Are you wondering what tokenization is? You have heard about that, but still does not how does tokenization work? What tokens are? We gathered all informations, just to let you know everything about that process. Let’s get started!
If you have not had contact with blockchain industry before, and you are still a beginner in the world of virtual currencies, it is worth to get to know the basics. Let’s start with defining what blockchain is.
Blockchain is nothing else than block of chains. Of course, it should not be interpreted literally. This concept has come to cast just to visualize what that technology really is. The concept itself is really complex, and describing it is not that easy as it might seem. What are the blocks then? Blocks are made to gather data. Each of them has a unique code named hash. It helps to distinguish one block from another.
Blockchain is made out of many blocks, that are connected to each other. To connect new block to the ones that were already created, it has to be verified. The transaction must be consistent with data already registered. It means, that they can not be added at the beginning of a chain, or in the middle. New block can be added only at blockchain end.
Blockchain is identified as secure database. Why so? At the time, when new block is attached to the already created chain of blocks, gathered data from previous blocks is very hard to be changed. Almost impossible. It is because each block contains its own hash code and hash code of previous block. Codes are created mathematically. Informations and data are converted into string of numbers and letters.
What if someone tried to change the block’s data? Well, by that time block hash would get changed too. But previous block would still have the changed block old hash. To cover the tracks of unwanted activities, a person would need to change the hash of every previous block. That requires a lot of computing power - that is why changing data in blockchain is very difficult.
Many things can be tokenized. We will shortly cover what are tokens, and how they differ from cryptocurrencies. Although many people use token term interchangeably with the cryptocurrency word, it is a huge mistake. There are many differences between these two digital assets. Of course they have some in common too, for example: both tokens and cryptocurrencies does not exist physically and they can not be touched.
Cryptocurrencies like Bitcoin (BTC) work on their own blockchain. Tokens use already created blockchain solutions. Token emissions can be carried out on blockchains like Ethereum. We can distinguish three types of tokens: utility tokens, security tokens, and payment tokens.
Main token functions
Due to the category they belong to, their functions are specific. For example, utility tokens are focused on practical application within the platform they were created. They gather money for project development. As an example of such token, TEO token can be pointed out, or BNB token which is property of Binance exchange. By the time investors are taking possession of this type of tokens, they receive access to services and products that company offers. Utility tokens are often created for Initial Coin Offering (ICO) - a crowdfundings popular in cryptocurrency industry.
Second group, security tokens, is completely different. They are constructed in such a way that form a legal point of view they resemble securities. Their main role is to provide security for investors. In case of Security Tokens Offering (STO) everything is different than in case of an ICO. Security tokens are based on real assets like shares or bonds.
Third group, payment tokens, are used just for paying. It sounds pretty easy, but their main disadvantage is that they do not have any other use. That is why they are a big unkown.
What is tokenization?
Simply put, tokenization is process of transforming real “value” into digital assets. We will cover an example to let you understand it better. Imagine that you have something for sell, but transferring it to the investor is very difficult. In this case, transferring it on blockchain as a token is much more likely to happen, and easier to be done. Tokenization biggest pros are transparency and transaction security.
There is no such definition but tokenization can be described as a process of protecting data within algorithmically generated code. The code is called as a token. It is often used to prevent frauds of credit cards. Tokens can be transferred through Internet or any other wireless network.
How does tokenization work?
Tokenization replaces live data with tokens. Its intention is to minimize the amount of exposed data. It can be done with various applications. Instead of using data, system generates a token (string of numbers). Because of that, transferred data is much more safe and it can be protected.
For an example of tokenization, we could use real estate market. In 2019 during Security Tokens Realized conference organised in london, Dos Ventures company convened an industry meeting. A group of experts spoke about how tokenization can improve real estate market. The first conclusion was that tokenization process can allow you to minify the amount of formalities and gives the access to all data related to resources, for example the history of ownership. According to Helen Disney, experienced investors typed two biggest advantages of tokenization process: economy and efficiency.
Ryan Serhant (“Sell it like Serhant” author) described tokenization as a new financing method, which might be better alternative for projects themselves and for investors too. He believes, that this process is able to pave the way for a leading position in the development industry. Example of tokenized property in 2018 in Manhattan is also worth mentioning. It was then suggested, that blockchain technology may save the problem of information asymmetry. Information asymmetry is a big problem and restriction for market liquidity.
An interesting example of tokenization process that is worth mentioning as well is shoe tokenization by Nike. Main goal of creating non-exchangeable NFT token was benefit for both: sellers and customers. With its help user can exercise more control over their own pair of shoes. For example, using special application, producer may set the limit of pairs to be manufactured. Token also allows to register history of shoe and its attributes.
Limited shoes collections sells the best on market. By creating NFT token, producer may track the overall number of pairs on market, and assess deficiency level on market.
As you can see, tokenization process is happening in many different industries. Starting on real estate industry, ending with shoe tokenization. Tokens are getting more and more popular all over the world. No doubts, tokenization is a process that is future. Rune Christensen (CEO of Maker DAO) says, that all assets will be tokenized sooner or later.