Naveen Agarwal Explains Beginners- “On-Chain Asset Tokenisation Mechanism & Its Prominence”

Naveen Agarwal, CTO of Zelta tech

Mass traction in the on-chain asset tokenisation looks forth as an opportunity to eliminate many of the disadvantages of the asset illiquidity, including the current modality of traditional fractionalisation. To understand the illiquidity, we need to understand the survey taken back in 1997, resulting in 56% or more of the assets held by taxpayers with a net worth of between USD 600,000 and USD 1 million being illiquid. The primary example of illiquid asset includes real estate, natural resources, land, commodity, and public infrastructure.

While giving his take on the same, Naveen Agarwal said, "There is a key limitation to traditional fractionalisation. It is not worth counting on the profitable sides. When we look at traditional fractionalisation, its impact of it can only be seen in the public market. This market is already using cutting-edge technology and is fairly efficient in handling any fall. Also, there are steps in the process of matching capital to investment opportunities in the private markets. The journey begins with finding and qualifying investment opportunities to secondary trading and management of these assets leading to marginalised pinnacles of customer experience and cost structure. But the scenario is different during on-chain tokenisation."

"Understanding on-chain tokenisation requires forbearance. At first, you start to "Deal Origination" where you identify the project and begin several discussions with the issuer, tokenisation platform, and other relevant FIs, you get answers to most of your questions. The second step is "Structuring", which refers to the issues related to cross-border regulations, terms of token offering, and getting an answer for whether it will exist in the form of equity, bond, fund, or another format. In the third step after the listing, the potential investors receive the token subscribed to the offer at the minimum investment price. It is known as "Subscription", Naveen Agarwal further added.

Naveen Agarwal continued, "As the subscription process comes to an end, the new process begins at the fourth step, namely "Minting and Distribution of Tokens" and the fifth step is "Asset Servicing and Custody", where the tokens are minted and distributed among investors. Now, the investors legally own tokens. Instantaneously, the collected fund gets transferred to the issuer. Now the catch comes here. There are tokenisation platforms which are self-custodial and custodial. Understanding custodial on-chain asset tokenisation, such platforms act as custodians and oversee post-trade servicing such as dividend and coupon distributions, as well as facilitate announcements such as NAV updates. Let's take the example of Paxos, a parent company of Bitcoin trading service itBit, a blockchain technology company for global financial institutes. Paxos provides solutions, including Custody Solutions, Exchange/Secondary Market, and Post-trade. Briefing about the company, Paxos has its own token USD PAX, an ERC20 token running on Paxos Protocol which people now know as Paxos Dollar (USDP). Paxos have a product namely "Gilded", a first-of-its-kind B2B-focused back-office solution product of Paxos backed by blockchain."

The expert further stated, "In the sixth step, there comes "Secondary Trading" where the token is tradable on the secondary exchange. The same happens on the blockchain with efficiencies when compared to the traditional process of a private secondary market transaction. Then comes the final step, the seventh step, "Maturity and Burning of Tokens" where the project is set on a fixed tenor. It is the same in bonds and closed-end funds where the token matures when the investment term ends. In this, the initiated tokens get burned and the remaining part, i.e., principal capital plus returns are credited to the investors' linked decentralised wallet".

There are prominent signals in the Web3 industry indicating that the day is not that far when on-chain asset tokenisation will take over the world.