Asset Tokenization: The Next Mega Crypto Trend

September 10, 2021September 11, 2021

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I start this blog post with a moment of silence remembering 9/11. As crypto markets taking a hit over the past two days due to regulatory crackdown and by El Salvador’s hindered bitcoin adoption, I am getting into a new box of crypto adaption, “Asset Tokenization”, offering fresh thoughts on expanding blockchain space.

Asset tokenization is the process by which an issuer creates digital tokens on a distributed ledger or blockchain, which represent either digital or physical assets. Blockchain will tend to the financial landscape and enable an asset to be easily broken down into smaller units, representing ownership, encouraging the democratization of investment in historically illiquid assets and bring about fairer markets.

Asset tokenization is poised to offer an opportunity of a magnitude of that Dutch East India Company offered in 1602 with the world’s first publicly traded stock that enabled sharing the costs and risks and there by profit from the growth of the company.

Asset Tokenization: A Big Picture

Let me paint the bigger picture. The total stock market size of ~$90 Trillion as an asset class, global equities went from zero to almost $100 trillion. Compare that to the total private economy size of $1.6+ Quadrillion (which include residential real estate assets of ~$170 Trillion & commercial real estate assets of $30+ Trillion as one private economy, and other include premium arts, precious metals, luxury cars and many more asset classes as shown in the diagram above). The majority of the private economy can be tokenized. Digital transfer agent Vertalo has teamed up with tZERO and a Pennsylvania investment firm to tokenize $300 million in real estate (a French Estate) on the Tezos blockchain. With tokenization, investors can buy directly into real estate like this – for less than $100. You don’t even need to leave your couch.

Not only real estate, recent JPMorgan announced tokenizing gold bars. Imagine buying a part of 1968 Shelby Mustang, Paul Newman’s one-of-a-kind “Rolex Daytona” watch, a cut of this rare Musgravite gemstone or a piece of your favorite sports team. Then selling your stake instantly from anywhere in the world with a few taps on your smartphone. How amazing would it be? Tokenization will allow retail investors to invest in assets that have historically been “off-limits.”

The process of tokenization can substantiate and define ownership in that asset. Let’s take an easy example of purchasing a property like home. We are typically the sole owner of that asset and perhaps spouse will also be on the title to the home, but it typically stops there. But if that property were tokenized as shown on the diagram below, fractional ownership could be conferred to hundreds – even thousands – of token holders. The value of these tokens would fluctuate just like any other security. If the value of the home increases, the value of the tokens would increase, and the token holders would be able to share in that value creation. This is a straightforward example.

Practically speaking any asset can be tokenized and traded. Real estate… gold… oil… art… classic cars… Anything that has value will be tokenized and traded on security token exchanges. What if you could own 1/100,000th of Empire State Building tokens… Or 1/10,000th of NBA Lakers tokens… Or 1/10,000th Kohinoor diamond tokens?

It seems like that’s the world we are headed for. Asset tokenization can virtually represent any asset of value that holds interest to others will be able to hold its own “public offering” and begin trading. And these token exchanges will be global – they will trade 24/7, and settlement will take seconds rather than days. Also, these tokens will be completely liquid. We will be able to buy, sell, and transfer these assets with ease. We can think of it this way: If we own our home, this asset is highly illiquid. We would have to sell our home – a time-consuming process – before being able to spend any of that value.

Imagine if that home was tokenized? We could easily transfer or sell fractions of that value. I found a humorous cartoon that explained this idea. Funny… But the idea is essentially correct. A tokenized asset would be entirely liquid and could conceivably be used as a medium of exchange. And while tokenization will unlock the “private economy,” it also promises to disrupt existing financial markets.

The Next Mega Blockchain Opportunity

What if security tokens bring 10% of global GDP into the blockchain ecosystem. That’s roughly $8 trillion growing blockchain space by multi-X. The growth of the blockchain industry will look much like the growth of tech stocks with the rise of the internet. There will be booms and busts as the industry develops. But the technology is real. It will change the world.

Here's the Latest Sign We're About to See a Bear Market in Stocks

Take a look at the chart above. It represents the boom and bust cycles of stock market since 1970. Along the tide, the tech stocks went through major booms and busts as the internet developed and eventually became ubiquitous in our lives. Now, if you look at the total size of the blockchain ecosystem today. And then gauge the amount of capital that is about to flow into the space. That would probably put us around 1997 on the chart above offering a life-changing upside.

Security tokens have potential to spark an economic boom of historic proportions. That’s because the U.S. capital markets are not functioning as intended. They are broken. There have been 5,415 IPOs between 2000 and 2021 with 2019 dipping by 42% compared to 2000. The full year 2020 was an all-time record with 480 IPOs, but 2021 has already beat that record with 720 IPOs and counting..

2020 was quite a year for IPOs, which was largely influenced by the significant rise in the number of special purpose acquisition companies (SPACs) who went public. But the fact remains that there are fewer publicly traded operating companies today than there were in 1975, despite GDP increasing significantly. And many of the IPOs that do occur today involve companies that are valued in the tens of billions of dollars. By comparison, in the 1990s, it was common for a company to reach public markets when they were valued at $1 billion or less.

Simply put, the U.S. capital markets rarely see high-quality small issuances. There is very little interest in these kinds of offerings. That’s a problem because small businesses are the backbone of the American economy. David Weild, Founder, Chairman, and CEO of Weild & Co at the inaugural Security Token Summit in 2018 reinforced that USA capital markets are not designed to support small issuances. Historically by restricting capital formation in the U.S. to only large IPOs, we are also restricting economic growth.

Security Tokens Will Reinvigorate Small Companies So what does this have to do with security tokens? Security tokens will make it much easier for companies to raise the capital they need to grow. Registering securities for a traditional IPO is a tedious, expensive process that requires companies to go through several layers of middlemen… And spend millions of dollars on lawyers and brokers.

What’s more, security tokens will not trade in fixed units like stocks and bonds – they will be fractionalized like cryptocurrencies. If you want to buy a stock today, you often must buy at least one share… And your broker
would prefer that you buy in even 100-share blocks. Well, many high-quality stocks trade for hundreds and even thousands of dollars per share. That limits access for smaller investors.

For example, Berkshire Hathaway’s A-shares (BRK.A) is trading at $421,000 per share today. The small investor cannot afford to buy even one share of BRK.A. But if Berkshire were a security token, the small investor could buy 1/100th of a token as an example – .01 BRK.A – and thus gain exposure to a legendary trophy asset. It is difficult to overstate how consequential the trend of tokenization will be. It will change our world in subtle and profound ways. And we are just getting started.

NFTs and Ethereum Are First Movers on the Tokenization Trend

The way we gain exposure early to the tokenization trend is through ETH, the native asset of the Ethereum blockchain. I’m sure many of us have heard of Ethereum, but very few investors truly understand the potential of Ethereum and its involvement in the move toward tokenization. Right now, the largest use case for tokenization is assets known as non-fungible tokens (NFTs).

NFTs are tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain – no one can modify the record of ownership or copy/paste a new NFT into existence.

NFTs and Ethereum solve some of the problems that exist in the internet today. As everything becomes more digital, there’s a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention that digital items often only work in the context of their product. For example you can’t re-sell an iTunes mp3 you’ve purchased, or you can’t exchange one company’s loyalty points for another platform’s credit even if there’s a market for it.

Here’s how an internet of NFTs compared to the internet most of us use today looks…

An NFT internet	The internet today
NFTs are digitally unique, no two NFTs are the same.	A copy of a file, like an .mp3 or .jpg, is the same as the original.
Every NFT must have an owner and this is of public record and easy for anyone to verify.	Ownership records of digital items are stored on servers controlled by institutions – you must take their word for it.
NFTs are compatible with anything built using Ethereum. An NFT ticket for an event can be traded on every Ethereum marketplace, for an entirely different NFT. You could trade a piece of art for a ticket!	Companies with digital items must build their own infrastructure. For example an app that issues digital tickets for events would have to build their own ticket exchange.
Content creators can sell their work anywhere and can access a global market.	Creators rely on the infrastructure and distribution of the platforms they use. These are often subject to terms of use and geographical restrictions.
Creators can retain ownership rights over their own work, and claim resale royalties directly. Items can be used in surprising ways. For example, you can use digital artwork as collateral in a decentralised loan.	Platforms, such as music streaming services, retain the majority of profits from sales.

Source: https://ethereum.org/

The possibilities are incredible. And since Ethereum’s launch in 2015, the network has seen millions of smart contracts deployed. It has even witnessed new types of smart contracts created that make NFTs a reality. They are known as ERC-721 and ERC-1155. And it’s these two types of smart contracts that are driving the explosive trend in NFTs happening on Ethereum. According to DappRadar, all but one of the top 20 NFT collections reside on Ethereum. As shown below, some of these NFT collections are commanding sizable attention in terms of lifetime sales volume:

• Axie Infinity: $600 million in sale volume
• CryptoPunks: $400 million in sale volume
• Rarible: $125 million in sale volume

These three collections alone are responsible for more than $1.1 billion in sales. And this all happened within just the last 12 months. Nearly all the value of NFT token sales is taking place on the Ethereum network. And if an NFT token creator is determining where to deploy their newest NFT, there is a high likelihood they will choose the destination where most of the sales volume is happening – Ethereum. Ethereum is what a first-mover advantage looks like. And as I’ll show you in a moment, it is not slowing down.

Non-fungible tokens, or NFTs, have been the rage over the past year. According to data from decentralised apps tracker DAppsRadar, 30-day trading volumes for NFTs on OpenSea have topped $1.56 billion. OpenSea is the largest NFT marketplace in the world and recorded a volume increase of 542% over the last month, registering over half of its total lifetime trade volume of $2.423 billion during the period. According to DAppsRadar’s data, OpenSea recorded over 181% user growth in the last 30 days, with over 140,000 unique wallet addresses involved in transactions. Over 1.57 million transactions took place with a total volume of around $1.67 billion.

In the overall size of the market NFTs are poised to disrupt – this number tells us we are in the very early days of this decade-long trend. It’s also important to understand that the technology companies working in the industry are working quickly to make access to NFTs as simple as buying a product from Amazon. It won’t take special expertise or programming skills to be able to interact in this marketplace. In fact, one of the leading e-commerce technology companies, Shopify, recently announced that it has programmed the ability for NFTs to be purchased using its e-commerce technology. That means that every one of its 1.7 million merchants around the world is now empowered to sell NFTs. And one of the first businesses to take advantage of this is the NBA’s Chicago Bulls.

And institutions like the well-known auction house Sotheby’s, who recently partnered up with NFT platform Nifty Gateway, have demonstrated that they understand NFTs are the next generation of the collectibles market. Pop stars Katy Perry, Jay-Z, and Ashton Kutcher also recently got involved in the industry. And even a legacy financial services giant like the Intercontinental Exchange issued a series of NFTs. These entities are all working hard to make NFTs available to their customers. And this is why we want to get involved in the most promising blockchain for NFTs today.

In Summary

At present Ethereum is placed at the epicenter of asset tokenization and the logical choice to support new tokenization projects. This is an asset we’ll want to own for years to come. You can consider other Layer 1 platforms like Solana, Cardano, or Polkadot that has potential to mass tokenize the assets. Chalk out your strategy to ride the asset tokenization wave!

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