Digital transformation has been introducing profound improvements across various sectors, especially in the case of digital payments. In addition, the use of tokenization in blockchain has been making news for prospects of converting tangible and intangible assets into digital tokens.
So, what does the new age of tokens mean for the future of blockchain and the world? Let us discuss tokenized meaning in detail, along with the value it brings to anyone in the world.
Tokenized Meaning
Within the context of blockchain technology, tokenization is the process of converting somETHing of value into a digital token that’s usable on a blockchain application. Assets tokenized on the blockchain come in two forms. They can represent tangible assets like gold, real estate, and art, or intangible assets like voting rights, ownership rights, or content licensing. Practically anything can be tokenized if it is considered an asset that can be owned and has value to someone, and can be incorporated into a larger asset market.
The concept of tokenization precedes blockchain technology. The financial services industry has implemented some form of tokenization to protect clients’ confidential information since the 1970s. This process has typically involved the conversion of sensitive information such as credit card numbers, social security numbers, and other personally identifiable information into a string of alphanumeric characters, which are then processed through a cryptographic function to create a unique token.
To some extent, this mETHod bears some resemblance to the tokenization process enabled by blockchain technology. However, while past tokenization mechanisms were primarily designed to protect sensitive data, blockchain-enabled tokenization allows for a more secure yet flexible tokenization of assets that has significantly broadened the potential applications of digital tokens across a wide array of industries.
Benefits Of Tokenization
Crypto tokens enable both information and value to be transferred, stored, and verified in a way that is both efficient and secure. And while asset tokenization has massive implications within the financial services sector, this technology is equally valuable for smaller investors and other individuals who can benefit from more market access and more effective ways to leverage their existing assets. These several user benefits that can be generalized into three main categories:
More Liquidity
Once tokenized, assets can be made available to a much larger audience, which increases market liquidity and removes the “liquidity premium” associated with investments that are traditionally more difficult or time-consuming to sell, like fine art or real estate. Tokenized assets can be designed to be freely exchangeable online and allow investors to acquire fractional ownership of a token’s underlying asset. As a result, crypto tokens can both contribute to the liquidity of existing markets and provide a broader range of investment opportunities to more investors.
Faster & Cheaper Transactions
Crypto tokens allow investors to bypass market intermediaries and other middlemen who are typically involved in the traditional asset management process. This effectively reduces the transaction costs and processing time of each exchange, allowing for a more streamlined and cost-efficient mETHod of transferring value. Additionally, since crypto tokens exist on the blockchain, they can be traded and sold 24/7 around the globe.
Transparency and Provability
Because crypto tokens live on the blockchain, users can easily trace their provenance and transaction history in a way that is cryptographically verifiable. Transactions can be automatically recorded on the blockchain, and the immutability and transparency enabled by blockchain technology helps guarantee the authenticity of each token’s stated history. These qualities enable crypto tokens to achieve a level of reliability that most other digital assets cannot match.
Use Cases Of Crypto Tokenization
There are four main categories of crypto tokens, although the delineations can blur depending on the specificities of a particular token or the platform with which it is tokenized.
Security Tokens
Security tokens embody a particular investment, such as a share in a company, a voting right in a company or other centralized organization, or some tangible or digital thing of value.
In addition to serving as a digital representation of an underlying asset or utility, security tokens can be programmed with an inexhaustible array of unique characteristics and ownership rights. As such, these tokens constitute an entirely new type of digital asset.
Tokenized Securities
It’s important to note that security tokens are not the same as “tokenized securities.” While the two terms are often conflated, a tokenized security serves as a straightforward digital stand-in for its underlying security, and is typically designed to be easily exchanged, aggregated, or used.
In other words, tokenized securities mainly exist to broaden the market accessibility or liquidity of the security being tokenized, without the addition of unique programmed or cryptographic characteristics such as those found in security tokens.
Utility Tokens
Utility tokens represent access to a given product or service, usually on a specific blockchain network. Utility tokens may be used to power a blockchain network’s consensus mechanism, furnish the operations of a decentralized market, pay transaction fees, or grant holders the right to submit and vote on new developments within a decentralized autonomous organization (DAO) or other decentralized network.
While security tokens are primarily used to establish ownership rights, utility tokens are more focused on practical use. Many of the crypto tokens launched via an Initial Coin Offering (ICO) on the ETHereum platform are intended to function as utility tokens.
Currency Tokens
Currency tokens are designed to be traded and spent. Some are based on underlying assets – as is the case with asset-backed stablecoins such as MakerDAO’s DAI and Gemini’s GUSD. However, many others are not based on any underlying assets. Instead, their value is directly linked to their distribution mechanism and underlying blockchain network.
Challenges Surrounding Tokenization
Blockchain projects’ tokens can often involve characteristics common in financial securities but are often not subject to the same regulations as traditional securities. This presents a challenge to both government authorities and blockchain projects trying to balance innovation and compliance. For example in the U.S., the Securities and Exchange Commission is considering officially classifying certain tokens as securities, which would subject those projects to a heightened level of external scrutiny.
Another central concern for regulators is how security tokens will remain tETHered to their underlying assets. If thousands of anonymous investors collectively own a tokenized hotel, how will they determine who is responsible for the hotel’s maintenance and operations? Or what happens if the gold reserves underpinning an asset-backed token go missing?
In other words, while tokenizing digital assets allows for decentralized, trustless value transfers, physical asset tokenization will likely still require some degree of centralization and third-party involvement. As a result, a more mature regulatory environment will likely be necessary in order to achieve the mass adoption of crypto tokens across a broader range of industries.
Closing Thoughts
As a result of blockchain technology enabling any asset or service to be represented and stored on a blockchain, tokenized digital assets are transforming the way we exchange information and value. The ability to democratize access to assets while providing an unprecedented level of online transparency and security is the reason more and more searches of “tokenized meaning” are materializing on the Google search engine.
Thus, there is no doubt as more and more people and governments around the world come to terms with the incredible power and utility of blockchain, the tokenized future is very quickly becoming a reality.
