Tokenization has recently become a new way of converting an asset into a digital token on a blockchain. Global experts including bankers from Wall Street are very enthusiastic about the endless possibilities that come with the usage of Ethereum tokens and other alt-tokens to move real-world assets onto blockchains while maintaining the fundamental characteristics of the underlying assets.

Why tokenize real-world assets? Financial markets are full of different type of assets: stocks, CO2 emission credits, real estate, lithium, oil, etc. However, most of these assets are hard to subdivide or transfer from one market participant to another. Due to this complexity, actors prefer trading papers that represent these assets. The main problem — it’s time consuming to track, exchange and audit papers and legal agreements, and the process introduces substantive operational risk. The BANKEX solution is efficient and mitigates the traditional pitfalls and risks associated with the transfer of ownership for real assets utilizing Ethereum smart contracts.

But what’s the point of tokenizing a physical asset and how can that be done?

Imagine you’re an owner of an office building and you would like to get additional funding to construct a new building, improve the already existing office spaces or just facilitate the renting process for your clients. Tokenization can be seen as an efficient alternative to the time consuming and expensive procedures that you would need to accomplish to get funding through classic securitization.

Office space tokenization is quite an easy example to understand, but what about non-fungible assets, how can we tokenize them? First, we need to understand the difference between non-fungible and fungible assets.

A fungible asset by definition means that one asset can be easily replaced by another identical asset. The examples would include a kilogram of pure gold, a barrel of BRENT oil, etc. Thus, these types of asset are easier to tokenize because of their granular nature. It means that fungible assets can be broken into smaller pieces. The process of converting fungible assets into a token applies to a group of objects rather than a set of individual objects. Fungible assets are technically easier to tokenize because we can construct a bijective (one-to-one) map between the set of assets and the set of tokens.

Non-fungible assets are assets that are not interchangeable. Some examples of non-fungible assets are individual mortgages or debt of individual firms. Simple tokenization of single mortgages would only slightly increase their liquidity: not many token buyers would be ready to take risks of non-payment on a single mortgage. In order to resolve the challenge, BANKEX will pool multiple similar assets (for example, mortgages) from multiple asset owners (for example, banks) together and issue tokens which are backed by the pool of assets. This way a token buyer bears much less risks because default of one mortgage taker will have almost no influence. This is how classic securitization works.

BANKEX Proof-of-Asset Protocol takes the challenge to make securitization significantly more affordable, faster and less risky for token buyers by harnessing the power of smart contracts on a blockchain and continuous audit of assets. In our next blog, we will discuss the legal aspects linked to fungible and nonfungible asset tokenization.