How Tokenization Increases Liquidity and Facilitates Liquid Trading

how tokenization increases liquidity

The total global wealth stored in bonds, equities, and other financial instruments in 2021 was a massive $280 trillion. However, a large part of this amount is illiquid. This poses issues of locked-up investments for extended periods of time, causing investors to fork up more money on liquidity premiums. If you have experience in real estate investment, you can understand the pain.

But good news — with blockchain technology, there is now an attractive solution. In this article, you will learn what is asset tokenization, its benefits, and how it facilitates liquid trading.

What Is Tokenization?

Tokenization refers to the process of converting assets into digital tokens. This allows you, the token holder, to own a fraction of the equity in the physical representation of the asset. In essence, you will be entitled to a fractionalized ownership of the asset by purchasing digital tokens.

Some traditionally illiquid assets (like real estate) currently require tedious and considerable capital commitments. Tokenizing such assets can facilitate liquid trading and offer market convenience. Moreover, the problems faced by traditional markets such as search costs and a lack of transparency can also be solved through the process of tokenization.

Benefits of Tokenization

The World Economic Forum (WEF) predicts that by 2027, 10% of the GDP will be stored on blockchain technology. This prediction is based on the increasing fractional ownership of assets and the elimination of liquidity premiums. What makes tokenizing assets attractive?

Simply put, tokenization:

1. Allows fractional ownership

When an asset is tokenized, you can simply invest a small amount to own a fraction of the asset. This means that you do not need to lock up huge capital to invest in them. As such, tokenization promotes accessibility and reduces the barrier to entry as well as transaction costs since intermediaries are removed.

2. Increases liquidity

Converting traditionally illiquid assets into digital tokens secures higher liquidity for asset holders. This eradicates the inconvenience of paying compensations such as liquidity premiums, which are traditionally required while dealing with investments in assets like real estate.

3. Promotes transparency

Blockchain technology is transparent and immutable. Once a transaction is completed, it cannot be altered or manipulated. The information is stored in the blockchain and can be verified with ease. This is one of the qualities that has been attracting investors to tokenized assets.

4. Supports financial inclusion

By tokenizing assets on the blockchain, commodity trading becomes decentralized. There is no need for background checks and costs are lower due to the lack of intermediaries. Thus, anyone regardless of economic or geographical status can invest in tokenized assets with minimal capital requisites.

5. Increases efficiency

With the assistance of smart contracts, several transitional steps such as document verification and investment trading can be carried out automatically using Smart Contracts on the blockchain. This makes trading more efficient, optimizes the exchange of various assets, and removes the inefficiencies of traditional processes.

What Exactly Is Liquidity?

One of the benefits of tokenization is that it increases liquidity. But what exactly does that mean?

Liquidity can simply be defined as the level of ease with which an asset can be converted into cash without compromising its instrumental value. In the context of digital tokens representing legal claims over financial assets, liquidity is a continuum and is affected by many variables like market conditions, asset quality, and more

How Tokenization Increases Liquidity

Tokenization is a method of asset securitization for investors, allowing them to spread the risk of investing over several assets. The biggest advantage it offers is reducing barriers to entry for investment by enabling small-size investors to invest in previously illiquid assets.

Imagine wanting to invest in a high-potential building but not having enough capital for such an investment. DeFi enables you to invest your wealth and own a part of this building.

Unlike traditional finance, the absence of intermediaries allows for such scenarios, dramatically widening the scope of the accessible market for investors. This subsequently facilitates liquidity.

Industries That Can Be Tokenized

Traditional finance

Decentralized Finance is designed to cover most if not all of the financial products and services offered by traditional finance. An extremely common use of DeFi is its lending protocol, where users can lend out their digital assets to improve liquidity on trading platforms in exchange for yields. In an average consumer finance market, there is a growing demand for interest-generating services and products.

Medical and pharmaceutical

When fraudulent or manipulated products make their way into the supply chain in the pharmaceutical industry, not only can money and the lives of users be drastically affected, but companies also lose out on time and profit. With tokenization in the pharmaceutical industry, digital tokens can be used to represent real-world products on the blockchain. Suppliers can easily scan a product they are selling to verify whether they are bona fide. This limits the likelihood of counterfeit pharmaceutical products infiltrating the supply chain.

Oil & gas

Cryptocurrency mining is now considered a sustainable alternative to gas flaring from oil wells, which is traditionally expensive with detrimental effects on the environment. Blockchain has established itself as a backbone technology for many applications across the oil and gas industry. By tokenizing oil and gas, exorbitant costs are avoided and transactions become more efficient as intermediaries are eliminated. Because of the increased liquidity of the asset, oil and gas companies have also attracted a wider range of investors.

Investing Tokenized Assets Is for Everyone

The tokenization of assets has opened up a wide range of opportunities in various industries. It has brought an enormous change in how traditionally illiquid assets are being dealt with while substantially improving the market depth of investors across the globe.

The digitization of such assets on the blockchain enables efficiency, transparency, and better methods of price evaluation while facilitating liquid trading in a manner that makes investing in several industries accessible to all kinds of investors.

Now that you can own real-world assets or commodities in fractional amounts, you can start investing in them through the MRHB Ecosystem. MRHB (pronounced ‘Marhaba’) is an ethical and halal web3 solution built to deliver inclusive DeFi solutions to excluded communities worldwide in the easiest way possible. Its latest line of products is the commodity exchange, TijarX where you can buy tokenized gold and silver.

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