Are you wondering what tokenization actually is? You have heard this concept, but you still do not fully understand what the process is all about? What are tokens? You’ve come to the right place, because in this article, we’ll guide you through a maze of intricate, seemingly complicated issues! So let’s get started!
Blockchain from A to Z
If you have not had any contact with the blockchain industry so far or you belong to the group of people relatively new to the world of virtual currencies, it is worth getting acquainted with the basic terms in this field at the very beginning. So we’ll start by explaining to you what blockchain technology actually is.
The term blockchain in free translation means a blockchain. Of course, it should not be interpreted literally. This concept was created to project a picture of what this technology actually is. But there is much more to this than meets the eye. What role do blocks play throughout the chain? Well, their primary task is to store information. Each of them has a unique code called a hash. This one allows you to distinguish one block from another.
A blockchain is made up of many blocks connected to each other. In order for a new block to be included in the chain, it must be verified. In other words, the transaction carried out should be consistent with the rest of the information records. It is worth knowing that newly added blocks are stored linearly and chronologically. This in turn means that they cannot be added at the beginning or in the middle of the chain, but only at the end of the chain.
Blockchain is very often equated with a secure database. Where did it come from? Well, when a new block is added to the chain, it is very difficult to change the information contained in the previous blocks. All because each block has its own hash along with the hash of the block in front of it. The hash codes are created mathematically. They convert digital information into strings of numbers and letters.
What if someone tries to edit information in one of the blocks? Well, then the hash value of this block would also change. However, the block in front of it will still have the same hash as before. To hide traces of tampering in one of the blocks, the person applying the changes would have to do the same for all blocks immediately after him in the blockchain. Moreover, recalculating the hash values would require an enormous amount of energy. For this reason, modifying the information on the blockchain becomes quite difficult.
Tokens – their division and specificity
We can tokenize many “things” reflecting a given value. In this paragraph, we will focus on what a token actually is, what distinguishes it from a cryptocurrency and what types it can be divided into.
Although many people use the term token interchangeably with the word cryptocurrency, this is a huge mistake as they are not synonymous. There are many differences between these two digital assets. Of course, they also have some things in common. For example, both of them cannot be touched because they are not in physical form.
While cryptocurrencies such as Bitcoin (BTC) have their own blockchain, tokens use ready-made solutions. For example, they can be issued on the Ethereum blockchain.
Due to the function of tokens, we can divide them into three groups: utility tokens, security tokens and payment tokens.
Main functions of tokens
Due to the category they belong to, the tokens have a strictly defined purpose. For example, utility tokens focus on practical application within their own platform, acquiring funds for the development of the project. Such a role is played, for example, by the BNB Coin token owned by the Binance cryptocurrency platform. Investors, having acquired this type of tokens, receive access to services or products offered by the company (depending on the concept chosen by a given project). ICO (Inicial Coin Offering) is also carried out via utility tokens – crowdfunding. Users who decide to acquire them are motivated primarily by the promise of profit closely related to the development of the project.
The situation is different in the case of security tokens. These, in turn, are constructed in such a way that they are legally similar to securities. Their main functions include providing investors with greater security. In the case of the so-called STO (Security Tokens Offering) is completely different than in the ICO itself. The key difference is that the issued tokens are based on specific assets such as stocks or bonds.
Now let’s move on to the use of payment tokens, and these, as the name suggests, are used to make payments. Their main disadvantage, however, is that they do not really have any other application, so their future value may be one big unknown.
What is tokenization?
Simply put, it is the process of transforming “value” into digital resources. Let us give you an example to help you understand this. Imagine that you have something that you would like to sell, but it is quite difficult to pass this resource into the hands of an investor. In such a situation, you can convert it into a token placed on the blockchain. Transparency and security of transactions are the advantages of tokenization.
Tokenization – real-life examples!
Let’s look at this phenomenon from the perspective of the real estate market. In 2019, during the Security Tokens Realized conference in London, Dots Ventures convened an industry roundtable meeting. A group of experts spoke on the benefits of tokenization on the real estate market. The first of the conclusions drawn was that it allows you to eliminate many formalities, and at the same time gives access to all data related to resources, such as, for example, ownership history. According to Helen Disney (behind Dots Ventures), experienced investors have identified two main advantages of this process: efficiency and savings.
Ryan Serhant (author of the bestseller Sell it like Serhant) described tokenization as a new financing method that could become a better alternative for both the project itself and investors. In his opinion, this process is able to pave the way to a leading position in the development industry. It is worth citing an example of a property tokenized in 2018 in Manhattan. It was the fruit of a partnership between two companies: Fluidity and Propellr. It was suggested at the time that blockchain technology could solve the problem of information asymmetry, which is a constraint on market liquidity.
Quite an interesting example that is also worth mentioning is the tokenization of footwear by the popular sports brand – Nike. The main purpose of the non-exchangeable NFT token is to provide benefits for both the seller and the customer. With it, the user can exercise greater control over his own footwear design. For example, by using a special application, it sets a limit of copies that the manufacturer can make. This token also allows the registration of genotypic information, including specific attributes of the footwear.
Due to the fact that limited collections sell best, the producer also benefits from it. Thanks to the NFT, he also has an insight into the number of shoes in circulation, which allows him to assess the shortage of the product on the market.
As you can see, our dear reader, you can tokenize many things, from shares in a company, to real estate, footwear, and even your own person (by issuing a personal token). Not so long ago, Rune Christensen (founder and CEO of Maker DAO) revealed his positive attitude to the tokenization trend. He also emphasized that he believed that all assets would be tokenized in the long run.