Tokenization is a revolution in the world of business

21 Oct 2020
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By combining the best in cryptocurrency and classic banking, tokenization is gradually preparing a “new economic order.” What is tokenization?

Due to the development of cryptocurrency and blockchain technology, tokenization is often referred to as a principle that new business models can bring. A prerequisite for tokenization is the dematerialization of an asset, which can have any value, by replacing its physical form with an entry in a trusted book (ledger). This basic principle is not new and has already appeared, for example, in book-entry securities. For them, a centrally maintained ledger, created at a trusted institution (CSD), keeps track of who currently owns it and therefore does not need to be documented on paper.

The availability and security of blockchain technology has allowed the same principle to be widely applied in areas where it would have been impossible to imagine before. This first happened in the case of the virtual equivalent of bank notes. The first tokens were common cryptocurrencies (bitcoins and many others). Later they were supplemented with other attributes that define their use.

Their generalization ultimately led to the so-called intellectual asset – the total book value of a token, which can take any form (physical assets, virtual goods, intellectual property) and any attributes.

Unlike centrally maintained ledgers (ledgers), which in principle should be managed by a trusted authority, the blockchain does not need a central authority. Validity is guaranteed to the same extent by cryptography and distributed processing mechanisms (consensus, PoW). The key advantage of crypto tokens is their autonomy, which guarantees the simplicity of the transactions in which they are involved, as well as the possibility of their digitization and automation.

Low transaction costs

Such a transaction will always be permanently recorded on the blockchain, where it can be repeatedly and independently verified. Thus, if a change of ownership is to be a condition for the subsequent execution of the agreement, an entry on the blockchain can serve as evidence that a transfer of ownership has occurred and fulfillment can take place. The transaction costs of “listing”, that is, creating a token and changing its state, are in principle insignificant in electronic form, and there is also scope for further automation. This can be in the form of rules, implemented as auto-executed smart contracts, that define how a given token can be processed.

Benefits of tokenization

Tokenization offers completely new ways to further manage virtual assets. For example, you have a house. Your ownership can be represented by a single token, the ownership of which you simply transfer to someone else if you want to sell it. But what if you only want to transfer part of your property? You can actually divide the value of a house into multiple tokens, which you can sell separately and independently of each other.

The big advantage is that in this case the token is based on real fundamental value.

Almost like stocks

In fact, this principle resembles the initial issue of shares, which will be undertaken by a company deciding to enter the stock market in order to raise funds for its further development. However, by comparison, the whole blockchain-based process is orders of magnitude simpler and most accessible to almost everyone. This creates opportunities for new financing methods (such as crowdsourcing) and business models based on them. The main advantage of blockchain technology is that it can correct the described transactions in a reliable and indisputable way, even without the need for central authorities. Currently, the widespread use of tokenization is hampered by the existing legal environment or, conversely, the lack of formalized rules, especially in the case of tokenization of physical properties.

Tokens in closed systems

However, for closed systems (private, authorized blockchains) in which a limited community participates (for example, a consortium of firms, a community of apartment owners, a community around computer computer games), the necessary rules can be established by mutual agreement.

The result is an agreement that defines the obligations of the parties and how to resolve possible disputes. In such cases, if the community is large enough to include both supply and demand, a “closed ecosystem” emerges in which private and non-convertible tokens can operate.

Examples are virtual assets that arise in computer gaming communities. For example, you can sell predefined game currencies or trade characters and trained avatars. Another example is the closed marketplace for loyalty programs, where you can earn “loyalty tokens” for purchases and then

promote them in a certain way in the affiliate network.

The solution of token-based programs and blockchain technology will significantly increase flexibility and simplify access for new partners. It will also increase the attractiveness of the entire network for customers (more opportunities to spend non-refundable loyalty points) and for partners (the ability to attract a large number of new customers). This is a new source of income for platform operators through an extensive partner ecosystem.

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