Equity tokenization is a term that has become increasingly popular in the world of finance and technology. But what does it really mean? In this article, we'll explore what equity tokenization is and how it's changing the way financial assets are traded.
But first, what does tokenization mean?
Asset tokenization refers to the digitization of any type of assets, whether tangible or intangible, and their subsequent division into smaller units called tokens. A token, in general terms, is a digital representation of something, in this case, a fraction of the digitized asset. Thus, the holder of a token has property rights or any other associated right. At TurinPool, we believe that there are infinite possibilities for tokenization, since everything that can be digitized and fractionated can be tokenized. This can include physical assets such as real estate, art, as well as financial instruments such as debt, stocks, bonds, securities and of course, corporate equity.
You may be wondering, how do Security Token Offerings relate to the tokenization of equity? The answer is quite simple. Once the equity has been digitized and divided into smaller units, that is, tokens (this is the tokenization of equity), these are offered to the market so that anyone can purchase them (these are the Security Token Offerings). The term Security Token Offering derives from the use of blockchain technology, in which the process of creating these specific tokens, which work through smart contracts, is only possible on a blockchain. As for example, Polygon in the case of TurinPool.
Having established the connection between these two concepts, it's time to explore the benefits of equity tokenization. One of the main advantages is the ability to eliminate barriers to entry for retail investors, such as high investment costs. Let's use an example to illustrate this point.
Imagine an investor who wants to buy a stock from a company and has a company in mind that is not publicly listed. This investor recognizes that the company is extremely innovative and is creating unique technology and is likely to increase in value over time. However, the initial investment is quite high, requiring a large amount of available capital or a bank loan. Both of these scenarios can be problematic for the investor. Investing a significant amount of capital can cause problems in the future if you need liquidity, while resorting to loans introduces the need to pay interest and return the amount within the established time.
Thanks to the tokenization of equity, the founders and partners of the company can divide their equity into many parts. In this way, the equity percentage of the partners' company worth one million euros can be represented by 10,000 tokens of 100€ each. This scenario is much more attractive to investors, as it allows them to invest without going into debt or financial juggling. With this reduced entry price, the investor can purchase 100 tokens and obtain benefits commensurate with the company's performance and growth.
How does equity tokenization work?
Equity tokenization is the process of converting a financial asset, such as a stock or property, into a digital token. A token is a unit of value that exists on a blockchain, or blockchain, which is a decentralized and secure database. Each token represents a part of the underlying asset and can be bought, sold or traded in a manner similar to a stock on a stock exchange.
The process begins with the creation of a token on a blockchain. This token represents a part of the underlying asset and can be bought or sold on a token exchange platform. Investors can buy these tokens using fiat currency or cryptocurrency, and then they own a portion of the underlying asset.
The shares or shares of a company comprise 2 types of rights: political and economic. Depending on the country in which the company is tokenized and depending on the type of company (public limited or limited), both rights or only political rights can be tokenized. With Turin Pool, for example, we tokenize the economic rights of limited companies, leaving out political rights.
Once tokenization has been completed, investors can trade these tokens on a token exchange platform. This allows for greater liquidity and accessibility for investors, as they can buy and sell fractions of assets instead of having to buy an entire stock.
Why is equity tokenization important?
Equity tokenization is changing the way financial assets are traded by making them more accessible and liquid. Previously, only accredited investors could invest in private stocks or commercial properties. However, with the tokenization of equity, anyone can buy a fraction of these assets, democratizing access to investment.
In addition, the tokenization of equity also allows for greater transparency and security in financial transactions. By using a blockchain, all transactions are recorded and can be tracked, reducing the risk of fraud and increasing trust in the system.
Conclusion
Equity tokenization is an exciting process that is changing the way financial assets are traded. By converting them into digital tokens, they become more accessible and liquid, democratizing access to investment. In addition, the tokenization of equity also offers greater transparency and security in financial transactions. With the potential to tokenize a wide range of assets, we're likely to see an increase in the use of this technology in the future.
If you are interested in tokenizing your company's Equity or investing in the tokenized Equity of others, visit Turin Pool or fill out the form below to participate in our BETA.
