Six use cases of asset tokenization for business.

Six use cases of asset tokenization for business.

Six use cases of asset tokenization for business.

The tokenization market is developing incredibly fast. Entrepreneurs worldwide implement brand new disruptive business models that change the way we think about assets and investments — which, in the end, make founders rich.

Traditional vs Alternative Asset Classes

One of the vital tokenization use cases is to give access to assets people dream of investing in but, due to many reasons, aren't able to. There are numerous examples of that. Among them, there are tokenization cases of CryptosX, Stobox’s partner company, tokenizing the legendary Millenium Sapphire and famous whisky brands. CurioInvest provides another compelling case by tokenizing classic cars. Some of the Stobox clients are interested in the tokenization of diamonds, gold, and rare wood species. Cases like this raise questions why investors are so fond of such options.

The specific way in which it works with such alternative assets is that investors put their money in the securitization vehicle or special purpose vehicle — a separate company holding the given assets. In such a case, blockchain tokens serve as shares or other securities issued by this holding company. These assets are not usually cash-generating; thus, investors do not receive dividends. However, they can still benefit from capital appreciation after these assets rise in price.

You may be wondering why investors are interested in such investing opportunities. There are two principal reasons.

The first is that alternative asset classes have shown excellent financial performance throughout history, which was systematically better than the stock market. For example, scotch whisky returned between 150% and 450% over ten years. In contrast, for the stock market, returns on average are around 115% over the same time, with a much higher vulnerability to downturns.

The second factor is the powerful story behind every asset like this. As people are emotional in their essence, it's easy to see that the value of such assets lies not only in their financial capacity but also in their narrative. Owning a picture by Rembrandt or a piece of fine jewellery makes their possessor a tiny part of world history. This is what gives these assets preciousness regardless of their financial performance.

Access to expensive investments — fractionalization of expensive shares

A subcase of creating access to expensive investments is the tokenization of publicly listed or pre-IPO shares. Stocks worth a few hundred dollars may be non-accessible to many people in developing countries. Let's say more: shares of companies like Berkshire Hathaway that hit $400,000 are way too expensive — even for residents of developed economies. On the blockchain, one such stock can be represented by a few dozens or hundreds of tokens. It will appeal to investors for the same reasons other alternative investments do: strong performance and a powerful brand story.

Tokenizing the distressed property

When it comes to tokenizing property, people often limit their imagination to raising capital for the property construction or fractionalizing ownership of existing real estate, while, in fact, there are numerous other exciting business models. One of such is the renovation of distressed properties. This model suggests identifying objects in bad conditions, raising money to buy them, holding a renovation to bring them into working condition, and selling afterwards. Investors get a one-time profit at the moment of the deal, which is usually a year or two after the initial investment was made. Such a business model is known to be implemented by ReitBZ, an investment project for distressed Brazilian real estate.

Suppose the motivation of coming up with creative tokenization models is still unclear to you. In that case, the answer is the longed-for freedom in changing the financial parameters of your offering, such as the risk-return profile or the return model, and the subsequent chance to increase your investment attractiveness. Real estate by itself is a very safe asset class that, on the other hand, doesn't offer high returns. Usually, it's 3 to 6%, which is lower than the stock market. By engaging in such new models, you can increase the potential risk and profitability of the investment or change how investors receive income from a steady stream of dividends to a one-time big profit. In such a way, it's possible to attract other types of investors for whom the risk-return profile of classical real estate investments is not appealing.

If this topic is of interest to you, see the speech of Stobox co-founder Borys Pikalov at the Digital Asset Investment Conference about three disruptive models in real estate.

Tokenized Investment Funds: middleman between the investor and the project

The following case is tokenized investment funds. The most famous examples are 22X and Blockchain Capital — one of the first tokenized companies ever. 22X invested in the batch of 30 startups graduating from the well-known 500 Startups accelerator, and Blockchain Capital is investing in blockchain companies. It's pleasing to say they are showing an outstanding performance: for instance, Blockchain Capital is traded on OpenFinance, and since 2017, it has shown a growth of over 500% of its net asset value.

Tokenized investment funds are beneficial because, for the regular investor, it's hard to make wise investment decisions: this requires serious research of companies and projects, for which an average person possesses neither time nor sufficient sophistication. This is especially challenging when investing in private companies that are not listed on a stock exchange and are not making a corresponding disclosure or investing in crypto with its extra complicated technical and economic models. Therefore, investors are left with two options: either not investing at all and missing out on significant returns or investing with the subsequent chance of losing money. Investment funds solve this problem by acting as a middleman between the investor and the project. They choose deserving businesses, alleviate investor stress, and ensure that portfolio companies are properly managed.

Tokenization is a crucial element of this picture as it reduces the entry threshold for funds by streamlining investment procedures. It substitutes the old-fashioned manual process of signing a purchase agreement and flying to physical meetings with the convenient digital flow. The whole system becomes scalable and efficient, reducing minimum investment from a million or hundred thousand to as little as $10,000, or even less.
To understand more precisely how blockchain makes operations with securities more efficient, see our video "Stobox Insights: How tokenization transforms securities transactions?"

Scaling the existing traditional businesses

The next critical case is scaling the existing traditional businesses. For hot tech startups, getting scale-up capital is relatively easy, as there is an entire ecosystem of late-stage venture funds focused on this segment. However, most businesses are not disruptive and fall outside of the venture scheme of high risk-high return.

Raising capital to scale is much more challenging for such companies, as banks often ask for very high-interest rates. At the same time, private equity investors usually want to acquire the entire business. Tokenization opens access to a global community of small-check investors interested in the moderate risk to moderate return companies with validated business models and growth potential.

A good example would be L'Osteria — a food chain from Germany that attracted a million euros for opening new restaurants via crowdfunding. They have a validated business model that has proven to work, which gives confidence to small-check investors and lets them understand: they won't lose their money.

This example is a perfect illustration of how blockchain can benefit traditional non-tech firms. The advantage doesn't only lie in acquiring capital: it's also about creating a loyal community, which positively influences the brand, reduces the cost of marketing, and brings new clients.

Blockchain allows to get rid of intermediaries

The last case is tokens issued by non-commercial institutions, such as public bodies or international organizations. A great example is an Austrian Government that issued bonds worth more than one billion dollars on the Ethereum blockchain. Another example is the World Bank, which issued $100,000,000 worth of debt securities in the blockchain.

Typically, blockchain is discussed in the context of small and medium-sized business fundraising. On the other hand, traditional finance is plagued by a large number of intermediaries: brokers, custodians, banks, central counterparties, central securities depositories, clearing houses, etc. This results in transactions being complicated, lengthy, and expensive. Blockchain allows getting rid of some of these actors, which makes transactions noticeably more straightforward and efficient. This is why big institutions have an interest in implementing blockchain.