What is Tokenization in Blockchain?
Tokenization is the process through which a digital token is created on a blockchain to represent a valuable physical or digital asset. A token is basically the representation of an asset. After conversion, the asset is said to be “tokenized”. The blockchain ensures that the token is immutable – when its ownership is transferred, the ownership cannot be erased or changed unless you sell it. Tokens can be designed as fungible or non-fungible, such as NFTs.
What do tokenized assets actually represent?
- Tangible assets – tokens can represent assets with a physical form such as art and paintings, real estate, and precious metals like gold.
- Intangible assets – tokens can also represent assets that lack a physical nature, such as ownership rights, intellectual property rights, content licensing, and voting rights.
This means that any valuable asset can be tokenized and traded in a secondary marketplace. Cryptocurrency tokens facilitate the transfer and storage of information in a verifiable, secure, and efficient manner. The process of creating a unique token involves a cryptographic function, called the hash function, to encrypt and secure the data against alteration or unauthorized access.
What are the Different Categories of Cryptocurrency Tokens?
Tokens can further be categorized into – security tokens, utility tokens, currency tokens, and tokenized securities.
- Security tokens digitally represent an underlying asset or investment, such as a company share, voting rights, etc.
- Tokenized securities directly represents the underlying security without involving any cryptographic features.
- Utility tokens digitally represent access to certain services within a blockchain ecosystem. They may be used to cater for transaction costs, give voting rights, or power the network’s consensus mechanism.
- Currency tokens are tokenized assets whose value is directly linked to the underlying crypto network and their distribution mechanism. They are typically meant for trading and may or may not be based on an underlying digital asset.
What are the Benefits of Tokenization?
Tokenizing assets extend the utility of blockchain networks beyond cryptocurrencies. It offers benefits such as:
- Provide more liquidity: Tokenizing assets enhances the accessibility of illiquid assets, such as real estate, by making them available to the everyday user in fractions.
- Offer provability and transparency: Since tokens live on blockchain networks, transactions are permanently recorded on the decentralized ledger. The immutability and transparency in the network facilitates the traceability of asset ownership or history in a verifiable and authentic way.
- Enable cheaper and faster transactions: Cryptocurrency tokens eliminate the need for intermediaries, immensely reducing the transaction costs and processing time.