How Tokenization Is Putting Real-World Assets on Blockchains
September 13, 2018
Tokenization is the process of converting rights to an asset into a digital token on a blockchain.
Why Tokenize “Real World” Assets and how can that be done? Our world is full of assets: stocks, real estate, gold, carbon credits, oil, etc. Many of these assets are difficult to physically transfer or subdivide, so buyers and sellers instead trade paper that represents some or all of the asset. But paper and complex legal agreements are cumbersome, difficult to transfer and can be hard to track. 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 cryptocurrency / token such as 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.
Intangible Assets: They exist only due to the operation of law and there is no physical object. Examples of intangible assets include patents, carbon credits, brand names, copyrights, etc. The challenge with intangible assets is ensuring that the blockchain system’s model of asset transfer lines up with the real-world legal model of transfer. Intangible assets are often easier to tokenize than physical objects because there are fewer concerns regarding storage and shipment.
Fungible Assets: A fungible item is one that can be replaced by another identical item. Think wheat, gold or water. Fungible assets are much easier to convert to tokens because they can generally be broken down into smaller units (like bitcoin), and a token can stand for a group of objects (e.g., a pile of gold) rather than a set of individual objects (e.g., a warehouse full of unique works of art).
Highlights & Keynotes:
- Non-fungible Assets: Assets that aren’t fungible require an abstraction layer in order to tokenize.
- Transfers of Assets: Ownership vs. Limited Rights
- The Key Legal Issue: Ensuring Token Consistency: The key challenge for any system that involves tokenizing real-world assets is to ensure that the digital token stays linked to the real-world asset. If the buyer of a token can’t be sure that the token is properly linked to the real-world asset, then the value of the token will fall or become zero (if no one has faith in it).
- Legal Models: Licensing, Trading Systems, Redemption, Vaults & Smart Contracts
- Intersection With Global Securities Laws: Selling a fractional interest in an asset to the public (without permission from the government) is often prohibited by securities laws. Blockchain helps. Digital tokens are linked to real-world assets and ultimately involve a real-world entity that has value and can be tracked down by the relevant regulator.
- The Centralization Issue vs. Decentralization: The entire token can fail if the central asset holder fails. Blockchain can help with this.
- Legal limitations: It will not be possible to move some types of physical assets onto blockchains until statutory changes enable digital transfers.
- We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies. Since sidechains are separate systems, technical and economic innovation is not hindered. Despite bidirectional transferability between Bitcoin and pegged sidechains, they are isolated: in the case of a cryptographic break (or malicious design) in a sidechain, the damage is entirely confined to the sidechain itself.
- This paper lays out pegged sidechains, their implementation requirements, and the work needed to fully benefit from the future of interconnected blockchains.
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