What Is Tokenization on The Blockchain?
The word "Tokenization" itself is self-explanatory. It refers to the method of breaking down something into smaller chunks. But in the case of Blockchain, it refers to breaking down ownership of something into a digital token coded on the Blockchain. These digital tokens are cryptographically converted into unique values called Crypto tokens. They save the unique information as alphanumeric tokens by passing every token through a cryptographic function. This makes sure each token is unique.
Blockchain, the development platform, provides additional benefits like security, immutability, decentralized authority, and transparency. Moreover, it enables information and value to be transferred, stored, and verified efficiently and securely.
By tokenization, you can transform indivisible assets into transactional forms. For example, if you want to sell the famous painting Mona Lisa. You need a buyer with millions of dollars to buy it, but with tokenization, you can sell $100 tokens for Mona Lisa to 10000 people. This makes it easily accessible by a large group of people and transferable with a single click because of its digital nature.
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. You can tokenize any asset that can be owned, has value to someone, and can be incorporated into a larger asset market.
Types of tokens
Tokens can be classified broadly on two bases.
Based on Nature
Based on Speculation
Benefits of tokenization
Here are the following benefits of tokenization
The primary benefit of Asset Tokenization is enhanced liquidity. Traditionally the market of private assets is not available for trade. As a result, buyers and sellers take more time to find and trade and spend lots of time doing business with each other, and there is no law or contract to safeguard these transactions.
But, with asset tokenization, this process becomes smoother and streamlined. It uses Blockchain to trade and safeguards every transaction. As a result, anyone can buy and sell their tokens quickly without any hassle. This encourages high-net-worth individuals and agencies to invest in privately owned assets and securities.
Tokenization itself was made by keeping accessibility in mind. When a high net worth asset gets tokenized into minimum possible amounts of tokens, it is made available to a bigger audience for investment. It cuts the minimum investment period and amount. Furthermore, Blockchain ensures security and risk by making private companies and assets available for trade, the same as any public company.
Tokenization involves the most transparent technology of Blockchain and is abided by smart contracts. The token-holders rights and responsibilities are embedded in the contracts that define token attributes and records of ownership. This makes every transaction crystal clear and adds transparency to the whole process.
Blockchain gives tokenization some inherent benefits. One is immutability; we all know that data stored on the Blockchain is immutable. Once a transaction is stored on the chain, it stays there for eternity and cannot be changed, deleted, or corrected. It ensures that the asset information and transaction records are accurate without interference from any central authority.
Smart contracts and the immutable nature of Blockchain have reduced the number of intermediaries required in a transaction. Furthermore, Blockchain itself is a decentralized entity run by its participants.
Cheaper and Faster Transactions
The use of smart contracts in transactions automates a significant portion of the process. This cuts intermediaries out of the system and requires no administration effort. Hence, this result in faster and more cost-effective transactions.
Challenges with tokenization
Every nascent technology goes through a phase of rejection and adoption. Tokenization is no different. As we discussed, tokenization is free from third-party interference, but its adoption is not free from regulatory challenges posed by the government. Blockchain has a borderless nature and offers several opportunities for businesses and individuals. At the same time, countries haven't developed standard regulations that would apply in different jurisdictions. As a result, blockchain projects with crypto tokens encounter many regulatory hurdles as governments scramble to figure out how to react to the unprecedented nature of this new technology.
Additionally, digital tokens also struggle to tether their value to their underlying assets. For example, if 100 people own the Mona Lisa, who takes care of the original Mona Lisa painting? Though decentralization allows trustless value transfers, physical asset tokenization needs some degree of centralization and governance