What is tokenization? How it works and how to invest in it

Discover how tokenization is impacting the traditional financial ecosystem by digitizing assets.

The tokenization market could grow to $10 trillion by the end of the decade as traditional financial institutions increasingly adopt blockchain, according to a report by digital asset management firm 21.co.

Similarly, a report by Boston Consulting Group predicts that the market for tokenized assets could rise to $16 trillion by 2030.

Source: Boston Consulting Group

One of the key drivers behind the growth of tokenization is its potential to transform existing financial infrastructure, increase efficiency, reduce costs and optimize supply chains.

But the potential of tokenization goes beyond traditional financial instruments. In the future, we may see a wide range of assets being tokenized, including bonds, stocks, art, automobiles, commodities, and even fine wines.

This expansion into new asset classes has the potential to make investing more accessible and bring new liquidity to traditionally complex and slow-moving markets.

So let’s find out what tokenization is and why it is important.

Tokenization explained: What is tokenization in crypto?

Tokenization in crypto refers to converting real-world assets such as stocks, bonds, real estate, and even physical products into digital tokens on a blockchain.

These tokens represent ownership or share of the underlying asset and can be traded or transferred easily and securely.

What is the purpose of tokenization? Typically, tokenization aims to provide liquidity to traditionally illiquid markets. Assets that were once difficult to buy or sell can be instantly bought and sold on blockchain-based platforms through tokenization, reducing transaction costs and increasing market efficiency.

How does tokenization work?

Here’s a step-by-step overview of how tokenization generally works:

Asset selection: An issuer selects an asset to be tokenized. This could be anything from real estate to stocks, bonds or commodities.
Tokenization process: The asset is divided into digital tokens, each representing a portion of the underlying asset. This process is often facilitated by smart contracts, which are self-executing contracts where contract terms are written directly into code.
Issuance: Tokens are issued on a blockchain where they can be bought, sold or traded. Each token is unique and contains metadata that identifies the entity it represents.
Trading and ownership: Once issued, tokens can be bought and sold on blockchain-based platforms. Ownership of tokens is recorded on the blockchain, which provides a transparent and immutable record of ownership.
Redemption: Token holders may have the option to redeem their tokens for the underlying asset. This process is usually subject to the terms specified in the smart contract.
Regulatory compliance: Throughout the process, issuers typically ensure compliance with relevant regulations, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements. Benefits of tokenization

Tokenization converts real-world assets into digital tokens on a blockchain, providing the following benefits:

Increase accessibility: Tokenization allows fractional ownership, allowing smaller investors to access assets that were once inaccessible due to high costs or barriers to entry.
Increase liquidity: Tokenization makes traditionally illiquid assets, such as real estate or fine art, more liquid by allowing them to be bought and sold on blockchain-based platforms, thus reducing transaction times and costs.
Increase efficiency: By eliminating intermediaries and streamlining processes, tokenization can increase the efficiency of asset transfer and management, reducing costs and administrative burdens.
Enable borderless transactions: Blockchain-based tokens can be traded globally, enabling seamless cross-border transactions without the need for intermediaries or complex regulatory processes.
Increase security: Blockchain provides a secure and transparent ledger to track ownership and transactions, reduce the risk of fraud, and ensure the integrity of asset ownership. How to invest in tokenization?

Investing in tokenization offers a variety of opportunities for those looking to diversify their portfolios. Here are a few practical ways to invest in tokenization technology:

Buy tokenized stocks: Buy tokenized stocks of well-known companies like Google or Meta on crypto exchanges. These digital assets represent traditional stocks and offer benefits such as 24/7 trading and fractional ownership.
Invest in tokenization startups: Consider purchasing crypto tokens issued by projects focused on tokenization. Research the project team, token liquidity and progress before investing. Look for projects with strong use cases and growth potential.
Get layer 1 tokens: Look into purchasing layer 1 (L1) blockchain tokens from platforms that enable tokenization, such as Ethereum (ETH), Solana (SOL), Avalanche (AVAX), and BNB Chain (BNB). These tokens form the basis of their respective blockchain networks and may see increased demand as tokenization grows. Invest in exchange-traded products (ETPs): Some platforms offer ETPs that provide access to tokenized assets. These products can provide a convenient way to invest in tokenization technology. Tokenization platforms

These platforms provide the infrastructure and tools necessary to tokenize real-world assets and facilitate their trading and management on blockchain networks. Here are some important tokenization platforms:

Backed: Backed is building on-chain infrastructure for capital markets, offering tokenized securities that represent real-world assets like bonds, stocks, and ETFs.
Maple: Maple is an on-chain marketplace focused on providing high-quality lending opportunities to institutional and accredited investors, meeting their liquidity, risk and return requirements.
Matrixdock: Matrixdock is a digital asset platform that provides institutional and accredited investors with transparent access to tokenized RWAs, providing an immutable record of ownership and daily proof of reserves.
Ondo: Ondo offers on-chain financial products such as short-term US Treasury bonds and tokenized bonds backed by bank demand deposits.
Polymath Network: Polymath is a platform for creating tokenized securities and offers a streamlined process for issuers to digitize securities on the blockchain.
Securitize: Securitize is a compliance platform for the digitization of securities on the blockchain and ensures that tokenized securities comply with regulatory requirements. Risks and challenges of tokenization

Investing in tokenization offers exciting opportunities, but also comes with risks and challenges that you should be aware of:

Regulatory risks: Tokenization is a relatively new concept and regulations surrounding it are still evolving. Changes in regulations may affect the value and legality of tokenized assets.
Market volatility: The crypto market is known for its volatility, with token prices often experiencing wild fluctuations. You should be prepared for sudden price changes.
Security risks: Digital assets are susceptible to hacking and other security breaches. You should take precautions to protect your assets, such as using secure wallets and exchanges.
Lack of liquidity: Some tokenized assets may have limited liquidity, making it difficult to buy or sell them at desired prices.
Technology risks: Blockchain is still evolving and there are risks related to bugs, glitches, and other technical issues that could impact tokenized assets.

According to the hype, the tokenization market may continue to grow as more assets are tokenized and blockchain becomes more adopted.

However, you should proceed with caution and carefully consider the risks involved before investing in tokenization.