New Models Emerge Around Blockchain Technology
Every day new models emerge around blockchain technology. One of the biggest disruptors is asset tokenization, which could completely change the way we view the financial industry. Currently there are trillions of dollars locked up in assets that cannot be exploited or to which there is extraordinarily limited access.
Markets such as real estate, art, intellectual property, and rare and valuable resources are predominantly owned by institutional investors. Leaving little room for retail investors to invest in these markets. In other words retail. Investors are only left with the possibility of investing in debt or equity markets. Where there is high volatility and risk.
This is where asset tokenization and Digi shares come into play. Through Security Token Offerings (STOs) Digi shares can open new markets to anyone in the world. Allowing available capital to flow into illiquid markets. Opening up a world full of opportunities. How Security Token Offerings and asset tokenization are connected is something that will be discussed in the following sections.
Invest in Assets
The importance right now is to establish that with these two mechanisms anyone can invest in assets that they had never imagined before. People no longer need to go only to the stock market or cryptocurrencies, because they do not have large amounts of capital to invest in assets such as real estate. With these two mechanisms, anyone with any amount of capital can earn profits based on the performance of the real-world asset they have chosen to invest in.
To explain how the rules of the financial system are being drastically changed. We must first explain what asset tokenization is and how this is considered one of the biggest disruptions of the century.
What is tokenization?
Asset tokenization is the way any real-world asset tangible or intangible is digitized and then broken down into smaller parts that take the form of tokens. In a broad sense a token is basically the representation of something else, and in this case, each token represents a proportional part of the digitized asset.
This also means that the owner of the token owns the property rights or other rights. The possibilities for tokenization are endless and at Digi shares we like to say that the world can be tokenized. As what can be digitized and broken down into smaller parts can be literally anything from physical assets like real estate or art to instruments such as debt, social capital, bonds, securities, among others.
So, by now you must be wondering how Security Token Offerings and asset tokenization are related. Well, the answer is very simple, because once an asset has been digitized and divided into as many parts as necessary, which take the form of tokens (asset tokenization). Then an offer is issued for anyone in the world at any time can acquire the issued tokens (Security Token Offerings).
The reason why it receives this name Security Token Offering, is because blockchain technology is used and the creation of this specific type of tokens. Which are executed in intelligent contracts or smart contracts can only be done in a blockchain. Tokens and smart contracts are something that we will discuss in the “Blockchain technology and asset tokenization” section.
Now that we have linked both concepts, we can explain what the benefits of asset tokenization are one of its greatest benefits being the possibility of breaking down entry barriers for retail investors such as high tickets to invest. Let’s do an example to better explain what we mean.
Real Estate Tokenization
An investor could be thinking of entering the real estate tokenization market and studies a building that costs one million euros. The investor knows that the building is in a privileged location whose value can only increase in the coming years. The entry ticket is very high, so you either have great liquidity to invest, or a guarantee to obtain a loan from a bank to invest in the property.
These two factors, in addition to being a barrier can become problems for said investor. On the one hand deploying large amounts of capital can lead to problems in the future should you need liquidity. And on the other hand, entering debt instruments means entering a debt position. Which adds the additional issue of having to pay interest on the requested money.
With asset tokenization the building can be divided into as many parts as needed, so the million euro building is now represented in 10,000 tokens worth €100 each. This entry ticket is more suitable for the investor since he does not have to go into debt or perform magic tricks to obtain the capital to invest in what he considers a profitable investment. With this small entry ticket, you now have access to invest and decide to buy 100 tokens to obtain a return proportional to the performance of the building of 1 million euros.
The performance of the building can be linked to the fact that it is leased or rented thus obtaining profits on a recurring basis. Which are distributed among all the token holders, or because the building does a flip for which remodeling works are carried out on the building. Building to increase its value and sell at a higher price than it was purchased again the profits are distributed among the token holders.
These are just examples of how the building can be exploited but there are many other ways a building can be profitable for investors. The only important thing to keep in mind is that no matter what model is used to earn profits the important thing is that these are proportionally distributed among the token holders.
For the purpose of showing an example. We divided the 1 million euro building into 10,000 blocks but in reality you can divide the building into 1 million tokens worth 1 euro each to further reduce the entrance ticket. In this case people will have to assess whether they would rather have a coffee at their favorite coffee shop or buy a token for profit based on the performance of the digitized and tokenized real-world asset.
As we can see asset tokenization is the mechanism by which access is provided to anyone. Opening markets that seem unattainable. However this is not the only benefit of using asset tokenization. The fact that in order to execute an asset tokenization it is necessary to use blockchain technology. This creates a wide range of benefits. Now is the time to talk about how the disruption of asset tokenization translates into benefits for the market.
Benefits of asset tokenization
Without a doubt, the possibility of lowering the barriers to entry and breaking a real-world asset into as many parts as necessary which take the form of tokens. Which can be acquired by anyone anywhere and at any time is the most disruptive benefit. However it is not the only advantage, so let’s recap and explain in more detail how asset tokenization is a game changer.
The tokenization of assets allows greater liquidity by allowing the assets to be fractioned and owning only a part of them, which also means being able to carry out actions on said parts. This is generated by lowering the barriers to entry to invest and allowing a wider range of people to invest in assets. In traditionally illiquid markets for example real estate fine art or rare and valuable resources.
This technology can help sellers more easily find a counterparty to transact more easily as there are more potential buyers with whom to trade. which can be interacted with. The range of investors is not only increased by reducing high tickets but now investors from anywhere in the world can participate at any time.
Asset tokenization can create new business and social models such as sharing ownership of the property itself or rights belonging to it. For example different people who own tokens from a house located on the beach can now decide when a token owner can come and stay in said house. This is a disruption to the business model, as multiple people own the same house, or the rights associated with it.
This way they can set when they can use it for themselves or make a profit if they decide to rent the house at times. When no token holders are using it or because they have simply decided that it is better to make a profit by renting the house from continuous way. This example also serves as an example of how a new social model is created since a single asset is shared by several people who might not share any connection between them except owning tokens from the same house. We are used to owning something only for ourselves, and we have to pay for it in full.
With the tokenization of assets, a shared economy is built. Where by only owning a part we can still enjoy the benefits that a total ownership can provide. Such as the possibility of using said assets or obtaining benefits that come from them.
Asset tokenization
Asset tokenization can only exist using blockchain technology and therefore this means that a shared infrastructure is used between all participants. Also the fact that it is decentralized meaning that it does not require a central third party transaction costs are significantly reduced.
This decentralization improves the efficiency when carrying out actions since the lack of an intermediary means that automations can be created when carrying out transaction settlements. These transactions which could take hours or days. Can now be completed in seconds allowing the markets themselves to become more streamlined and less expensive by reducing time costs.
Another well-known benefit of using blockchain as the underlying technology is its transparency by default as transactions made on the blockchain can be viewed by anyone at any time. Here it is important to differentiate that when acting on a public blockchain the identity of the parties carrying out the transaction must be anonymized and in a private blockchain.
This is not necessary as long as it complies with data protection regulations. Applicable however the importance of being able to review transactions allows for improved traceability and provides trust. As anyone can see the point of origin and all subsequent transactions made making proof of ownership a built-in quality when tokenizing of assets.
The ability to make easily identifiable transactions adds the advantage of having a single point of entry for information. It’s more feasible to get all the information in a single call rather than having to rely on different data points to verify transactions and ownership.
The use of a single layer where all transactions and information are stored allows multiple parties to obtain the complete information from a single source. Also since the data stored on the blockchain is immutable the same information is always available to everyone and the same information will be available at any time.
The Asset Tokenization Process
Digi shares has established a comprehensive process so that asset tokenization can occur. The way it was created was to provide certainty and confidence to all potential buyers of the different tokens. When someone wants to tokenize an asset of theirs so that it is divided into small parts or tokens. That anyone can acquire they must first involve the Brickken management team to see the feasibility of tokenization. So let’s go over the different steps that are needed for an asset to be tokenized.
First, the asset itself must be analyzed. Tokenized real estate is quite different than a painting or a rare and valuable resource like gold. In the gold example there is already a market for it so its value and validity are well established in the market.
But what if someone wants to tokenize a vintage car? In this case, a valuation of the old car is necessary to establish its correct price, which will be used to link the tokens.
Digishares tokens are issued in the form of stablecoins which are stable cryptocurrencies because they are linked to a specific asset , which in this example would be the old car valued by an independent expert.
Stablecoins differ from other types of currencies in that they are less volatile due to their pegging to an asset. Which greatly reduces the risk factor of volatile movements that occur in other types of cryptocurrencies such as bitcoin or company shares.
Once the valuation has been carried out, the smart contract must be created, something that will be explained in more detail in the section “Blockchain technology and asset tokenization”
The price and number of tokens must correspond to the price and valuation of the asset. In addition, it must be decided what business model will govern the issuance of the token for example.
If the objective is a loan or to divide the asset in a co-ownership or transfer of rights model. Likewise, the rights that investors will obtain must be defined in the terms and conditions that will be incorporated into the token itself.
Tokenonomy
This previous step is what people have defined as tokenonomy, the science of token economic. This science covers all aspects of token creation from its management to its use. In the case of Digi shares, tokenomy is applied to how the smart contract is generated since you have to enter how many tokens will exist.
What their issue value will be, and also what are the established benefits that will attract investors For example, does the asset owner grant capital and rights or look for a profit sharing/cash flow scenario?
So far, we have established how asset tokenization works from a technical and economic perspective, but what about its legality? This is the next step to deal with when working with asset tokenization the legal framework needs to be established. Some of the questions that must be answered when configuring the legal structure have to do with the asset itself as to where it is located, who is going to be responsible for its audit and valuation. Under what conditions, what are the guarantees granted by the owner of the asset to protect the investments made by all buyers of the token who will be responsible for managing the assets, etc.
This is probably one of the most important factors that Digi shares cover establishing the legal framework for asset tokenization. This is not only necessary to protect the interests of investors, but also for a frictionless transaction to occur so that the asset owner can receive the requested funds to exploit their assets in the most simplistic way possible.
Digi shares takes care of all the contracts that are needed, and in the same way that one of our most important pillars is the customer experience, we have transferred our simple customer journey to buy tokens, to how the legality of tokenization should be executed. of assets.
New Investment
Finally, and as we have said before Digi shares wants to become the new investment and for this to happen it needs to become a trusted source for both asset owners and investors. For this reason, Digi shares is always in continuous study of what the applicable legislation is. Applying internal processes to comply involving different working groups to better understand the current situation of Security Token Offerings and asset tokenization, and mainly, simply understanding what you must do at all times to always comply with the law.
Once we have established what tokenization is and how Digi shares covers the legality factor, the final step for asset tokenization to occur would be the launch of the token on the Digi shares platform. Once activated, anyone can sign up and join the platform to start buying tokens and start earning passive income. We will discuss the process of purchasing tokens in the next section.
