Tokenizing physical-world assets is a lofty goal that’s been promised, hyped, and promoted every which way. From real estate to art, cars, and anything physical representing value has been the target for tokenization.
However, some serious challenges need to be addressed, which is exactly what we’ll get into in this post. Connecting the physical world and the digital world using blockchain is possible, but achieving widespread adoption will require that connection to meet the laws, regulations, and standards that exist today.
Tokenization Hype: Past Announcements and Releases
Before we get into the challenges of tokenization, and why it hasn’t materialized, there are some notable examples of high-profile failures across multiple industries. These examples give us some great insight into what not to do when attempting to connect the digital and physical worlds together via tokenization.
New York Real Estate Tokenization: Fluidity and Propellr
Among the failures in the tokenization space are buried the companies Fluidity and Propellr. The goal was to tokenize college dorms, ski results, Manhattan apartment complexes, and other U.S. real estate through an ICO (initial coin offering). That way, as they thought, they could more easily attract institutional investors worldwide and improve liquidity in the real estate market.
The hype was enormous but ultimately accounted for nothing. Among the many challenges to tokenization, the most glaring when it comes to real estate tokenization is the validation, and then transfer, of ownership. Walking into the Register of Deeds Office and showing them an NFT, or other token would not meet the requirements and laws that exist today to prove ownership, let alone transfer ownership between parties. This issue was the nail that drove the coffin into what was supposed to be a $20 million ICO.
Mega-Dorm Real Estate Tokenization: Harbor
As we’ve seen already, tokenizing real estate is a major challenge, and that is exactly what Harbor experienced in its attempt to tokenize mega-dorms. This was a major partnership between Harbor, Convexity Properties, and the University of South Carolina back in 2018 and attracted a token sale in the form of an ICO at $20 million, just like Fluidity and Propellr.
This project was hyped extensively all over the crypto world and was given major attention thanks to big-time venture capital firms, including Andreessen Horowitz and Pantera Capital. The idea was to sell tokens that paid a 5% annual dividend. However, this project fell through supposedly due to a lender dispute. Close examination finds that trust was still a major requirement of the process due to the need to validate transactions. There is little doubt real estate, with its multiple friction points and high barriers to entry, is an enticing target for tokenization. However, a bad real estate deal is still a bad deal, even if it is tokenized, and many of the early attempts appear to have been just that: bad real estate deals looking to take advantage of the energy and momentum from blockchain.
Intellectual Property Tokenization: Machi X
Among the tokenization projects that failed but actually launched (a beta, at least) was Machi X, which created a marketplace for anyone to tokenize intellectual property (IP) and copyrights. While it actually did launch the marketplace following the hype generated around it, a quick look at the market price of the Machi X token shows you where the project is at.
Compared with the other tokenization failures, this project appears to be in the category of being a scam. Thousands of token projects were launched during the ICO craze only to be discovered as vaporware that amounted to nothing. Now, it’s nothing more than a Discord channel and a worthless token. The connection between the token and the IP was never able to be validated, and the IP itself lacked verification.
Physical Art Tokenization: Maecenas
Tokenizing art is probably the most common type of tokenization, especially in the digital world of NFTs. However, tokenizing physical art has been attempted and failed epically. A prime example of this is how the company Maecenas tokenized Andy Warhol’s 14 Small Electric Cars and sold over six million tokens. Like Machi X’s token, Maecena’s ART token is now worthless.
Interestingly enough, another company named Freeport is attempting to do the same exact thing with other Andy Warhol pieces. Only time will tell whether this attempt plays out differently than ART token, but I wouldn’t hold my breath if I were you as there is a lot of ‘trust’ still required of buyers.
Automobile Tokenization: Amazing Blocks
One of the sweetheart companies that promised to revolutionize the tokenization of the physical world was Amazing Blocks. One of their claims is they would tokenize classic cars, especially luxury cars such as Ferrari and Bently. However, that, as you would imagine, failed miserably with their website no longer working and a complete absence on social media.
Interestingly enough, regarding this tokenization failure, they actually attempted to comply with the Liechtenstein Token Act, which is a physical validator that allows for a completely legal and licensed transfer of ownership of these tokenized objects. However, even with this support, the project was puttered out and became dust in the wind.
Reality Check: Why Tokenization Has Not Fully Materialized
Tokenization has made big promises regarding increased liquidity, fractional ownership, and overall accessibility. However, the roadblocks are significant when considering the legal and regulatory landscapes. Simply put when looking at any of the attempts to tokenize physical assets the tokenization must not only reduce or eliminate friction but it must still meet the laws, regulations, duties, and even standards that exist today.
Property Transfer Requirements
A major challenge is meeting the requirements for existing property transfers and complying with existing laws and standards. For example, the tokenization of real estate comes with it a complex web of legal frameworks that govern ownership and transfers of ownership. Deeds, titles, historical documentation, notarization and witnesses, and registration are among the requirements that protect the rights of buyers and sellers, which is difficult to replicate in the tokenized world.
Furthermore, different jurisdictions may have varying legal requirements and standards, adding to the complexity of tokenization efforts across state borders let alone international boundaries. Harmonizing these standards and creating a globally recognized framework for tokenized property transfers is a significant challenge that must be addressed for tokenization to reach its full potential if it cannot meet the requirements that exist today.
Standardized Frameworks and Interoperability
Tokenization involves connecting the physical and digital worlds using blockchain technology. However, significant hurdles exist due to the lack of standardization. With each blockchain platform having its own protocols, smart contract languages, and token standards, interoperability is an issue that hinders scalability and broader adoption.
Cross-chain interoperability solutions and token standards, such as ERC-20 and ERC-721, help to address these challenges. Unfortunately, widespread adoption appears to still be a ways away and requires further collaboration and consensus within the blockchain community. There are ten or fewer FIAT currencies in the world of high investment grade and 90% of international transactions are completed in dollars and euros.
There simply is not a need for 50 cryptocurrencies, let alone the 22,000+ that Coin Market Cap reports exist. Consolidation into ten or less will ensure conforming standards and interoperability. Governments look poised to regulate and that will have a drastic impact on the number of cryptocurrencies, the largest economy in the world has outlawed all cryptocurrencies, yet is releasing its own stablecoin based on blockchain technology. Governments will likely play a large part in standardization.
Technological Limitations and User Adoption
Scalability is a major technological limitation, but so is the user experience and accessibility of blockchain-based applications. Oftentimes interacting with these networks requires relatively high technological skills, like wallet management and private key security. Understanding the tradeoffs between things like custodial vs. non-custodial or single vs. multi-signature custody is crucial for the safe and effective use of these networks.
This has a major impact on user adoption. Enabling people to fully embrace the tokenization of real-world assets means having innovative and convenient ways to interact with these technologies. Improving the user experience and simplifying the process of interacting with tokenized assets are essential steps to increase accessibility and attract a broader user base. It has to be simple and easy. Currently it is not.
Trust Is a Crucial Obstacle to Tokenization Success
Trust plays a pivotal role in determining the success or failure of tokenization. Trustless, or zero-trust, is a central pillar to the foundation of blockchain technology, enabling users to engage end-to-end trustlessly. That same standard is expected and should be the goal when tokenizing physical assets. Eliminating the need for trust through transparency and immutability is the obvious solution.
The beauty of tokenization is that if done correctly it provides a high level of transparency, immutability, and verifiability by leveraging smart contracts and distributed ledger technology (DLT). By allowing participants in the network to independently verify transactions, validity and integrity flourish, resulting in a trustless system. Those same features must be applied to tokenization where transparent verification of the tokenized asset is possible.
However, the moment tokenization processes rely on third-party intermediaries or off-chain validators, trust enters the equation. Overcoming this can be difficult because tokenizing real word assets inherently involves non-blockchain technology, which means trust is a crucial obstacle that needs to be addressed. Innovations such as self-executing smart contracts and decentralized identity systems are interesting avenues that help minimize the trust factor but they all rely on a data source to effectuate, where that data comes from and the transparency of the data must be a priority.
The tokenization and transfer of physical world assets require transparency that validates the tokenized assets are genuine and accurately represented in a legal framework, particularly regarding ownership verification, asset origin or provenance, and reliability of asset location.
Achieving this can be difficult. Doing so often requires multiple parties, complex legal frameworks, and verification processes. Adherence to legal and regulatory requirements, such as property rights and ownership transfer, adds another layer of complexity. The promise and opportunity are truly global but also daunting, fortunately there is a solution.
ChainIT by Black Ink Tech: Revolutionizing Tokenization
In the intricate realm of tokenization, where challenges like fraud and lack of transparency loom large, Black Ink Tech introduces ChainIT. Think of ChainIT as the robust foundation, much like how Windows supports various applications. On this foundation, we've built applications like "Sportafi" for sports memorabilia, "Art Lock" for art, "Sources to Courses" for food traceability, and "Site Super" for construction and real estate. And yes, "BAE Tech" isn't about your loved one; it stands for Biometric Access and Entry!
Key Features of ChainIT:
Validated Data Tokens (VDTs): ChainIT bridges the physical and digital worlds. It creates VDTs, digital twins of real-world objects or events. These tokens encapsulate essential attributes: where it's from, when it happened, who's involved, and what it is. This clarity ensures transparency and truth.
Token Grading: Not all tokens are created equal. ChainIT's grading system evaluates tokens based on their data's source, transmission method, storage, and the parties involved. This grading helps users gauge the token's authenticity and reliability.
Touch Audit: This feature is ChainIT's transparency champion. With a simple touch or click, users can delve deep into a token's history. From its creation location on Google Maps to its exact timestamp on the blockchain, every detail is just a touch away.
Where: Dive into the GPS location of the token's creation and its journey.
When: Explore the exact timestamp of each token action on the blockchain.
Who: Discover the individuals or organizations behind the token, verified through biometrics and official databases.
What: Understand the unique identity of the token's subject, be it a product, service, or event.
ChainIT is not just a platform; it's a promise of transparency, authenticity, and truth in the world of tokenization. Dive deeper into how ChainIT is revolutionizing the tokenization landscape at www.chainit.com.
Tokenization faces substantial challenges, as evidenced by past unfulfilled promises. While it has generated hype as a revolutionary force in industries like real estate, art, and intellectual property, realizing its potential has proven elusive. Nonetheless, solutions have emerged to tackle these challenges. Platforms like ChainIT are at the forefront, offering end-to-end trustless systems.
Navigating the tokenization landscape requires expertise in legal frameworks, engineering, and blockchain technology. The potential impact spans across industries and products worldwide. With a robust product and service offering designed with this expertise in mind, widespread adoption can become a reality, and tokenization can finally fulfill its promises. Black Ink Tech is driving this mission forward, so don't hesitate to reach out and learn how your organization can implement tokenization using ChainIT.