What is Tokenization?

Tokenization

Tokenization is based on the blockchain and allows real assets to be valued in the digital world. In other words, it involves converting an asset into a digital asset — a token. This makes it easier for both the creator of the token and its users to trade in certain assets. In this article, we explain everything about tokenization.

What is a token?

Before explaining tokenization, it's important to understand what a token is. A token is a digital asset that is issued and can be redeemed on the blockchain. It has a variable price that is subject to supply and demand.

A token has several characteristics:

• It can be created by any user.

• It can be customized by the creator for decentralized use — for example as a right to use, a right to vote, copyright, or a share in a company.

• It can be transferred from user to user without duplication and without the intervention of a third party, like a cryptocurrency.

• It is highly liquid because it can be bought or sold on an exchange platform at any time.

Types of tokens

There are two types of tokens: fungible tokens and non-fungible tokens (NFT). A fungible token has no unique value — each fungible token is the same as the others, so if its value increases, the value of all tokens increases.

A non-fungible token has a unique value and therefore differs from all other tokens. This means the value of one non-fungible token can increase while the value of others decreases. This makes non-fungible tokens suitable as collectables, which is why they are widely used in the blockchain gaming industry.

What can you use tokens for?

Token as a means of payment

Like other cryptocurrencies, a token can be used as a medium of exchange during transactions, allowing you to trade with tokens on a crypto exchange. This is why many people confuse a token with a cryptocurrency.

Security token

A security token allows a company to raise capital while avoiding many of the restrictions and regulations imposed by traditional stock markets. A company can sell tokens that are equivalent to shares, making the process much easier than going public.

Utility token

A utility token allows a company to sell its products or services in advance. Its value fluctuates based on supply and demand. By keeping a portion of the originally issued tokens, the company benefits as its products or services are used more, because the value of the tokens also increases.

What is tokenization?

Tokenization, also known as tokenizing, is the conversion of an actual asset into a digital asset (the token). For example, suppose someone owns a painting by Vincent van Gogh with an estimated value of $20,000. The owner could tokenize the painting by selling 100 tokens each worth $200. A buyer of a token would then own 1/100 of the painting. If the value of the painting increases, the value of the token increases as well. When the painting is sold, the token holders receive their share.

The advantage is that users can invest in assets that were previously too expensive for them, making certain parts of the market more accessible.

Tokenization for crowdfunding

Although crowdfunding has gained momentum in recent years, investing is still largely the domain of banks, business angels and venture capitalists. Tokenization offers an investment model open to all — especially those who do not have enough funds to invest in stocks or real estate.

To raise funds, a company can issue utility tokens and obtain funding in exchange for access to its product or service. Similar to crowdfunding, this allows a group of people to coalesce around a project. For investors, this means gaining rights to a good or service while retaining the freedom to resell tokens at the market price. For entrepreneurs, tokens allow them to raise funds securely and launch with an existing user base, helping the product grow faster and attract more media attention.

ICO

This type of fundraising is also called an Initial Coin Offering (ICO). It involves a crypto project raising money before the project has actually been developed. However, investing in an ICO carries risk, as there is no guarantee the project will be realized.

Other uses for tokens

Exchange loyalty points with other users

Until now, loyalty points were used within a closed circuit inside a company — think of stamps from a supermarket that customers collect for discounts. When loyalty points are tokenized, users can choose to use their tokens for discounts or to give and sell them to a third party, without any agreement from the company. For companies, this is an excellent opportunity to attract new customers who acquire tokens on the open market.

Transfer of a business

Tokenization can also be applied to the transfer of stocks or bonds. A company can tokenize shares, allowing users to buy and resell tokens to other parties. Token holders can also earn dividends in the form of new tokens. Because it is much easier to buy tokens than shares, this market becomes far more accessible to everyday investors.

Tokenization therefore has significant benefits for both companies and end-users. We are likely to see many more use cases for tokens in the future, with the potential for a big impact on our economy.