Have you ever wondered why two businesses launched at the same time, with the same capital, often end up with very different values?
It’s not magic, it’s a matter of structure, design, and market dynamics. This same principle applies in the world of decentralised finance (DeFi) when it comes to tokens.
Two tokens created simultaneously, funded equally, and built on the same blockchain can evolve in entirely different ways. Sometimes they match in value, but more often they don’t, and understanding tokenisation is key to knowing why.
In this article, you’ll learn what tokenisation means, how it works, and how it’s reshaping traditional and modern finance.
Understanding Tokenomics
Before diving deeper, it’s important to understand tokenomics, the economics behind a token. Tokenomics covers how a token is designed: its supply, distribution, utility, and incentives for holders.
For example, Bitcoin’s maximum supply of 21 million tokens is a core part of its tokenomics, creating scarcity and long-term value. Many new projects fail because their tokenomics are poorly planned, too many tokens in circulation or no clear reason for people to hold them
What Exactly Is Tokenisation?
Tokenisation is the process of representing ownership of an asset as a blockchain-based token. These assets can be physical, like real estate, gold, or art, or purely digital, like intellectual property, music royalties, or shares in a company.
When an asset is tokenised:
- Ownership can be divided into smaller fractions.
- Investors can trade their portions easily.
- Transactions are secured and verified on the blockchain, removing unnecessary middlemen.
In simple terms, tokenisation breaks big assets into smaller, tradeable parts, and the blockchain guarantees trust.
How Tokenisation Works in Finance
Here’s a simple step-by-step of how tokenisation is applied in the financial world:
- Select the Asset: The owner decides what asset to tokenise, for example, a luxury apartment or a piece of farmland.
- Legal Compliance: They ensure all regulations are met in their country or region.
- Token Creation: Using smart contracts, the asset is converted into digital tokens that define ownership rights and conditions.
- Distribution: Tokens are offered on a secure blockchain platform for investors to buy and sell.
- Trading and Settlement: Investors can trade their tokens 24/7. Ownership records are updated in real-time, ensuring efficiency and transparency.
Major Benefits of Tokenisation
Tokenisation is shaking up traditional finance in remarkable ways:
1. Fractional Ownership
Tokenisation enables people to invest in high-value assets with smaller amounts of money. For instance, instead of needing $500,000 to buy a building outright, you could buy a token worth $100 and own a fraction of that property. This opens up investment opportunities to millions more people.
2. Improved Liquidity
In traditional finance, selling assets like private equity, real estate, or fine art can take months or even years. With tokenisation, these can be traded instantly on blockchain platforms. For example, a tokenised piece of farmland can be sold in minutes to an interested buyer on a global exchange.
3. Faster Settlement and Lower Costs
Blockchain eliminates intermediaries, reduces paperwork, and speeds up settlement times. What used to take days or weeks now happens almost instantly, saving both time and money.
4. Transparency and Security
Every transaction and token ownership record is stored securely on the blockchain, which cannot be easily altered. Investors can see the entire history of the asset, improving trust.
5. Interoperability
Tokens can operate across different blockchain networks. For instance, a token created on Ethereum might also be usable on Binance Smart Chain or Solana, boosting accessibility.
6. Global Reach
Anyone, anywhere, with an internet connection and a digital wallet, can invest in tokenised assets. This levels the playing field between rich and poor, urban and rural.
7. Fuels Innovation
Tokenisation allows businesses to create new products and funding models. Startups can raise capital by offering tokenised shares, musicians can sell tokenised royalties, and farmers can tokenise their harvest as collateral for loans.
Real-World Use Case
One popular example was when a luxury hotel in New York was tokenised. Instead of traditional shares, investors bought tokens representing a fraction of the hotel’s revenue. This allowed small investors worldwide to earn from the hotel’s profits without buying the entire building.
In Africa, some agri-tech startups are exploring tokenising farm produce or livestock. This allows small farmers to get upfront funding from multiple investors who, in return, share profits when the produce is sold.
Types of Tokens in Finance
To clarify, here’s a quick rundown of the common financial tokens:
- Security Tokens: Represent traditional assets like equity or debt. They are regulated and often pay dividends.
- Utility Tokens: Provide access to a service within a blockchain network. They are not primarily for investment but for using the platform’s features.
- Non-Fungible Tokens (NFTs): Represent unique items like art or collectibles. They prove authenticity and ownership.
- Stablecoins: Pegged to stable assets like the US dollar or gold, making them less volatile and suitable for everyday payments.
Key Challenges
While the benefits are huge, tokenisation still faces hurdles:
- Technical Risks: Bugs in smart contracts can be exploited by hackers. Example: In 2020, Yam Finance lost millions due to a flaw in its smart contract.
- Regulatory Uncertainty: Many governments are still figuring out how to regulate tokenised assets.
- Market Adoption: Big institutions and traditional banks can be slow to trust or integrate blockchain solutions.
- Liquidity Limitations: Some tokenised asset markets are still small, so selling a token might take longer than expected.
- Custody: Losing private keys means losing access to tokens permanently. This is a big barrier for some investors.
How African Entrepreneurs and Investors Can Leverage This
For Africa and other emerging markets, tokenisation is a game-changer:
- Real estate developers can attract more local and international investors.
- Farmers can access financing by tokenising crops and livestock.
- Artists and creatives can monetise their work directly with fans, using NFTs.
- Startups can raise capital more easily with clear, trustworthy tokenomics.
By understanding and applying tokenisation smartly, businesses and communities can leapfrog traditional barriers and tap into global capital markets.
Final Thoughts
Tokenisation is not a passing trend; it’s a fundamental shift in how we invest, trade, and own assets. For anyone in finance, tech, or entrepreneurship, learning about tokenisation is no longer optional; it’s a smart move for future growth.
As adoption grows and challenges are addressed, tokenisation will continue to break down financial barriers and empower more people worldwide to own, trade, and benefit from valuable assets.
Read also: What is consensus mechanism
