Ownership is a serious issue in economics, both because of the legal aspect and because of the difficulty in dividing some assets into parts. The crypto industry has found its solution to the problem – tokenized goods.

What are tokenized goods

Tokenized goods usually mean real products (energy resources, agricultural products, precious metals) presented in “digital” form. The process of moving from physical to electronic form is called “tokenization.” It consists of asserting ownership rights to certain goods through tokens in a blockchain environment. Each individual token represents a share of ownership in a real asset, which can reach 100%.

Tokenization modifies the structure of ownership of goods, giving users more opportunities to manage goods, their divisibility and liquidity. For example, if you have a gold bar worth $100,000, physically dividing it into smaller bars may be a challenge. Ultimately, damage to the bar can lead to a decrease in its market value. If you tokenize it by issuing 100,000 tokens, this will allow investors to exchange ownership shares without the problems of division, logistics and storage of the asset.

Tokenization stages

Tokenization consists of four stages. They always start with the release of tokens. This is done on the blockchain, usually with the support of some crypto exchange or specialized platform. The second step is to decide how and where the tokens will be stored. It is also necessary to determine who will oversee them: a third party with a good reputation or everything will be implemented through smart contracts.

The third stage is the direct entry of tokens into circulation. Mostly they end up on decentralized exchanges (DEX) and P2P exchangers. In fact, the concept of tokenization consists precisely in the implementation of the third stage. The fourth stage is reverse implementation. In general, tokens are only a digital expression of ownership of a particular real asset. Therefore, they can be sold back at any time and get real-life physical products.

Types of tokenized goods

In theory, anything can be tokenized, but in reality no one does it. Tokenizing an asset with near-zero value mostly makes no sense. But you will have to spend a lot of effort, energy and resources as part of this process. Most often, assets that carry real value are tokenized: precious metals, energy resources, agricultural products and real estate.

Precious metals are quite difficult to transport from point “A” to point “B”. Any careless action can lead to damage to the same gold or silver valuables. There is also a risk of theft. Tokenization solves these issues. It also gives investors more options to invest in defensive assets like precious metals.

The situation is similar with energy resources. Transportation of the same oil or natural gas is expensive and quite difficult. Investors often don’t need it – they are interested in the resale process and the final price, and not in actual ownership.

In relation to agriculture, both cereal crops (wheat, rye) and quite exotic products, such as coffee, can be tokenized. The tokenization process here, firstly, connects the real sector of the economy with the cryptocurrency one, and secondly, helps investors diversify their portfolio.

Real estate is quite expensive. Not everyone has the money to buy it completely. Tokenization allows you to purchase a small “piece of the pie” from which you can make a good profit.

In addition, there is such a class as cryptocurrencies tied to goods.

Commodity-linked cryptocurrencies

Such assets provide relatively high stability compared to classic coins. This is achieved by linking to real goods: gold, oil and others. Their nature is best illustrated by classic stablecoins linked to the exchange rate of a fiat currency, but in this case, any other underlying assets can determine the value. The physical product is in the hands of a specific organization, which issues tokens tied to a certain share of it.

The prices of the token and the real asset change accordingly. Investments in such cryptocurrencies allow you to combine the advantages of digital products and the traditional market. Examples of coins that are asset-pegged: PetroDollar (XPD) and Oil Token (OIL) pegged to oil, Tether Gold (XAUT) and Paxos Gold (PAXG) backed by gold. Such crypto assets are not widely popular and in demand on the market: none of them are in the top 100 by capitalization.

Coins tied to real goods can only partially be called “cryptoassets”, since they all imply a certain degree of centralization. Additionally, tokenized goods are not cryptocurrencies tied to real goods. Both classes differ in purpose of use, nature of ownership and storage. Thus, tokenized goods are created for direct ownership, and physical storage of the goods is required for them. Cryptocurrencies do not imply this.

Benefits of tokenized goods

The first advantage that can be noted is investment. Tokenization of goods allows you to increase their liquidity. It reduces the barrier to entry so that more potential investors can participate in transactions. The second advantage is an increased level of security. Blockchain technology is based on recording and storing information in such a way that once it is entered, the data cannot be erased. In addition, the likelihood of transactions with fake goods is reduced, since each token in the system is unique.

The third advantage is a reduction in time for real estate transactions. This is achieved by eliminating intermediaries, as well as reducing transaction costs. All transactions are carried out using smart contracts if pre-established conditions are met. The fourth advantage is the worldwide distribution of goods that were previously available only in a specific geographic area. Tokenized goods can be owned by anyone who has access to the Internet.

Problems with tokenized goods

The first thing to remember is that transactions with any real goods are regulated at the legislative level. In this regard, it is necessary to tokenize assets within the rules of a specific jurisdiction. Otherwise, there are risks of fraud and regulatory pressure.

The second problem is liquidity and market depth (the combination of buy and sell orders). While tokenization improves trading capabilities by allowing transactions to be made using shares of a real asset, it does not completely solve the problem. In any case, the liquidity problem cannot be solved without the participation of institutional and private investors.

For complete transparency, it is necessary to develop certain uniform standards. To do this, it is necessary to obtain mutual agreement from various market counterparties. To this end, it is necessary to develop smart contract and data formats in such a way that they are applicable to various trading platforms.

Although the blockchain is immutable and decentralized, the threat of cybercrime remains in tokenized goods. In this regard, it is necessary to pay more attention to safety. For example, you should not neglect such tools as two-factor authentication, encryption or simple monitoring.

Conclusion

Thus, tokenized goods provide quite a lot of opportunities for investors: they remove the need to involve intermediaries, reduce transaction costs, and increase liquidity. However, as of 2024, the technology has a number of problems that lie in the legal and technical planes.

This material and the information contained herein do not constitute individual or other investment advice. The opinion of the editors may not coincide with the opinions of the author, analytical portals and experts.