Blockchain is really good for registering, controlling, and transferring assets. Its decentralized ledger means anyone can transact in a trusted network while being certain the assets they own are secure. However, so far blockchain has largely been limited to digital assets. Recently, new companies have proposed that we put physical assets on the blockchain as well.
That can be a tough idea to wrap your mind around. Right now, owning a physical asset like a car, oil, or land is a matter of trading legal documents. These documents can get confusing, and it can be difficult to determine the real owner of an asset. Putting physical assets on the blockchain would mean tokenizing them so they can become part of smart contracts. Selling a boat or an ounce of gold could be as simple as transferring the digital token to the new owner.
Trend Toward Tokenization
Tokenization of real-world assets has generated a lot of publicity over the past year. The key to understanding this trend is to look at it from a legal perspective. The actual physical objects don’t change just because they’re on the blockchain. However, tokenizing physical assets on the blockchain does make it more transparent who owns what. It creates a central source of truth for things like commodities trading, auctions, or property development.
Take, for example, blockchain agriculture where tons of corn, wheat, and other commodities get traded and handed off between suppliers every day. These handoffs often have complicated contracts for quality, liability, and delivery times. Using tokenization, those contracts could all be handled on the blockchain with a single source of real-time data about the status of all wheat, corn, etc at any given time.
Fungible vs. Unique
In a legal and technical sense, assets and their tokens can either be fungible or unique.
Fungibility is the characteristic of tokens and assets that can easily replace one another. A pound of silver is equal to another pound silver (as long as it’s the same quality), and they can be subdivided and traded accordingly.
Unique assets can’t be easily subdivided or declared equivalent. A boat is a unique asset, since it can’t be immediately swapped for another boat. While you could subdivide a unique token (as in owning a third of a given boat), you couldn’t necessarily trade subdivisions in the way you could a fungible asset. Perhaps one of the best examples of a unique blockchain asset is CryptoKitties with each tokenized cat having its own value and unique properties.
Both fungible and unique assets can exist on the blockchain. Ethereum has a token standard for fungible assets – ERC-20, soon to be ERC-223 – and another standard for non-fungible (unique) assets – ERC-721.