7 key benefits of tokenizing real-world assetss | AI generated image by XBTO
7 key benefits of tokenizing real-world assetss | AI generated image by XBTO
For institutional investors, asset managers, and high-net-worth individuals, understanding the benefits of tokenization of assets is no longer a niche interest; it's a strategic imperative. Traditional financial systems are often slow, fragmented, and burdened by intermediaries, leading to inefficiencies, high costs, and limited access to lucrative markets like private equity, real estate, and fine art. Tokenization addresses these long-standing challenges head-on, offering a glimpse into a financial future that is more efficient, inclusive, and transparent. This article explores the seven key benefits of tokenization of assets that are reshaping the financial industry for a new digital era.
1. Unlocking liquidity & creating secondary markets
One of the most significant advantages of tokenization is its ability to unlock value from traditionally illiquid assets. Assets like real estate, private equity, and fine art often have substantial value but are difficult and slow to trade, tying up capital for extended periods.
Tokenization transforms these illiquid assets into liquid, tradeable digital units. This process allows asset holders to sell a fraction of their ownership to raise capital without needing to sell the entire asset. For instance, a commercial building owner could tokenize the property to raise funds while retaining majority ownership.
Key aspects of improved tokenization liquidity include:
- Secondary Market Creation: After an initial offering, tokens can be freely traded on secondary markets, such as decentralized exchanges (DEXs). This provides investors with flexible exit options that don't depend on traditional events like IPOs or sales.
- Dynamic Trading Ecosystem: The ability to trade tokens on secondary markets creates a more dynamic and efficient trading environment, allowing investors to react to market changes in real-time.
Attracting a Broader Investor Base: Liquid secondary markets empower issuers to attract a wider range of investors who value the ability to trade their investments. A case in point is the Aspen coin, which tokenized the St. Regis Aspen Resort, enabling real estate investors to trade their stakes on secondary markets without waiting for the entire property to be sold.
2. Lower costs & faster settlement
Traditional finance is notoriously inefficient, weighed down by intermediaries like banks, brokers, and clearinghouses that add complexity, cost, and delays to every transaction. The process of investing in private assets often involves opaque pricing, lengthy negotiations, and complex documentation.
Tokenization leverages blockchain technology and smart contracts to streamline these processes, delivering significant tokenization efficiency. Smart contracts - self-executing agreements with predefined rules - are the backbone of tokenized systems, automating tasks that once required manual intervention.
This automation leads to several key improvements:
- Reduced friction and intermediaries: By automating processes like compliance checks, dividend payments, and ownership transfers, smart contracts reduce the reliance on intermediaries, which in turn lowers transaction costs and eliminates delays. Santander's tokenized bond, for example, used smart contracts to automate compliance and payment processes, significantly cutting administrative costs.
- Near-instant settlement: Traditional markets often operate on a T+2 settlement cycle, meaning transactions can take days to finalize, tying up capital and introducing counterparty risk. Tokenized assets can settle in near-real-time, reducing this risk and improving capital efficiency for all market participants.
- Simplified asset servicing: Smart contracts can automatically distribute income to token holders, such as rental income from a tokenized property or interest payments from a tokenized bond. This ensures faster, more reliable payouts while reducing the administrative overhead for issuers.
3. Fractional ownership & broader market access
Historically, access to high-value asset classes like private equity, fine art, commercial real estate, and venture capital has been restricted to institutional or ultra-wealthy investors due to high minimum investment thresholds and other barriers.
Tokenization democratizes access by enabling fractional ownership, which is the process of dividing a high-value asset into smaller, more affordable, and tradeable units. This is one of the core tokenization benefits, creating a more inclusive financial ecosystem.
- Lowering entry barriers: By fractionalizing ownership, tokenization allows individuals to invest in assets that were previously out of reach. For example, instead of needing millions to purchase a Picasso masterpiece, an investor could buy a token representing a small fraction of the artwork for as little as $100. Similarly, Hamilton Lane tokenized portions of its private equity fund, reducing the minimum investment from $5 million to just $20,000, opening access to a new pool of investors.
- Global investor base: Blockchain networks are inherently borderless, enabling issuers to reach a global pool of investors without the complexities of traditional cross-border financial systems. A company in Brazil, for example, could issue tokenized debt to investors in Europe or Asia, bypassing traditional intermediaries.
- Access to new opportunities: Tokenization opens up opportunities for both retail and institutional investors to access a wider range of assets, from a luxury apartment in New York to a renewable energy project in Africa. This allows for greater diversification and participation in once-exclusive markets.
The case for tokenization
Tokenization reshapes financial markets, enabling faster issuance, increased transparency, and wider investor access. Learn how it unlocks capital formation and portfolio diversification.
4. Enhanced transparency & auditability
A core feature of blockchain technology is its decentralized and immutable ledger, which provides an unprecedented level of transparency and security. Every transaction and ownership record is verifiable, tamper-proof, and accessible to all relevant participants, fostering trust among investors, issuers, and regulators.
This inherent transparency is a key component of institutional tokenization, where auditability and compliance are paramount.
- Immutable ownership records: Blockchain serves as an immutable ledger where ownership records are securely stored, preventing disputes and fraud. This creates a single, verifiable source of truth for every asset.
- Streamlined compliance: Smart contracts can have regulatory rules embedded directly into the token's code. This can automate compliance with requirements like AML (anti-money laundering) and KYC (know your customer) checks, investor accreditation, and geographic restrictions, thereby enhancing trust and reducing the administrative burden.
- Full traceability: The history of an asset, from its origin to every subsequent transaction, can be recorded on the blockchain. Everledger's tokenized diamonds, for instance, use blockchain to trace information like origin, quality, and ownership history, which builds trust with buyers and helps eliminate fraud in the supply chain. This is particularly valuable for assets where provenance is critical.
5. New collateral & financing models
Another of the important benefits of tokenization of assets is its ability to enable innovative financing models by transforming previously illiquid assets into usable collateral. In traditional finance, securing loans against assets like fine art or private company equity can be a cumbersome and inefficient process.
Tokenization unlocks new possibilities within both traditional finance and decentralized finance (DeFi) ecosystems.
- Tokenized assets as collateral: In the world of DeFi, tokenized assets can be used as collateral for decentralized loans, offering more flexible and inclusive financing options than traditional systems. This allows asset holders to borrow against their holdings with unprecedented flexibility.
- Innovative funding mechanisms: Tokenization creates new use cases for raising capital. For example, small businesses can tokenize their future revenue streams to attract investors, bypassing traditional funding barriers. Similarly, renewable energy credits can be tokenized to enable transparent trading and incentivize green projects globally.
- Bridging traditional and decentralized ecosystems: Tokenization acts as a bridge between traditional finance and DeFi. On-chain investors gain access to off-chain assets like real estate or private debt, while traditional investors are introduced to the efficiencies and innovations of decentralized ecosystems. This creates a multidimensional marketplace that leverages the strengths of both worlds.
6. Portfolio diversification & innovation
For institutional investors and asset managers, effective diversification is critical for optimizing asset allocation and managing risk. However, gaining exposure to a wide range of alternative and illiquid assets has traditionally been difficult and costly.
The RWA benefits provided by tokenization fundamentally change this dynamic by making a diverse array of assets more accessible, manageable, and tradeable.
- Access to a wider universe of assets: Tokenization brings a vast range of asset classes on-chain, from real estate and private credit to infrastructure projects, commodities, and intellectual property. This allows investors to diversify their portfolios across multiple asset classes with greater ease.
- Fractionalization for granular diversification: Because tokens represent fractional ownership, investors can allocate smaller amounts of capital across a wider variety of assets. This granular approach to diversification was previously impractical for many illiquid asset classes.
- Unlocking new investment strategies: The ability to tokenize and trade assets like music royalties, patents, or even rare collectibles creates entirely new opportunities for portfolio innovation. Investors can now participate in revenue streams and markets that were once inaccessible, allowing for more creative and sophisticated investment strategies.
7. Alignment with broader digital transformation
The shift toward tokenization is not happening in a vacuum; it is part of a broader societal and technological trend toward digitization. The COVID-19 pandemic accelerated the world's shift to digital payments, remote work, and virtual communication, creating a widespread embrace of digital technology. In this context, tokenization feels like a logical next step in the evolution of finance and ownership.
This alignment with digital transformation is being driven by several converging factors:
- Technological maturity: Early blockchains were often slow and lacked the scalability needed for large-scale financial applications. However, modern platforms and Layer-2 scaling solutions have resolved many of these limitations, offering the speed, efficiency, and programmability necessary for institutional-grade tokenization.
- Growing investor demand: There is a rising demand from high-net-worth individuals, family offices, and institutional investors for alternative investments and greater portfolio diversification. Retail investors are also eager to access opportunities that were traditionally reserved for the wealthy. Tokenization directly meets this demand.
- Regulatory momentum: Governments and regulators worldwide are increasingly recognizing the transformative potential of tokenized assets. Frameworks like the European Union's MiCA (Markets in Crypto-Assets) are providing clear guidelines for the treatment of digital assets, giving businesses and investors the confidence to operate in a structured and compliant environment.
This "perfect storm" of technological breakthroughs, regulatory progress, and rising market demand has made the adoption of tokenization not just possible, but inevitable.
The future of ownership is tokenized
Tokenization is far more than a mere technological upgrade; it represents a fundamental rethinking of how we interact with, own, and transfer value. The key benefits of tokenization of assets - from unlocking liquidity and lowering costs to democratizing access and enhancing transparency - are creating a more inclusive, efficient, and dynamic financial ecosystem.
For institutional players, the advantages of tokenization are especially compelling. The ability to achieve greater portfolio diversification, streamline complex processes through automation, and access a global investor base presents unprecedented opportunities for growth and innovation. While challenges like regulatory uncertainty and market fragmentation remain, the momentum is undeniable. As technology matures and adoption accelerates, tokenization is set to reshape industries and redefine the future of finance and ownership. The question is no longer "if" tokenization will revolutionize finance, but "how quickly" it will happen.
To learn more about the mechanics of this transformative technology, explore our in-depth guide on how asset tokenization works.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
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