Asset Tokenization is the process by which typically off-chain Assets are represented on the Blockchain in the form of tokens. This usually is best done on a sufficiently decentralized chain like Ethereum.
Is it possible to tokenize everything?
Short answer, No.
Assets which already have a centralized quasi state approved record such as real estate, cars etc are not suitable for direct tokenization, as they already have a central record which makes representing them on blockchain redundant.
Role of Blockchain: Decentralized Consensus ONLY
If the decentralized record of an assets ownership (represented in the form of tokens) is always overridden by a record kept somewhere else then the blockchain is redundant.
Another scenario where blockchain is not useful is where despite the decentralized record the claim is unenforceable
Is it possible to tokenize everything?
Pure bearer assets such as Gold and Cash are also unsuitable for tokenization since whoever possesses them is also the defacto owner, making a decentralized record redundant.
Role of Blockchain: Decentralized Consensus ONLY
Creating multiple copies of records and keeping them in sync imposes significant costs on the system. This cost is not justified if only one or a very small group of parties dictate update to the record.
Such systems are better served with a centralized master slave thin client solution which is faster, cheaper and often more secure.
Which Asset can be tokenized?
Peer to Peer contracts that are currently not recorded centrally are best suited to be recorded on the blockchain.
Examples of these are Invoices, Loans against Real Estate, leases or other such collateral.
Why should I tokenize my Assets?
Representing Assets on the blockchain can allow you to borrow against them as collateral on various DEFI (Decentralized Finance) lending platforms.
This in turn could help you solve cash flow issues via invoice factoring or solve your funding gap for real estate developments.
Why borrow using DEFI
DEFI unleashes the true potential of blockchain by allowing financiers from all over the world to get connected with lending opportunities worldwide. This creates a much bigger, wider deeper, market place with potentially lower rates and greater liquidity.
In the last 12 months alone DEFI assets deployed have grown from 100 Million to 750 Million with a similar or greater trajectory expected for next several years to come.
Types of Assets: Peer to Property
All Assets are a “Claim” to something.
It can mean claim to own something, or the claim to right of use of something physical (House, car, gold, mobile phones).
Such Assets are hard to tokenize as explained earlier.
Another scenario where blockchain is not useful is where despite the decentralized record the claim is unenforceable
Types of Assets: Peer to Peer
The other type of claim, One to One contracts between people, or entities for exchange of some value are tokenizable.
for eg: claim to get paid at some future date for providing a certain service.
Claim to get paid something at a future date for renting out money or a house or a car. Note that if these contracts are recorded by a central party they become untokenizable.
Claim to future value
All P2P contracts in essence is an exchange of present value in return of a future value.
The assumption is generally that the future value expected is greater than the present value offered.
The party that expects to get paid in future is the Asset holder and the party that is expected to pay in future has the liability.
Structure of a P2P Asset
All P2P contracts have the following elements
1. Party A
2. Party B
3. Value provided by A to B
4. Value provided by B to A in return
5. Date by which the services/goods from A need to be fulfilled (can include multiple dates if part fulfilment is to be done)
Structure of a P2P Asset
6. Date by which the services/goods from B need to be fulfilled (can include multiple dates if part fulfilment is to be done)
7. Security provided by A to B (optional)
8. Security provided by B to A (optional)
Example of a P2P Asset: Invoice
The elements of an invoice would be
1. Party A: A business selling machine parts to another business
2. Party B: The Buyer of the goods
3. Aforesaid machine parts
4. Agreed price
5. Date by which items need to be delivered
Example of a P2P Asset: Invoice
6. Invoice due date
7. The machine parts which are already delivered
8. Good will of B or A might take a charge over Business B
A is the Asset holder as he expects to get paid in future.
Example of a P2P Asset: Loan
The elements of a loan would be
1. Party A: Lender
2. Party B: Borrower
3. Loan principal
4. Interest rate
5. Loan start date
6. Loan repayment date
7. Money lent
8. Security such as house or car offered up as mortgage
The lender has offered tangible value right now (cash) in return of getting paid more (+interest) in future, and is hence the Asset owner.
Both sides can be Asset owners
In the scenario where both parties are expecting the other to provide some service or good in the future, then both are asset holders.
For eg: A homeowner H agrees to sell the house at an agreed upon price in 90 days to buyer B.
This contract which gets H to be paid in 90 days is his asset.
Both sides can be Asset owners
However the right to buy the home for the agreed price in 90 days can also be viewed as an asset, especially if the buyer expects the price of the home to go up in 90 days.
Note that in this scenario it will be essentially 2 separate assets who are mirror image inverses of each other and from a tech standpoint be structured similar to a FX forward contract dual security structure.
Tokenizing a P2P Asset
A P2P contract may be represented on the blockchain in form of a NFT (Non Fungible token) or a set of ERC20 tokens representing that asset or asset class.
Either party A or B can initiate the contract and send it to the other one for sign off. Once it is signed off by both, the contract may be tokenized with the key elements described earlier recorded on-chain.
Tokenization done, where to borrow?
Once the Asset is represented on the chain, it may be possible for others to lend the asset owners against the asset as collateral.
However given that these are non-standardized on-chain assets, no major platforms as of today’s date would accept these assets.
Open Money Market Protocol
We are creating a more open Money Market where anyone with any type of ERC20 token may be able to borrow any other ERC20 token.
We will build a censorship resistant Open Money Market protocol, on top of which any one will be able to deploy their own front ends with their own custom logic of ERC 20 collateral selection.
OMM: Demand side front ends
This is obviously only possible if the lenders are willing to accept the ERC20 being offered as security.
The decision however of what collateral is acceptable will be left to the lenders (those deploying tokens in the pool to lend) who will be able to make that choice dynamically.
OMM: Demand side front ends
We will also have an interface to support our Assets, alongside potentially several other front ends by others for their own assets.
OMM: Supply side front ends
On the supply side, anyone should be able to onboard their own off-chain assets as collateral to borrow. And as long as some interface allows their assets to be accepted as collateral they should be able to access borrowings.
We will have our own interface alongside potentially several other Asset on-rampers.
How to grade and enforce off-chain?
While we have discussed representing real world assets on-chain and also how tokenization can help the asset owners to borrow against them, the key problems are how to grade and enforce defaults off-chain.
Grading off-chain
Expert valuation reports for various different assets such as property, intellectual property etc are quite the norm. These can be easily used to form a base figure for valuing the asset off-chain.
Veracity of the valuation and how to enforce
However a single point valuation can be susceptible to corruption.
Enforcing a default in case of non repayment of loan is also an issue which needs to be answered.
There are a few different options in this regard.
A system of Anchors
Grading and enforcing on real world assets will always be done by flesh and bone human beings. Even if these assets are represented on-chain, someone needs to go out in the field to verify if the asset is a real world asset.
The people who value and enforce (typically brokers, bankers, real world lenders, valuers etc) can be termed as Anchors.
Option 1: Trust the Anchor
A simplistic system would be to simply trust the Anchors work or build a peer review system which would grade the Anchors.
The Anchors can grade and take the security on the asset and enforce it in case of defaults on behalf of the investors.
Option 1: Trust the Anchor
The Anchor would represent the asset on-chain and then deploy the funds lent via the money market against the asset.
Option 2: Collateralized Anchors
The problems with simply trusting an Anchor are obvious, and it does not necessarily need a blockchain apart from potentially making it easy for those with DAI in their metamasks to deploy funds.
A more robust solution would be to require the Anchors to furnish on-chain collateral (ETH, or other high quality tokens) which is ideally equal or greater in value than the loan to be made.
Option 2: Collateralized Anchors
This puts in an added layer of safety whereby if the Anchor fails in his job either through acts of omission or commission, the lenders are secured via the high quality collateral furnished by the Anchor.
This on-chain collateral may be liquidated by a system of automated smart contracts when a repayment is not made in time.
Option 3: Pooled Collateralized Anchors
The challenge with the previous approach is that the Anchor might not have the necessary collateral.
A solution would be to allow others to pool their tokens together to arrive at the necessary collateral and get a spread of the fees and/or interest alongside the anchor.
Incorporated Anchors
The anchors should not be taking security in their own personal names but on behalf of an entity that represents the pool of collateral.
This may represent a legally incorporated entity that can take security in its name.
Option 4: DAO Anchors
Such an entity can function as a DAO with MKR style tokens that allow its holders to vote on potential off chain loans that are presented by Anchors.
Loans may be presented only by accredited Anchors to the DAO (people with prior experience in making loans) and the DAO would then sign off on whether to accept that and tokenize it.
Option 4: DAO Anchors
The DAO tokens can be directly used as collateral on the Open Money Market.
The DAO may only make loans equal to or less than the total value of its tokens under circulation.
DAO token
The spread of interest or fees between the Open Money Market rates and what the DAO charges would be held in a smart contract and this reserve pool would keep on increasing.
DAO tokens entitle you to a share of this pools. Any DAO token holder may withdraw from their share from this pool by burning their DAO tokens, provided enough remains in reserve to support any loan obligations.
Handling a default
In the event of a default, the Anchor would liquidate the real world security on behalf of the DAO, suitable incentives would be provided to the Anchor for it.
If this security proves not sufficient then the accumulated interest pool would be dipped into to cover the difference, which effectively leads to a loss of value for the DAO token holders.
Handling a default
If the reserve pool also proves insufficient then more DAO tokens would be minted and sold to cover the loss, leading to a dilution of value for the DAO token holders.
DAO token holders essentially become the equity backstop vouching system for the off-chain assets.
A fully configurable model
Note that while we intend to build a DAO using which we will make off-chain loans, others may come up with their own flavors of tokenizing off-chain assets.
They may use DAOs, direct or pooled Anchors or some combination of the systems described earlier. They may even come up with their own models to represent off-chain assets in an ERC20.
A fully configurable model
The Open Money Market will facilitate borrowing against these as long as there are borrowers willing to lend against these tokens as collateral.
A fully configurable model
Such a model would support those with access to real world lending opportunities to come up with their own business models and get connected to the DEFI funds from all over the world.
DEFI lenders also get access to higher interest rates. A typical private real estate construction first mortgage loan ranges from 8 to 12%. Invoice factoring, business loans, personal loans command even higher interest rates.
A real world Asset tokenization protocol
We enable the tokenization of real world assets on-chain. Tokenization makes it possible to borrow against these from the worldwide defi community.
Connecting these 2 groups which have been hitherto not connected, would mean greater access to funds for the borrowers and better lending opportunities to the DEFI lenders.
Is your Asset suitable for tokenization?
Is the asset currently not recorded in a centralized registry operated by the government or a state approved 3rd party?
Is the outcome you get not based on the skilled active management of a 3rd party but might involve some ministerial work?
Eg. Passive ownership of a share of a private standard housekeeping such as property management is not an active management but is deemed ministerial work.
Great! Your asset may be fit for tokenization. Please get in touch with us by sharing more details
Estate Baron launched August 2014
1st Offer live December 2014 (Seed)
3 Offers live June 2015 (Angel)
Full retail securities offering June 2016
Launched Konkrete as a STO platform
1st STO Retail August 2018
Distributed Registry / MVP
Other Asset tokenization
1st product Factorium Asset Tokenization Live September 2019
Fully decentralized Factorium June 2020
Our first product built on Konkrete
A decentralized P2P non-custodial invoice factoring market place focused on the B2C segment. FACTORIUM
Stakeholder Updates
We write about regular updates on the progress of the business and our thoughts on how the industry is shaping up here. A select sampling of some of them are provided below.
