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. It probably still sounds very vague to you, but we explain everything about tokenization in this article.
What is a token?
But first, it's important to have a good understanding of what a token is before we can explain to you what tokenization is. A token is a digital asset that is issued on the blockchain
. It can also be redeemed on the blockchain. Such a token has a price that is variable and is subject to the demand a supply of the token.
A token has several characteristics:
- It can be created by any user.
- It can be customized by the creator for decentralized use. So, for example, it can be a right to use, a right to vote, copyright, a share in the company, etc.
- It can be transferred from user to user without duplication and without the intervention or consent of a third party, such as 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. These are the fungible tokens and non-fungible tokens (NFT
). There is a big difference between these tokens. A fungible token is a token that has no unique value. Each fungible token is the same as the others. Thus, if its value increases, the value of all tokens increases.
A non-fungible token is a token with a unique value and thus differs from all other tokens. This allows the value of one non-fungible token to increase, while the value of other tokens decreases. This has the advantage that non-fungible tokens can be seen as collectables. This is also why it is widely used by blockchains in the gaming industry.
What can you use tokens for?
It is important to understand what a token can be used for. In general, tokens have those different types of user functions:
Token as a means of payment
In the same way as other cryptocurrencies
, the token can be used as a medium of exchange during transactions. Therefore, you can trade with tokens on a crypto exchange. Because of this, many people confuse a token with a cryptocurrency. We will explain the difference further in this article.
The use of the security token allows a company to increase its capital by freeing itself from the many restrictions and regulations imposed by the stock market and more traditional methods of financing. Thus, a company can sell tokens to raise capital. A token is then equivalent to a share in the company. However, issuing tokens is much easier than going public.
A utility token allows a company to sell its products or services in advance. Its value will fluctuate based on supply and demand. By keeping a portion of the tokens originally issued, the company will get richer as its products/services are used more and more. This is because the value of the tokens will also increase.
What is tokenization?
Tokenization, also known as tokenizing, is the conversion of an actual asset into a digital asset (the token). Suppose someone has a painting of Vincent van Gogh with an estimated value of $20,000. The owner could tokenize the painting. He will then sell 100 tokens all worth $200.
A buyer of the token will then own 1/100 of the painting. However, if the value of the painting increases, the value of the token will also increase. Token holders can therefore make money with this. When the painting is sold, the token holders will receive their share.
The advantage is that users can now invest in assets that were previously too expensive for them. This makes certain parts of a market more accessible.
Tokenization for crowdfunding
Although crowdfunding has gained a lot of momentum in recent years, investing is still the domain of banks, business angels and other venture capitalists. Tokenization is therefore also an investment model open to all, and in particular to all users who do not have enough funds to invest in stocks or real estate, for example.
To raise funds, a company can issue Utility tokens and thus obtain funding in exchange for access to the product/service when it is implemented. Similar to Crowdfunding, this allows a group of players to coalesce around a project when raising funds.
This model has certain advantages for an investor. Indeed, he gets rights (these are defined at the creation of the token) to a good/service, while retaining the freedom to resell his tokens at the market price.
For the entrepreneur, this system is a blessing. The tokens will not only allow him to raise funds in a completely secure manner but also to benefit from a large number of users. This is because when the product is launched, there are already many people who own the tokens, and can therefore use the product immediately. This ensures that the product can become very large much faster. And that results in more media attention.
We're talking about fundraising. This is also called an Initial Coin Offering (ICO
). It involves a crypto project raising money even before they have actually developed the project. With the money raised, the team can actually start realizing the project. However, it can be risky to invest in an ICO, because you don't know if the project will actually be realized.
Other user functions for tokens
Because a token comes in different forms, it can also be used for different purposes.
Exchange loyalty points with other users
Until now, loyalty points were used within a closed circuit within a company. Think, for example, of stamps from Walmart. Customers can collect them and use them to get free products or discounts.
Now let's imagine that a user's loyalty points are tokenized within a company. This person will then have the choice to use their tokens to buy at a lower cost or to give/sell them to a third party, without any agreement from the company.
For the company, the benefit is considerable. Let's take the example of the "Miles" system set up by airlines. Someone who is not a customer can then acquire cheap "Miles" in the form of a token. This is an excellent opportunity to attract new customers.
Transfer of a business
Tokenization can also be considered at the time of transfer of a stock or bond.
For example, a company can tokenize shares. Users can then buy tokens, and also resell them to other parties. Subsequently, token holders can also earn money (dividends) in the form of new tokens. Because it is much easier to buy tokens than shares, this market will suddenly become much more attractive and accessible to the common man.
Tokenization, therefore, has significant benefits for both companies and the end-user. The change is big that we will find more use cases for tokens in the future. So, it could have a big impact on our economy.