How can Blockchain bring liquidity to illiquid assets?
Blockchain technology has ushered in a new paradigm in not only finance, but also in wider civilizational progress. The idea of owning a fraction, or part of an asset, was a pretty far-fetched idea a few years ago. But with the onset of new innovation, the concept is taking shape as a popular investment vehicle today.
Many people are aware of the underlying importance of blockchain, distributed ledgers and crypto. But tokenization can be something that not many people are familiar with. It could have implications for all asset classes in the financial world. So with that said, let’s address the obvious.
What is tokenization?
Tokenization is the process of splitting traditional assets into digital tokens that can be traded on a blockchain. This facilitates investment in and trading in such assets and contributes to the development of a more liquid market. To put it simply, tokenization is the act of transferring ownership rights to a blockchain as digital tokens.
Tokenization can be applied to tangible assets such as precious metals, real estate, art, etc., and also intangible assets such as intellectual property. Moreover, it can also include financial vehicles such as bonds and stocks.
Investors are able to own a portion of the underlying real asset directly in this way without having to purchase or manage the entire underlying asset.
Tokenization can help increase liquidity and availability to invest in specific assets. Investors can buy tokens that represent a fraction of the asset rather than the whole thing. People can thus invest more easily, and it also contributes to the market becoming more liquid.
Benefits of being on the blockchain
Tokenization could very well change the way people invest and do business.
The industry may have a higher level of transparency due to the use of blockchain technology. The decentralized ledger on which the data is stored makes every transaction on the network transparent. It is impossible to change, modify or cancel completed transactions, which makes the system more reliable and secure. By increasing transparency, the market is strengthened and fraudulent behavior is reduced.
By removing current restrictions on real-world asset fractionation, tokenization enables participation from a larger investor base. Therefore, barriers to entry are eliminated because resources that were previously only available to a select and privileged few can now be accessed by a larger number of people. This improved access contributes to the democratization of the market and the leveling of the playing field.
In addition, public blockchains’ worldwide reach makes it easier to tokenize assets, making them accessible to investors anywhere. This makes it easier to build bridges between global markets and remove geographical barriers.
Giant financial institutions are also looking at tokenization of their funds for greater participation. KKR recently decided to put part of its private equity fund on Avalanche’s public blockchain.
