What is tokenization and how can you use it in practise?

Blockchain technology is associated by most people only with cryptocurrencies. This association is not entirely false, as the blockchain was originally developed to meet the needs of the cryptocurrency Bitcoin. However, a lot has changed since 2009 (the year Bitcoin was introduced), and the range of applications for blockchain technology is constantly expanding. Currently, one of the most used and emotional applications of this technology is tokenization.

Tokenization is a form of digitization based on the blockchain technology mentioned earlier. It involves assigning a specific value (tangible or intangible) to a token, a digital token that stores data. This solution allows you to spin and trade assets on the internet.

One example of the use of such tokens is stock market assets. Most of us associate stocks or government bonds with a paper confirmation of ownership of such an asset, while tokenization allows you to replace the paper confirmation with its digital equivalent. By moving traditional solutions into the digital sphere, many processes become simpler and more streamlined, while also becoming much more efficient.

Tokens and cryptocurrencies

The terms “token” and “cryptocurrency” are very often confused and used as synonyms. This is hardly surprising, as both terms are closely related to blockchain technology, which has been around for a long time but can still be quite difficult for people unfamiliar with the subject.

The main difference between a cryptocurrency and a token is that a cryptocurrency is a means of payment, which cannot be said of a token.

Tokens are created using smart contracts on certain blockchain networks and can serve different functions. There can be an unlimited number of tokens on each blockchain network.

Smart contracts, on the other hand, are special computer programs that reside on a particular blockchain network and automatically (following the IFTTT principle, i.e. “if it happens - do it”) enforce the terms contained in the contract.

Both tokens and cryptocurrencies can be sent within the blockchain network, but the fees for operations performed with tokens (e.g. a fee for sending a token) are covered by a cryptocurrency - a specific cryptocurrency located on a specific blockchain network.

Types of tokens. How to tokenize?

Due to the wide range of applications of tokens, they can be divided into many types that serve different functions. One of the most important divisions is into fungible and non-fungible tokens:

Fungible tokens

Their main feature that distinguishes them from non-fungible tokens is that they cannot be distinguished from others on the same blockchain network. Moreover, they all represent the same value and can therefore function as cryptocurrencies. Among the fungible tokens, the following are also distinguished:

Currency type tokens

As the name implies, they are used for payments.

Security tokens

These tokens could be described as a kind of “virtual securities”. Their main function is to provide security to investors. The security tokens issued are legally protected and represent stocks, bonds or other specific assets that are actually secured. For example, real estate is converted into tokens with the help of security tokens.

Utility tokens

They are used for practical purposes within a specific platform. Utility tokens have specific functions, such as a product or payment function. The term utility token is inextricably linked to ICO (Initial Coin Offering), i.e. in direct line with crowdfunding collections. When purchasing a utility token, the investor transfers money for the development of the project and can then use the purchased tokens and receive various types of products or services in return.

Non-Fungible Token (NFT)

This is a type of token that has become increasingly popular recently. NFT are the exact opposite of convertible fungible tokens, as each one is unique. They are used as certificates of authenticity, e.g. for works of art, and to track the movement of certain products in the supply chain, e.g. in the luxury goods industry, which prevents counterfeiting.

What can be tokenized?

The examples of the use of tokenization could actually be continued indefinitely. In the vast majority of cases, it is used in business because it enables its digitization. The most practical examples of the use of tokenization can be described using the example of various corporate projects.

Enterprise digitization consists in the creation of tokens that are closely associated with a particular project. The process of tokenization, in which a certain value is assigned to the token, can be an irreplaceable tool for automating processes in the company, as well as a method of financing it. So what can be tokenized?

Real Estate

Tokenization of buildings and land is growing in popularity around the world, in part because of the speed of transactions, elimination of middlemen, and security. Real estate tokenization involves issuing tokens over the blockchain network and then assigning them to a specific property. In this way, investors can become co-owners or owners of a particular property by holding its shares in the form of tokens.

Gemstones and ores

Using blockchain technology and a specially prepared platform, it is also possible to identify the authenticity of gemstones or certain forms of ores by assigning them individual numbers. A registered commodity with a digital number can later be identified by verifying its origin, properties and related transactions.

Computer games and virtual items

Swiss company EverDreamsoft developed this idea in collaboration with All 4 Games. The game Spells of Genesis was launched in 2017 and has attracted a lot of interest from both the gaming and blockchain industries, as the items in the game can be stored outside the game and traded on the Bitcoin network using blockchain technology. The creators themselves say, “We believe players should have full ownership of the items they own in the game. Once you acquire certain items, you should be able to freely own and transfer them. Unlike other games, we give you the ability to store your ownership outside of the game’s database and be completely independent. ”

Artwork

NFT tokens have the unique potential to revolutionize the art market, both tangible and digital. Each NFT token is unique and represents a non-exchangeable value, so it can represent a share of the rights to a work of art, making it easy to invest in art very quickly. One of the first examples of the use of this solution is the painting “14 Small Electric Chairs” by Andy Warchol. In 2018, 49% of the token shares of the painting were auctioned on the Maecenas platform. The auction was conducted using cryptocurrencies and smart contracts, and over 800 people participated!

Some of the most interesting projects using NFT tokens are:

OpenSea - It is a selling platform similar to eBay where you can create, buy and sell NFT tokens. OpenSea was founded in 2017 and is currently the leading market for NFT artwork and other collectibles. We can buy any goods there that can be converted into a token including: computer graphics, music, virtual items for computer games, etc. The token can be purchased on the website in two ways. First, it can be purchased by clicking on the “Buy Now” button at the price indicated in the seller’s ad. This method is definitely faster and easier than the second, which usually turns out to be cheaper. The second option allows you to make an offer to the seller, who can review it and decide whether or not to accept it. Of course, our price proposal may be lower than the price quoted by the seller.

NBA Top Shot - In October 2020, the American-Canadian NBA Basketball League officially launched a licensed blockchain app for trading collectibles in partnership with Dapper Laps. The app’s blockchain is based on a platform called Flow. The NFT tokens that can be redeemed in the app include video snippets of the most exciting game moments, statistics on individual players, and information about the history of each token. Limited packages of tokens are issued each week, with the price depending on their uniqueness and the interest of the app’s users.

Are tokens safe?

There are undoubtedly many advantages to using tokens, but many people wonder if storing data in a distributed registry is even secure? In fact, security is considered one of the most important benefits of tokenization. Stability, irreversibility of transactions, and the elimination of intermediaries are just some of the features that affect the security of blockchain technology. For this reason, blockchain is becoming increasingly popular and is being used in many areas of the economy. Moreover, the security of tokenization is also ensured by smart contracts that allow parties to conduct completely direct transactions. For example, if you sell a property in the form of tokens, you do not need to involve a notary or real estate agent. Everything is handled quickly and directly. However, you should keep in mind that each party to the contract must ensure that the private key is properly stored and protected from loss so that the token can act as a guarantor for the transaction.

The potential of tokenization is enormous and certainly not yet fully explored. Tokens are mainly divided into fungible and non-fungible tokens. The most common application of tokens is the digitization of various types of assets, such as physical goods, digital resources, projects, company shares, stocks, or loans.