Smart Assets: What It Is, How It Works, and Example

What Are Smart Assets?

Smart assets are real-world tangible or non-tangible assets that have unique virtual tokens assigned to them on a blockchain. These tokens may represent ownership or rights that can be purchased, sold, or exchanged.

Other names for smart assets are tokenized assets, crypto assets, and digital assets. These terms and definitions are likely to change, morph, or merge as blockchain technology continues to mature and standards emerge.

Understanding Smart Assets

A smart asset is a token on a blockchain that represents another asset. The asset could be physical, like a property or a car, or it may represent a virtual product, an equity share, or a patent on a novel product. Each smart asset is associated with a smart contract that governs its transference.

To make an asset a smart asset, ownership must be transferred to the blockchain. This is done by taking information from the asset and assigning it a token on the blockchain it will reside on. The blockchain sends the information through a hashing function, which generates an alphanumeric sequence called a hash.

The hash is wrapped in a smart contract that acts as a transfer mechanism. When the underlying asset is sold, the buyer and seller conduct the transaction through a blockchain interface called a wallet. Its ownership is transferred automatically by the smart contract. The asset still needs to be delivered to the new owner, but their ownership is established by the transference.

Example of Smart Assets

An e-book is an excellent example of an asset that could become a smart asset. For instance, say you co-authored a book with a friend and published it on a digital platform. You and your friend decided to split any royalties 50/50. On the platform, you opted to tokenize the sales, which means that for each copy you sell, a token is generated for the purchaser, giving them the right to read it but not sell or pass it to someone else. The token is registered to the reader and a selected device through a smart contract on a blockchain.

The smart contract is not a contract in that it has terms—it is a script that executes the terms of a contractual agreement. The terms could be written into a purchase agreement, which might be required to be accepted at purchase time. You could choose to have the smart contract code not allow the book to be transferred to anyone else, or you could allow the book to be sold by the purchaser. If you let it be sold second-hand, the token and smart contract the copy is tied to would ensure you receive a specified amount of the sale because you also selected royalties.

So, you retain and share the copyright and royalties with your friend and continue receiving revenue from first- and second-hand sales of your e-books through a token on a blockchain.

The Bottom Line

Smart assets are tokens that represent an asset on a blockchain wrapped in a smart contract. They can represent any physical or intangible asset.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.