What is tokenization?
Tokenization is the transfer of value from the real world to the digital world that allows you to trade assets fully online. In the traditional form, for example, to acquire shares in a company or purchase real estate, an agreement should be signed in an agreed and legally binding paper form. In the digital world, this traditional form is replaced by a token issued using the blockchain technology. It is a decentralized and distributed database that functions as a growing ledger of records which are called blocks. This ensures security in many areas, for example guarantees the invariability of historical data.
What is a token?
The token is a crypto-asset. In other words, a digital ownership right. Due to the fact that it is stored on the blockchain, it cannot be copied, but the ownership title to it can be transferred. As a result, the token can be traded on the exchange market. A token, as a property right, represents some value. What is this value really depends on our creativity. It can be something traditional, such as a work of art, real estate, gold, a share in a company, but also something non-standard, such as a digital file or land ownership in a computer game.
Finter runs a series of Free Fintech Webinars about tokenization.
Check them out and Sign Up ►
Difference between token and cryptocurrency
The terms “token” and “cryptocurrency” might often be treated as synonyms. Nothing could be more wrong. Cryptocurrency is a kind of a medium of exchange, a certain digital form of money. Tokens, as mentioned above, are a type of digital contracts embodying the value of an asset and confirming its ownership. What these two concepts have in common is the form of their transmission that only takes place over the distributed blockchain network.
Types of tokens
There are two basic categories of tokens – fungible tokens and non-fungible tokens (NFT). Fungible tokens are indistinguishable from others on the same blockchain network. They all have the same value. Among them we distinguish the security tokens that legally represent stocks, bonds and other real-world assets. They can also be used for real estate tokenization. Non-fungible tokens (NFT) on the other hand are the inverse of fungible tokens. Each of them is unique. NFTs are used as certificates of authenticity for e.g. digital works of art or objects in computer games.
What are the benefits of tokenization?
Tokenization opens up many new opportunities and increases the security of transactions. Storing tokens in a distributed ledger is one of the greatest advantages of tokenization. Security is ensured by the use of the smart contracts. Smart contract is a kind of system that is designed for automatic verification and documenting important rights resulting from a digital contract. This eliminates intermediaries, e.g. a notary necessary in the traditional form of real estate sale, decreases costs and reduces the chances of losses caused by fraud.