An Andy Warhol Painting. The Aspen Hotel. A gold bar in a London vault.
Throughout most of history, similar goods have been out of reach for the average consumer, reserved for the wealthy elite. But the growing industry of asset tokenization is here to change the system.
What is Asset Tokenization?
Think of asset tokenization like a stock. Just as an investor can buy a share of a company, which represents a percent of ownership, the same can be done with physical assets. For example, a $1 million hotel can be divided into 100,000 tokens, each worth $10. If a consumer buys 1,000 tokens, they now own 1% of that hotel. Tokens may appreciate in value as the hotel grows and provide a percentage of profits, depending on the deal's financial structure. These transactions take place on the blockchain—a decentralized network of computers that records transactions and ownership of tokenized assets.
For example, take Andy Warhol’s 14 Small Electric Chairs, which was sold at a blockchain art auction in 2018. By selling 49% of the painting as digital certificates, investors across the world were able to buy fractional shares of the artwork. This allowed ordinary people to own part of the £4.2 million asset, which would otherwise have been exclusive to wealthy collectors.
Smart Contracts: The Engine Behind Tokenization
Normally, buying an asset often involves going through multiple middle men. For example, when trying to buy real estate, it isn’t uncommon to go through brokers, banks, legal teams, and other institutions before gaining ownership. To solve this, tokens are often embedded with smart contracts—computer programs that bypass middlemen. In the real estate example, a smart contract might confirm that a transaction meets regulatory requirements and automatically transfer ownership when payments have been made, which eliminates the need for escrow agents.
Another use of smart contracts is automatic income distribution. If a tokenized property generates profit, smart contracts can easily divide the money across token holders by percent ownership. This reduces administrative costs and the need for third party managers, making assets divided across thousands of investors significantly easier to manage.
The Hidden Risks of Asset Tokenization
Because tokenization is extremely accessible, a large amount of its investors are everyday people. These individuals are more prone to panic-selling, since they are more likely to sell due to short-term price fluctuations. This makes tokenized assets significantly more volatile than traditional markets, which have institutional investors that hold on to assets during temporary downturns.
Smart contracts are also far from perfect. There have been multiple instances where hackers took advantage of vulnerabilities in their code to drain funds by performing unauthorized withdrawals or altering contract conditions. For example, in 2016, a block-chain investment fund’s smart contract vulnerabilities were exploited by scammers. The attacker syphoned off $60 Million from the project, leaving investors with significant losses.
In 2022, a similar incident occurred with the Ronin blockchain network, which powers NFT-driven game Axie Infinity. Hackers stole private keys and used them to approve fake withdrawals, resulting in over $600 million being stolen.
While blockchain security has certainly improved since then, vulnerabilities continue exposing investors to significant risk.
The Future of Tokenization
As we head towards the future, tokenization shows no signs of slowing down. In fact, McKinsey estimates that tokenized markets could reach $2 trillion by 2030. We are still very early into blockchain’s development, so technological and regulational improvements are likely to support further growth.
Just as early adopters of the internet made billions, those who embrace tokenization early may just benefit from the rapidly growing market. While it's important to consider the downsides of any new technology, tokenization will undoubtedly reshape markets.
Sources:
How will asset tokenization transform the future of finance?
Blockchain’s role in commercial real estate
Andy Warhol’s 14 Small Electric Chairs To Be Sold in Blockchain Art Auction
DAO Hack Explained: How a Vulnerability Split Ethereum
Update: Crypto Hackers Exploit Ronin Network for $615 Million
From ripples to waves: The transformational power of tokenizing assets
Image: SWNS