Blockchain 101: What is Asset Tokenization?
Remember “Blockchain technology represents a potential 3%-10% cost savings on every good that uses it as a medium of exchange”
Let’s start in a time before computers, asset purchase and sale orders had to be done through very rudimentary methods. For example, stock trades were made on trading floors throughout the 20th century by having men yell out the share price and the amount they were willing to transact of a certain stock. They would create a ledger in their notebooks when an agreement was reached between two traders and at the end of the day, they would settle the trades. This inefficient system was the best that we could come up with before automation through computers.
In today’s world, we trade our large assets through semi-digital, centralized organizations. The digitalization of asset transfer has led to huge amounts of wealth expansion over the past 30 years. Instead of having traders yelling at each other on the floor, most trading is done on computers through an order book system. This order book is automatically maintained by a trusted third party, the exchange. Exchanges have very siloed approaches to how they record asset transfer for different asset classes. This is mostly because history build out these silos.
Asset tokenization pulls much of the power from the centralized organizations and brings it back to the individual investor. Tokenized assets can be built in a standardized way that allows them to be traded on multiple types of exchanges. This enables competition on an exchange level to offer the lowest fees and the highest service. There isn’t such direct competition for organizations like the New York Stock Exchange. They essentially have a monopoly on the trade of the stocks that they list for transaction. This will change with asset tokenization.
Earlier, I mentioned that asset tokenization has the ability to be systematically built out so that there is a standardized mechanism for exchange between tokens. Let me break this down in an example, Say you have a tokenized oil future and you want to trade it for a tokenized Japanese company’s equity. In today’s terms you would have to go to CME through a broker and sell your oil future, transfer than money over to a Japanese bank through an intermediary bank. Then you would have to use a Japanese broker to purchase that specific stock. There are pain points throughout the process. These lead to inefficiency with time, resources, and fees. In a tokenized asset based system, you could sell your oil future on any number of exchanges for an intermediate cryptocurrency and then trade into the Japanese equity within minutes after. Almost all of the intermediaries are no longer a part of the process so your trade executes faster, and cheaper than it does in today’s siloed system.
A few major assets to be tokenized are USD through the Tether project, and Gold through Digix DAO. Check them out if you get a chance.
In the future, I plan on exploring how derivative trading and other complex financial instruments are being tokenized. Tokenization will enable types of transactions that we haven’t been witness to yet.