Jewelry Tokenization: Temporary Trend or Transition to a Decentralized Digital Economy?
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Jewelry Tokenization: Temporary Trend or Transition to a Decentralized Digital Economy?

The digital asset market is still far from global adoption, but tokenization of real assets can help with this. This will significantly lower the threshold for investors to enter, simplify the process and provide them with other benefits. Tokenization is the process of converting such assets into the electronic tokens that represent them. As a result, assets acquire additional liquidity, transparency and divisibility.

What is the physical meaning of linking a token to a materialized good? The launch of a token that has a clear value proposition – the so-called «intrinsic value». For large funds and investors, there should be an opportunity to provide fundamental support for those financial instruments that are traded, and even the opportunity to «get out» of these instruments into something guaranteed to be tangible and valuable. In general, the topic of Asset Backed and Security Tokens is now a new trend, the investment world is disappointed in ordinary tokens with utilitarian functions.

How to tokenize an asset? - Unicsoft

It is important to note that a tokenized tangible asset is not a cryptocurrency, although tokenization allows the transfer of ownership in the form of a token on the blockchain. After that, the owner of the asset will be able to trade it and store it without the participation of traditional intermediaries – brokers. Prior to tokenization, investors could invest in gold through exchange-traded funds (ETFs) and futures. But such schemes had certain limitations related to the cost of the transaction and liquidity.

Tokenization increases liquidity and allows investors to quickly and efficiently add to or change their asset portfolios. Other benefits of tokenized gold include:

  • independence of the owner from the mode of the exchange day or the work of dealers;
  • the ability to buy and sell an asset around the clock in real time;
  • no commission for management, storage, insurance.

In addition, the low threshold for entry into tokenized assets increases their availability to investors, and their fractionation allows for the transfer of ownership and value of physical gold in a way that was not possible before.

As of March 2023, the volume of tokenized gold reached $1 billion, which indicates that the tokenization of tangible assets is gaining momentum.

At the end of November 2022, the Dubai Commodity Center (DMCC) announced a partnership with Comtech Gold to trade tokenized gold. Anyone can purchase any number of tokens and thus own a certain part of the UAE gold reserves. The tokenized assets will be backed by gold bars registered on DMCC Tradeflow, the UAE government’s online platform that records ownership of commodities. Thus, each tokenized gold bar will be provided with a state certificate, which will increase the security and transparency of the precious metal trade.

Bullion tokenization will take place using the Xinfin Protocol (XDC) blockchain network. Each Comtech Gold (CGO) token will represent one gram of 999 fine gold, fully backed by a physical asset. The physical holdings of the precious metal thus tokenized will «contain unique identification numbers and certificates».

The Dubai Commodity Center (DMCC) is a government organization established to expand commodity trade flows through Dubai. DMCC is a free trade zone and the global trade center of the UAE. Ahmed bin Sulayem, CEO of DMCC, is confident that the initiative will provide an opportunity to make the gold trading market more accessible. The use of blockchain technologies will allow trading in fractional shares of one gold bar, potentially bringing new investors to the market. And tokenization and the use of digital assets will simplify the gold trading process for potential investors by eliminating the need to transport and store purchased bars.

This is not the only example: over the past 6 years, about 60 physical gold tokenization projects have appeared on the market. Thus, in 2022, it became known that the World Gold Council (WGC), together with the Swiss infrastructure and application provider DLT aXedras Group, would issue tokens backed by the main precious metal for retail investors.

With Gold247, the WGC blockchain will create the basis for global gold bar tracking. David Tait, chairman of the World Council, said that the next step is to launch a digital token backed by physical gold. According to the head of the WGC, this initiative can make gold trading more accessible to all classes of investors, including retail ones. In recent years, gold and digital assets have competed as investment alternatives to stocks, bonds, and fiat currency.

Some Bitcoin advocates often refer to it as «digital gold». The Council already once, in 2004, tried to launch a gold-backed exchange-traded fund. However, there are barriers that may prevent retail investors from exchanging ETF units for real gold bars. As part of a new initiative, the WGC intends to issue gold-based tokens that «defragment the gold market», increasing the availability and transparency of the real physical commodity, stimulating demand from ordinary investors.

However, market participants gathered at the conference where the concept of the new solution was presented were skeptical that Gold247 would gain momentum, since many previous attempts to tokenize the gold market had failed. In August 2022, the regional leadership of the WGC stated that the use of the blockchain will allow the gold mining industry to achieve transparency of operations and consumer confidence.

Even though the cryptocurrency market has grown in recent years, it still cannot compare to other asset markets such as real estate, stocks, gold, oil, coal and other markets in which trillions of dollars have been invested.

Proud Limpongpan, Chief Strategy Officer of Zipmex Thailand, Asia's leading cryptocurrency trading platform, explains that the purpose of using blockchain for tokenization is to overcome barriers to entry into investment markets, ensure the authenticity of assets, and eliminate fraud.

«Essentially, this is the democratization of investment. You can invest in the same things that Elon Musk invests in without being as rich as he is. It started with digital assets and has now spread to the physical realm», says Limpongpan.

Diamond Backed Tokens: Digital Asset Sale at Christie's

Recently, there has been a huge explosion of interest in NFTs, fueled in part by the sale of digital art at Christie's (the largest auction house in the world, headquartered in London).

Chilean artist Sebastian Errazuriz also capitalized on the NFT craze by creating the world's first crypto gems with Digital Diamond Co. The craftsman sells digital diamonds for the price of real ones, presenting an intriguing price offer that challenges the modern diamond landscape.

Jewelry Tokenization

In April 2023, Gucci unveiled the first fruits of a collaboration with the Yuga Labs metaverse. The $4 billion company is known for creating the largest NFT project Bored Ape Yacht Club (BAYC).Yuga Labs has announced the release of the limited collection Otherside: Relics by Gucci, which includes both physical and digital items. The project will be the first major event in the metaverse from the creators of Bored Ape Yacht Club.

Gucci Joins Forces With Yuga Labs in The Metaverse

The first Relic item will be the KodaPendant pendant, which Gucci has officially unveiled on their Twitter account. KodaPendant is an NFT that allows you to get both a physical decoration and various bonuses in the Otherside metaverse. YugaLabs and Gucci will release only 3333 of these pendants.

As for the pendant, it is 50 centimeters long and features a Koda alien-shaped pendant engraved with "GG". After purchasing an NFT, the metadata of the owner of the token will be updated, and the decoration will appear on his character in the metaverse.

Image: Gucci

Diamond Tokenization

For all the assets listed above, tokenization is also a solution to reduce fraud and overhead. However, it can do more for one asset class than for others.
As society moves steadily towards a decentralized digital economy, new and sometimes unexpected blockchain solutions are emerging. Thus, in recent years, startup companies and investment projects have emerged that implement blockchain solutions for the commercialization of jewelry, in particular diamonds.

Investors Flock to Tokenized Diamond as Crypto Banking Crisis Props Hard  Assets

Blockchain pioneers believe that tokenization can offer a safe and efficient way to invest in jewelry without having to physically buy it. Companies such as Diamond Standard, D1 Coin, Altcoinomy and GemBit have integrated this technology in various ways to help revolutionize the gem trading.

Similar to a stock exchange, tokenization essentially allows token holders to trade shares of ownership of a gem on the Ethereum blockchain. Jewelry tokenization can be divided into two categories: the first includes fungible tokens (for example, the ERC20 standard token), the second includes non-fungible ones (the NFT ERC721 token). A fungible token implies that each iteration is identical. For example, one Bitcoin token is identical to others.

The global pandemic has fueled the growth of gem tokenization. This trend is an evolutionary step in an industry that is trying to monetize diamonds as a source of wealth.

Diamond markets have a number of challenges that other assets do not face.One of them is the lack of interchangeability. Each gram of gold is worth as much as any other gram of gold. A barrel of oil costs the same as another barrel. But with diamonds, everything is much more complicated, because there is no single metric that could be used to determine the value of a stone.

As a result of the lack of interchangeability, the market for diamonds is limited. Only people with expert knowledge of the industry can trade diamonds and make a profit. Diamond lovers usually lose 30-50% of the fair market value they should have received on transactions. In addition, diamonds are difficult to transport. They require a high level of security and transparency. Counterfeits are one of the constant risks, which is why every time a diamond changes hands, an expert check is required.

The main advantages of diamond tokenization:

  • Use as a financial instrument for investments in diamonds, similar to the oil and precious metals markets (Brent and ETF).
  • The purchase of diamonds of a given quality with reduced risks during the purchase process, since the procedure is based on a smart contract and a reserve fund to protect against default by the parties.
  • With a stable value of a physical asset, the price of a token will also be stable. Stablecoin is the most important element for the crypto industry. At the moment, there is no reliable stablecoin with a transparent emission and a confirmed periodic audit.

Based on the foregoing, it can be safely stated that the tokenization of diamonds using blockchain technology is a potentially revolutionary idea.

An example is the Diamond Standard company, which in 2020 introduced the world's first diamond product that can serve as a universal asset for making any digital transactions on the blockchain. Commenting on the move, Diamond Standard founder and CEO Cormac Kinney said that unlike gold or platinum bars, it is difficult for investors to use diamonds as assets because the stones are individual and their price is negotiable.

«We have created a diamond product by grouping sets of stones in a fair and transparent manner. The sets are interchangeable and the diamonds are independently certified. The key is that they are supplied through a regulated exchange with market-driven price disclosure», the head of the company emphasized.

Diamond Standard® to Launch World's First Regulator Approved Diamond  Commodity in Initial Public Commodity Offering for $25M on September 28

Sets are coins or bars in which interchangeable sets of stones are embedded in transparent resin. Initially offered products are calibrated for $10,000 and $100,000 respectively. In addition, the Diamond Standard Coin and the Diamond Standard Bar contain an NFC chip with the Bitcarbon blockchain token, with which you can instantly authenticate and verify the product.

You can store it yourself, but Diamond Standard believes that most investors will use the depositary service. There, the coins will be stored in smart cabinets, which will allow owners to carry out transactions with them remotely via a smartphone.

The new asset is similar to a gold bar, but with digital properties.The Diamond Standard coin has a daily market price and can be traded on world exchanges through transactions through the Bitcarbon token on the blockchain.

In 2020, Icecap launched diamond tokenization based on the Ethereum blockchain. Each diamond has its own unique token (NFT). According to Icecap CEO Jacques Voorhees, there have already been attempts to tokenize diamonds several times, but all attempts have failed, since diamonds are not a fungible commodity. For example, if a user buys a gold bar of 999 fineness, then it does not actually matter which of the bars will be delivered, because they are all the same in composition and weight. But with diamonds, things are not so simple. Each stone has a different shape, transparency, weight, color and cannot be replaced with a similar one.

«I saw attempts to create diamond fungibility up until 1972 when the West Coast Commodity Exchange was trying to sell futures contracts for diamonds. Trading went on for about three days, and then the market collapsed because the contracts did not match the product», Voorhees explained.

In order to organize a tokenized trade in diamonds, a number of necessary measures have been taken, such as marking, certification and others. Before being marked, all diamonds are certified by the Gemological Institute of America (GIA) and then sent to the Gem Certification and Certification Lab (GCal), which verifies the GIA certificate and provides a guarantee. «So if it's ever found that their estimate wasn't accurate, they (GCal) will pay the price difference», Voorhees said.

Also, Voorhees explained, today there are no problems with the regulation of the sale of tokenized diamonds, so this product can be safely sold on the market.

Jacques Voorhees was told about the features of NFT by his son Erik (Erik Voorhees), CEO of the ShapeShift exchange platform. And as soon as CEO Icecap heard about NFT, he had a picture: «All diamonds are different, like snowflakes. And all attempts to create a fungible token with an irreplaceable asset are doomed to failure. And blockchain has nothing to do with it. The situation was the same in 1972, when the West Coast Commodities exchange created diamond futures contracts as if they were fungible. The product lasted three days and then the market crashed because the contracts weren't really equal».

That is why unique tokens (NFTs) are suitable for tokenization. Icecap is trying to change the current situation in the market – a retail investor is practically unable to trade in polished diamonds, since there is no secondary market. To sell a diamond, he has to go to significant discounts. With the help of tokens, it will be possible to trade diamonds quickly and easily on the OpenSea platform, and the diamonds themselves will be stored in a reliable custodial service. At the same time, as Jacques Voorhees said, there should be no problems with regulation either:

«Regulators have watched what we do, how we transfer ownership, and how we handle sales taxes. They had a lot of questions, and they came to the conclusion that there would be no problems from the regulatory side».

CEDEX: Decentralized Diamond Exchange

In 2018, the world’s first decentralized diamond exchange built on the Ethereum blockchain was launched. The new technology promised to close the gap between the traditional diamond industry and modern financial markets, thereby allowing people to invest and market diamonds as easily as any other financial asset. Individuals could use the decentralized tokens of the CEDEX Coin exchange to buy individual diamonds, fractions of high-value stones, or fractions of a collection of diamonds called a diamond basket.

Imagine that a diamond lover with no specific education wants to invest several thousand dollars in diamonds as a hedge against market inflation.Given the differences between diamonds, she is able to put together a diverse portfolio that includes stones of various qualities and cuts. With her relatively small budget, finding a salesperson is not an easy task. From the seller's point of view, finding such a short-term investor is not worth the effort, time, and overhead. The very fact that these kinds of transactions themselves cannot exist is a win-win situation.

The founders of CEDEX hoped to change this situation with the help of diamond tokenization. Through tokenization, an investor can go to an exchange based on blockchain technology and select diamonds listed on it or a basket of diamonds that have a transparent price. At the same time, sellers will have a new distribution channel, the maintenance and maintenance of which requires a minimum of effort and investment. And diamond owners who couldn't get a fair price for their stones stand to gain the most, as having liquidity, standardization and transparency means they no longer have to accept unfavorable offers from retailers or pawnshops.

Blockchain-Based Diamond Exchange CEDEX Launches Token Pre-Sale | NewsBTC

The creators of the CEDEX coin stated that the benefits of tokenization are not limited to the above. According to them, the use of the CEDEX coin will make it possible to:

  • Exclusive access to additional services of gemological laboratories (which authenticate and evaluate diamond assets), transportation, insurance and customs services;
  • Access to loans (in CEDEX coins) through diamond investment portfolios;
  • Transparent payment for the sale of diamonds;
  • Coverage of borrowing and security fees by opening short sales through the CEDEX platform.

Jewel Tokenization: Expert Opinion

Not all of the projects described above have managed to become viable. And here the question arises: will intangible assets, such as digital diamonds, have a future along with real diamonds?

«Diamond-backed tokens are very different from digital images that are sold as NFTs. These are, at best, photos of diamonds. They have no more to do with the diamond industry than a deck of playing cards with diamonds on some of them», says Jacques Voorhees.

However, in the past, very few investment vehicles for diamonds have been truly successful due to illiquidity, opaque prices and large spreads between supply and demand, he said.

Some are skeptical about how NFTs can be accepted in the world of gems and jewelry. Rami Baron, founder of Young Diamantaires, an initiative of the World Federation of Diamond Exchanges, and CEO of Q Report Jewelery Insurance, said:

«NFTs enter into symbiosis with art. Clearly, diamonds or any asset is open to this space. However, the buyer is looking for security and confidence in the investment. NFT is a new and untested financial instrument. And while it may become popular in the future, the decision has yet to be made in the diamond community».

There is a trend in the market right now to blur the lines between conventional tokenization and NFTs, but they serve different purposes. Conventional tokenization issues a fungible coin that represents a share or percentage of a gem on the Ethereum blockchain, while NFT is a unique token, non-fungible, one of a kind.Tokenizing a gem means you allow more than one person to buy and sell different parts of that gem – it's like you break it down into smaller pieces so that anyone can only invest $1. An NFT is typically where the entire gem is attached to 1 token, and that token is not only trackable, but unique.

Using NFT, merchants can designate gems and diamonds in a hierarchy to represent the value they may have in the physical world. In addition, both buyers and sellers can personalize NFTs through smart contracts and reflect the essence of true ownership.

«Gems are very small items that are difficult to trace, and blockchain technology and tokenization add real value to our industry. This makes the product more attractive as it has the potential to add transparency and integrity to the process», said Icecap CEO Jacques Voorhees.

As the market for cryptocurrencies and non-fungible tokens is growing rapidly, there is an opportunity to attract representatives of the crypto world to purchase diamonds and jewelry.

Where do I buy diamond tokens - and how good is the return?

Expansion of distribution channels and market integration can lead to improved liquidity. The supply of diamonds is limited and remains the same whether they are converted to NFTs or not. What is changing is the integration of the market as people can now buy diamonds both from traditional jewelers and through the NFT platform.Buyers benefit from increased choice and lower retention costs, ease of resale, and security – in short, all the benefits of NFT. It is easy to store and track, and hard to lose.

The gem tokenization trend depends on how successful the first few projects are. Projects may only concern certain ecosystems or geographic regions, they do not have to be accepted worldwide. The only way to know is to actually launch the NFT in the market. There is huge potential in this area.

While many people are mostly unaware of the concept of gem tokenization, industry players like Icecap Diamonds are paving the way for it to be widely adopted. After all, tokenization technology may one day be as important an achievement as lab evaluation certificates or the internet itself. While investors and merchants can mutually benefit, gem tokenization also comes with a number of challenges. Rami Baron believes that diamond grading is still subjective, which leads to the same lack of objectivity in diamond pricing.

«It also becomes even more problematic if you add another component as a new investment vehicle such as cryptocurrency», says Rami Baron.

In his opinion, the diamond community is currently very skeptical about this type of investment instrument.

Tokenization allows the creation of a new financial system that is more democratic and efficient than anything we have seen before. The concept of gem tokenization and NFTs is rapidly changing and is still in its infancy. While it may be too early to predict the benefits and profits from this growing trend, only time will tell if crypto gemstone investments can flourish in the coming years.

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WRITTEN BY

Viktor Ihnatiuk

Founder at Boosty Labs, SNO Growth Lead at Storj Labs

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