|Book of Smart Contracts 1959|
Tokenization is the process of converting rights to an asset into a digital token on a blockchain.This sounds fancy, but as the article soon makes clear, it's basically a variation of an old theme,
There are many proposed methods for taking real-world assets and "putting them on a blockchain." The goal is to achieve the security, speed and ease of transfer of Bitcoin, combined with real-world assets. This is a new form of an old concept: "securitization" (turning a set of assets into a security), and in some cases the tokenization is of securitized assets.Here's how the innovation is supposed to help small investors (source):
Imagine that you have some property — say an apartment. You need cash quickly. The apartment is valued at $150,000 but you just need $10,000. Can you do this quickly without much friction? To my best knowledge, this is next to impossible.I often use a similar example in my monetary theory classes. How to liquidate a fraction of one's illiquid wealth? One way is to use a bank (say, to open up a credit line secured by your property). But what he means, I think, is that it's basically impossible to issue a personal IOU representing a claim against the property (and ultimately, against the income that is generated by that property). Well, it's possible, but any such security is not likely to be marketable at any reasonable price. The author has stumbled across the concept of an "illiquid" asset. We use institutions called banks to monetize illiquid assets (banks transform illiquid assets into liquid deposit liabilities). But why do we need banks? Why are most assets illiquid? Economic theory answers: because of the frictions associated with asymmetric information and limited commitment (or lack of trust). O.K., but is there any way to get around these frictions without the use of banks? The same article continues:
Enter tokenization. Tokenization is a method that converts rights to an asset into a digital token. Suppose there is a $200,000 apartment. Tokenization can transform this apartment into 200,000 tokens (the number is totally arbitrary, we could have issued 2 million tokens). Thus, each token represents a 0.0005% share of the underlying asset. Finally, we issue the token on some sort of a platform supporting smart contracts, for example on Ethereum, so that the tokens can be freely bought and sold on different exchanges. When you buy one token, you actually buy 0.0005% of the ownership in the asset. Buy 100,000 tokens and you own 50% of the assets. Buy all 200,000 tokens and you are 100% owner of the asset. Obviously, you are not becoming a legal owner of the property. However, because Blockchain is a public ledger that is immutable, it ensures that once you buy tokens, nobody can “erase” your ownership even if it is not registered in a government-run registry. It should be clear now why Blockchain enables this type of services.Well, no, to be honest it is not at all clear how "blockchain" solves any of the fundamental problems associated with transforming an illiquid asset into a payment instrument.