The blockchain technology is promising and is expected to transform most of the financial assets and technological models due to its transparent, immutable and distributed structure. The blockchain technology has brought along with it so many benefits and tokenization are one of them. Blockchain can today inject liquidity into previously cumbersome markets. Let’s take a better look at tokenization.
Tokenization is a process where some form of assets are converted into a token that can be moved, stored, or recorded on a blockchain. This might sound complex in a way. Tokenization in simple terms converts the value of an object like a painting or carbon credit into a token that can be transferred and manipulated on a blockchain system.
For instance, Bitcoin can be said to represent tokenization of computing power and electrical use into a medium of exchange. The aim here is to understand that a blockchain is a platform or system and has a structure that permits trading of items that can’t be easily traded. For example, you can’t trade computing power or electrical use without tokenization. Additionally, it has benefits over traditional paper markets in terms of speed, accountability and security.
How does tokenization work?
The world is full of assets most of which are difficult to subdivide and transfer. Instead, buyers and sellers trade papers representing those assets. However, papers involve a lot of legal agreements which are cumbersome, difficult to transfer and can be daunting to track. Tokenization has made this easier by switching all these processes along lines of Bitcoin but linked to the assets.
Tokenization of assets is limitless but the assets can be grouped into three categories for better understanding.
These are the assets that exist only due to the operation of law and no physical object exists. Examples include copyrights, carbon credits, patents, etc.
In tokenizing these assets, the challenge is to make sure the blockchain system’s model of asset transfer matches with the real world transfer model. These assets are easier to tokenize since there are no storage and shipment concerns. However, there might be jurisdictional differences making the transfers difficult.
A fungible item according to lawyers is one that can be replaced by another identical item. Examples are gold, wheat, etc. these are easier to tokenize because they can be broken down into smaller units easily and a token can stand for a group of them, for example, a pile of gold.
To tokenize these assets, you require an abstraction layer. In fungible assets, a set of tokens are linked to a set of interchangeable asset components. For example, 10 kg of gold.
Tokenization will change how assets are bought and sold by democratizing the process of owning anything. Ownership is slowly taking a new meaning via the blockchain and tokenization.
Tokenization allows real-world, non-fungible goods to be broken down into digital shares which can now be traded fully or in a limited fashion. Non-fungible goods are those which can’t be broken down into smaller pieces in the real world but tokenization makes it possible. Art and real estate are two of the best examples of tokenization of non-fungible assets. Take the physical painting of Mona Lisa. there is only one genuine Mona Lisa painting and the smallest divisible unit of it is the Mona Lisa itself. The picture or poster of Mona Lisa doesn’t have the same value as the genuine painting.
To tokenize this, a digital signature that can’t be modified is introduced. The digital token represents the Mona Lisa painting and it is unique not a copy. The token can also be broken down into subtokens also signed digitally. These tokens can now be sold like shares of the original painting to the public.
Tokenization allows distribution of ownership in non-fungible assets something that can be daunting in the real world.