Robert Napoli | January 10th, 2022
In November 2017, Leonardo da Vinci’s painting Salvator Mundi sold for $450.3 million at auction, shattering previous art sale records [1]. The previous owner of the painting had purchased it in 2005 for $127.5 million, yielding his estate about a 250% profit in just over a decade.
In 2008, the General Motors (GM) Building in New York sold for $2.9 billion [2].
A Chinese investor recently purchased the Brooklyn Nets NBA basketball franchise for $2.35 billion and their stadium for an additional $700 million [3].
What these high-dollar transactions have in common is they all represent investments in unique items or entities that are far out of reach for most people. Few individuals, even those who are well-off by most standards, have access to enough capital to even contemplate purchases like these. Additionally, the risk – along with any potential profit – is concentrated in the hands of one or a handful of people.
The rise of online trading platforms in recent decades has made investing in publicly traded companies more accessible. Investors with bankrolls as low as tens to hundreds of dollars can own and trade stocks, bonds, or other instruments in whole or fractional portions. Millions of people can own a stake in a company, even if only in a tiny part, sharing the risk and even participating in some corporate decisions.
It’s not uncommon for several investors to collaborate on the purchase of tangible assets, whether for later resale or for the regular profits they generate. There are plenty of sports franchises, racehorses, works of art, stock cars, luxury condominiums, etc., with multiple owners in partnership. But these types of joint ventures have not generally been practical on the micro-scale like they are in financial markets simply due to the mechanics of tracking ownership among a large and dynamic number of participants.
That’s all changing with the emergence of blockchain technology, particularly with tokens.
Digital Ownership: The Blockchain Token
Blockchain protocols provide a secure, decentralized, and transparent method of tracking transactions related to some asset of value. In their most familiar application, cryptocurrency, blockchains are digital data structures that correspond to interchangeable “coins” of identical value.
But blockchain is not limited to money. One blockchain application with rapidly growing interest is the non-fungible token or NFT. An NFT represents ownership of some individual, unique asset. Each NFT is tied to a specific item with a unique value, as opposed to a cryptocurrency coin that can be substituted for any other.
Most early manifestations of NFT’s have taken the form of tokens representing ownership in digital assets – often art, collectibles (like digital sports trading cards), or other electronic media. These types of assets are stored on a server or in the cloud, and the token holds access to that location.
While baseball cards and pixelized art may seem at first blush to be trivial uses of such a powerful technology like blockchain, they are becoming big business – and fast. Nike recently acquired the NFT collectibles company RTFKT (pronounced as “art-i-fact”), which had an estimated value of over $30 million [4].
Steve McKeon, CEO at the software solution firm MacguyverTech, has decades of experience in tech and is one of the blockchain industry’s leading voices [5]. He has been mining crypto and developing blockchain solutions for over six years. According to McKeon, the next big things in NFTs are gaming and metaverse applications.
Online gaming is a multibillion-dollar industry and is just gaining steam [6]. Game designers are recognizing the power inherent in blockchain and are rapidly adopting the technology by tokenizing virtual items that can be bought, sold, and traded among gamers. Entire virtual worlds or “metaverses” are taking shape based on this type of token-based ecosystem.
For those of us not interested in the metaverse or digital collectibles, tokens may seem like an abstract technology with little significance. But tokens aren’t limited to digital entities. NFTs are just the smallest, most recognizable examples of tokenization. At its heart, blockchain is simply a ledger of transactions. As such, tokens can be tied to any asset, real-world or digital, that has value.
What Can be Tokenized?
Tokenization (as pertains to blockchain and not to be confused with the separate but related, cryptographic term) is the process of associating a blockchain token (or a number of tokens) with a specific asset. In theory, anything that has some agreed-upon value and is subject to ownership can be tokenized.
We have been seeing digital assets tokenized regularly for a couple of years, serving to demonstrate how ownership can be successfully managed using blockchain. When a token tied to a digital asset, say a piece of digital art, is traded, the magic of blockchain simply records the transaction, and the new owner then holds the key to the server location of the item.
But how is this accomplished when the asset in question is not a string of binary code, but something with physical existence sitting in a safe, or a garage, or encompassing an entire city block?
Using the example of da Vinci’s Salvator Mundi – the owner could elect to tokenize the painting into an arbitrary number, say 1 million, equally valued tokens. Each token would be worth about $127, giving art-loving crypto traders a budget-conscious way of owning a piece of history along with its appreciating value.
Compelling examples of potential tokenized physical assets are, among many others:
Benefits and Challenges of a Token-Based Economy
There are challenges inherent in blockchain which have yet to be resolved; it’s still a relatively young technology and it may be decades before it reaches its full potential. We see difficulties in cryptocurrency related to public acceptance, regulatory hurdles, and potential fraud that would naturally bleed over into a token market.
The question of how to legally bind a physical asset to blockchain tokens is still an open one, and there are likely to be competing approaches as systems develop [7]. This comes along with certain regulatory concerns, especially when an office building in Manhattan could feasibly have millions of co-owners spread across multiple countries.
And just as is the concern in cryptocurrency, when an electronic ledger determines the ownership of a ten-figure asset, the stakes are high. There will need to be iron-clad confidence that blockchain tokens can hold up under what will likely be an unending onslaught of cyberattacks.
But the benefits of tokenization are just as easy to recognize. Most of the advantage, and the real power of tokens, comes with the ability to allow fractional ownership.
Tokenization adds liquidity to assets that could otherwise take years to convert into cash. Expensive assets typically have to be moved wholesale from one buyer to another. But offering tokens allows an owner the option of raising cash on an arbitrary portion of the asset quickly. This fractionalization also allows investors to enter capital markets previously closed to them.
Like with any emerging technology, what’s so exciting about tokenization is not just all of the potential new investment possibilities mentioned here, or the ways in which it could transform the economy and society – it’s the ones we haven’t thought of yet.
[1] https://www.christies.com/features/Leonardo-and-Post-War-results-New-York-8729-3.aspx
[2] https://www.foxbusiness.com/sports/most-expensive-us-sports-team-sales-in-history
[3] https://www.nytimes.com/2008/05/25/nyregion/25gm.html
[4] https://techcrunch.com/2021/12/13/nike-acquires-nft-collectibles-studio-rtfkt/
[5] https://macguyvertech.com/