What is Tokenization? A Guide for Professionals

What is Tokenization? A Guide for Professionals

Introduction to Tokenization

The tokenization of assets was led by the creator of Ethereum, Vitalik Buterin in 2014 in the ethereum’s white paper provided for the idea of tokenization of assets. Now tokenization is an essential part of the blockchain technology that serves the purpose of platform identification and accessibility. It is the process of restoring sensitive data with unique identification symbols that store essential information about the data without compromising its security. Three types of tokens are their currency tokens, utility tokens, and security tokens.

 Currency Tokens – they are created entirely as a means of payment for goods and services. For example, they are Paying for Frappuccinos with Bitcoins.

 Utility Tokens – It is the liquid medium of exchange that gives future access to a given product or service by the blockchain-based economy.

 Security Tokens – A security token is a digital asset that takes its value from an external asset that can be traded.

“Software is eating the World”

Marc Andreessen

How does Tokenization work?

Assets and securities can be tokenized on a private and public blockchain such as Ethereum, Tezos, or can be deployed on platforms such as polymesh or Hyperledger fabric.

Tokenization Assets can be divided into three categories

Intangible assets – these are those which we cannot touch. We use them to do things, but they don’t have any physical representation—for example, Copyrights, patents, and carbon credits, etc.
Fungible assets – these assets are those that can be replaced by another identical item—for example, Gold, Wheat, money, bitcoins, etc.
Non- fungible assets – these kinds of assets are represented as precious, unique, and collectable items—for example, Diamonds (comes in different sizes, grades, and cuts), crypto kitties.

“Everything will be tokenized and connected by a blockchain one day.”  

Fred Ehrsam

Blockchain is the buzzword of 2017 promised to disrupt every single business model, and it has promised to disrupt how we transact peer-to-peer, and it has promised to disrupt government models. But In buzzword of 2019, everything is promised to be tokenized, everything is promised to be on the blockchain, and everything is promised to be traded.

Cryptocurrency is evolving and adapting really quickly, and they see crypto like a little baby is growing tech-wise, financial wise, and even economics.

Tokenization on the blockchain network

What was the magic that they are bringing to this from a blockchain perspective? It’s primarily digital uniqueness, Gold for an example. But the unique quality that they get from the Blockchain construct is what allows them to do unique digitization and the unique digitization allows them to do things like uniquely identify things that are abstract or uniquely identify people or other things that are really important.

Tokenization basically a unique representation of physical are objects is also possible, so both digital and physical are important.

What tokenization looks like: Microsoft Case Study

Yorke Rhodes, Co-founder of Blockchain at Microsoft, told the story to explain this concept he talks about cars because it involves uniquely representing quite a few different things in this case. He took an example of BMW electric vehicle, the institution of Germany, charging stations that have a unique representation.

If tomorrow he allowed his neighbour to charge their electric vehicle at his house, today the only way to do this would be through barter.

Benefits of Tokenization

  • GREATER LIQUIDITY – Tokenization allows us to unlock the liquidity from the illiquid property, which is difficult to divide physically. Their high price tends to make them inaccessible. It is benefiting investors who consequently have more freedom and sellers because of the token benefiting from ‘liquidity premium’’, thereby capturing value from underlining assets.
  • FASTER AND CHEAPER TRANSACTION – Transaction of the token is completed with smart contracts. This automation can reduce the burden involved in buying and selling with hardly any intermediaries needed, leading to not just only faster deal execution, but also lower transaction fee.
  • MORE TRANSPARENCY – Transparent tokenization offers more than just data security. Here are some benefits of transparent tokenization.
  • On-chain monitoring
  • On-chain reporting
  • Work with all data sets.
  • Increases business continuity and utility.
  • Reduces risk of data theft by storing all delicate data in a private or public blockchain network

 MORE ACCESSIBLE – Reduction of minimum investments and periods, lower investment risks, improved relation, and facilitated access to financing capital in the form of ICO’s.

What financial institutions will need to examine in order to take part in the token economy

Financial institutions and enterprises should determine how they are going to adapt to the token economy and the major areas enterprise must consider.

  1. BUSINESS MODEL – financial institutions will have to choose where to take part in the value chain. For example, they choose to advise distributer on how to structure their token or could act as a safe keeper of tokenized assets ( real estate property, luxury car, art), Paying agents to create life-cycle event transactions on the distributed records.
  • PLATFORM INTEGRATION – depending on the business model they choose to accept, they execute the different operating models. One of the main components of new operating models being the blockchain platforms. They have to choose on which platform they will work or collaborate with. This will depend on the rules they follow, the type of product or service they offer to clients.
  • CYBERSECURITY-   Cybersecurity is much more than a matter of IT. With the increase of digital payments and the growing popularity of bitcoins and other cryptocurrencies, tokens are increasingly becoming targets of cybercriminals. Not only financial institutions need to apply proper security measures to secure the whole value chain when they interact with the blockchain platform but also suggest a new kind of service to their customers. Wallet security and the level of centralization is a big issue. There have been lost of instances million-dollar hacks due to which cybersecurity is one of the key parameters while making any decision.

Tokenization is already a reality; Security and Agreement alone are reasons to implement tokenization. Tokenization creates a new financial system- one that is more democratic, more efficient, and faster than anything we have seen.

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