A physical asset can be any entity exist which we can see or touch.
There is an ongoing trend in fintech space about digitizing assets or tokenization of assets. Today we will discuss some of the fundamental components in that process.
There was a headline few years back:
Paul Newman’s ‘Paul Newman’ Rolex Daytona Sells For $17.8 Million, A Record For A Wristwatch At Auction
That was sold for that price as it is a rare collectible. This is just an example of trading a valuable asset. It can be anything literally from a watch, artwork to a real estate asset like a building or land or even valuable data set.
Authenticate an Asset
Every asset has it’s own specific parameters to measure the authenticity and transferring the ownership.
Eg: Verifying authenticity of a watch can be based on original material and a movement where as real estate is based on legal papers.
Why Asset tokenization?
There are few reasons why behind the popularity of the process. Most closest one is the ability to provide liquidity to illiquid assets. That helps an asset to conveniently trade.
Few other reasons can be listed as below:
- Eliminate the custody and allows non-custodial investment opportunities. In other words eliminate the # of 3rd party interferences.
2) Relatively un-complicated and convenient for the users who likes digital activities
Digitization / Tokenization of an Asset
Digitization of a physical asset means basically a creating a digital representation of a physical asset entity. That can be a set of legal documents for a real estate asset.
Then add important details like ownership.
Blockchain as a service technology is booming as it is proven for many different advanced use cases other than the crypto currency. Asset tokenization is one of them. After the asset is tokenized or transformed in to digital entity, then it can be persist in blockchain distributed ledger as a NFT ( Non fungible token ) with a transaction.
The NFT has special characteristic as it is non- fungible. That means every NFT is unique. Therefore after we map asset to NFT then that asset-NFT is not able to use for any other transaction. Basically 20% of NFT from an asset means 20% of unique tokens that represents underlined characteristics of an actual asset.
Because of that NFT is different from the crypto currency tokens we see in common that are fungible.
Tokenization process can be facilitate with the use of smart contracts. Smart contracts are custom code snippets written and deployed in to the blockchain. They can be triggered and executed by DAPPS. ( Decentralized App )
Once the operations such as buying / selling is happening at the DAPP front end level, then the DAPP can call related smart contract snippet to execute the related business logic against the liquid asset.
Smart Contracts are executable code snippets written in specific language that is related to blockchain platform. In ETH ( Ethereum ), Solidity is the smart contract language. For ZIL ( ZIlliqa ), Scilla is their smart contract language.
Digital representation must always remain same for the existing state of a physical asset.
Eg1: If the collectible vintage watch breaks it’s movement then it has to be re-authenticate for current state
Eg2: Say someone tokenized a gold reserve and deposit in safety box in a bank. Then the actual gold reserve in box has to be track for its security
As I mentioned in one of above sections, blockchain involvement is very important. Once the asset has its tokenized representation the current owner can easily and conveniently transfer the ownership of an asset to it’s new user.
Other technology involvements such as IOT
IOT can play a role in overall mechanism as well. Assume a same use case of tokenizing a gold reserve. So with a digital ownership change we can notify / trigger IOT sensors to physically transfer gold from first owners box to new owner’s box.
Refer below example if you want to explore more
HG Exchange tokenized rare whiskey collection, partnering with zilliqa blockchain