by anyone, visible to everyone else in the network.

The market for private company securities is illiquid. It takes time for the buyers and sellers to find and vet each other and the assets that they’re buying and selling from each other. Tokenization could eliminate such friction. Participants involved in a blockchain platform where the tokens represent private company securities are sold are first vetted to determine whether they are accredited investors with enough capital to take on the risk of private company investment.

The Private equity and hedge funds could benefit a great deal from a more liquid private company securities market. An extremely liquid market leads to an expansion of participation in private company investments. Tokenization of private securities market will also be larger since it would be open to accredited investors within a small investment network, wealthy individuals and organization around the world. It could create a more worldwide market for these private securities.

Tokenization promises to change how broad asset classes are bought and sold, democratizing the process of owning everything. Blockchains offer a streamlined alternative to traditional paper markets and a unique way of sharing ownership of unique objects like painting or real estate.

Leave a Reply