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April 12, 2024

Advantages of fractionalizing assets through tokenization

Explore the advantages of asset tokenization and fractionalization to investors and owners of various assets. Understand how blockchain unlocks liquidity and access to traditionally illiquid assets.

Investing is shifting with asset tokenization. Utilizing blockchain technology, traditionally illiquid assets such as real estate, art, and collectibles are becoming increasingly accessible to wider pools of investors.

With fractional ownership, even small-scale investors can participate in the ownership of high-value assets, fostering financial inclusivity and democratizing access to investment opportunities. 

In this blog post, we’ll explore the advantages that asset tokenization and fractionalization bring to investors and owners of various assets.

Impact of tokenization on liquidity

Tokenization – the digital representation of asset ownership and associated rights – is modernizing the investment process. It also brings increased value to assets by enabling them to be traded, shared, and leveraged like never before. 

Traditionally, asset management and transfer is time-consuming and complex, involving multiple parties and intermediaries as well as lengthy paperwork. Tokenization eliminates the need for intermediaries and manual processes, streamlining the asset lifecycle. This, in turn, reduces costs and brings a new level of transparency and efficiency to investments.

The ability to trade assets 24/7 on decentralized networks greatly enhances liquidity. Unlike traditional markets with limited trading hours, blockchain networks operate globally and continuously, allowing investors to trade at any time, from anywhere in the world. 

Asset fractionalization through tokenization

Real world assets have traditionally been the playground of the wealthy, inaccessible to the average investor. Now, with tokenization, assets can be fractionalized – split into saleable fractions – that even small-scale investors can own, unlocking liquidity in historically illiquid investments. 

Combining tokenization with fractionalized assets creates liquidity by increasing saleability of assets, lowering barriers to entry, and exposing assets to a wider range of investors. 

Investors have greater flexibility, easier access to investments, and less risk from tying capital in illiquid assets. Not being tied down for years or decades is the difference between waiting for an exit and making an agile, strategic move. 

Democratizing investments by empowering small-scale investors

Asset fractionalization through tokenization breaks down barriers of high entry costs and limited availability, democratizing assets and allowing even small-scale investors to participate. Owning a position of a high-yield asset, be it a landmark building or rare artwork, is now a possible reality instead of a pipe dream. 

Blockchains such as Polymesh enable multi-million dollar assets to be divided into increments that anyone with an internet connection can own a piece of. By fractionalizing assets into smaller, more manageable units, tokenization enables easier trading and opens the door to a wider investor base, re-defining traditional boundaries of asset ownership.

Investors can diversify their portfolio with assets previously out of reach, participating in the  growth and potential returns of assets once exclusive to institutional investors and the ultra-wealthy. This can enhance their investment strategies and mitigate the risk associated with reliance on a single asset or market. 

Ultimately, asset fractionalization though tokenization unlocks new opportunities for wealth creation and shifts how individuals participate in market economies. 

Industries in the spotlight

Real estate, venture capital and private equity, art, and even intellectual property rights are reaping the benefits of fractional asset tokenization, paving the way for new markets and business models.  Here are a few of the industries most impacted by asset fractionalization.

Real estate and asset fractionalization 

Using blockchain technology, investors can buy and sell tokenized assets backed by real property assets, opening the doors to a borderless market where the only limit to growth is a traditional mindset. 

Fractional ownership through tokenization opens up new possibilities for real estate investment, bringing liquidity to an industry traditionally plagued by high capital requirements and limited exchange. Now divided into smaller, more affordable units, real estate assets can be accessible to a wider range of investors. 

Tokenization also facilitates easier and more efficient transactions, reducing the costs associated with traditional real estate investing. Meanwhile, the transparent blockchain provides a tamper proof record of ownership that brings benefits to investors, issuers, and regulators alike. 

Examples of companies building real estate offerings on Polymesh: RETokens, ABC Tokens 

Private equity and asset fractionalization 

Private equity thrives on the secondary market. Tokenization on blockchains such as Polymesh enables easier trading and transparency that brings a new dynamic to private secondary markets, typically reserved exclusively for institutional investors and accredited individuals and requiring high minimum capital requirements.

Venture capital and private equity markets are quickly embracing fractionalization through tokenization to enable new fundraising and ownership models where even small-scale investors can participate.

Fractionalized private equity assets open assets to a broader range of investors with lower minimum investment, fueling a market that’s responsive to change and inherently more inclusive. Investors get the benefit of increased portfolio diversification and gain exposure to high growth potential startups and private companies. 

Examples of companies dealing with private equity on Polymesh: Raze Finance, DigiShares, Polymath

Music industry and asset fractionalization 

A lesser-talked about – but no less impactful – impact of tokenization will be in the music industry. As with real estate and private equity, of the problems facing music investing is that the majority takes place in private markets.

It’s possible to invest in publicly-traded music funds, but most are private. These funds also limit investors to pre-chosen catalogs compared to picking and choosing their preferred investments. 

Direct purchase of intellectual property in music requires investors to commit high minimums and properly value the asset, or pay a record label or publisher to do it on their behalf. Investors can also invest in the record labels and publishers who own shares of music revenue, but these are often part of larger conglomerates or privately owned and so also difficult to access.

Tokenization can solve these challenges by democratizing assets through fractionalization. Fractional ownership enables the average investor to own a share of music royalties while allowing artists to explore innovative ways of distributing and monetizing creative assets. 

For example, tokenizing music rights allows fans and investors to own a share of an artist’s earnings, helping the artist transition from reliance on music labels to a crowdfunding-type model for funding production. Artists gain a new revenue source while fostering closer connection with their fans.

Examples of companies building tokenized music platforms on Polymesh: TokenTraxx 

Navigating regulatory considerations with Polymesh

Tokenization operates within the framework of financial regulations. This is where Polymesh’s approach to compliance truly shines.

Navigating the regulatory landscape for tokenized assets, including fractionalized assets, is complex. Participants need to consider relevant laws and regulations before proceeding, which is tricky in an evolving regulatory climate. There are also various levels to consider, such as state and federal securities laws for the United States.

Purpose-built for tokenized assets, Polymesh ensures tokenization is compatible for compliance with both current and future frameworks. Rules embedded into tokens at the protocol layer enable automatic enforcement without smart contracts and are customizable to adapt to changing regulation. 

From setting strict transfer restrictions to easy reporting, Polymesh streamlines the compliance process. Transparency and trust are no longer ideals but built-in to the solution.

With its robust infrastructure, Polymesh facilitates secure exchange of assets large and small, transforming liquidity in both public and private markets. Its transparency and immutability also provides issuers, investors, auditors and regulators with an immutable record of investment – an essential in digital finance. 

To learn more about asset tokenization on Polymesh, visit polymesh.network/asset-tokenization.

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