Tokenization

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Tokenization is the practice of representing rights as tokens using the blockchain ledger.

What it is used for

An asset (e.g. a specific car or an abstract design or painting) can be tokenized by creating a unique token associated with it that gets secured on the blockchain. The token represents the assets in the same way the dollar represents goods and services that can be bought with it. Tokenization greatly increases effectivity, accessibility, and liquidity and vastly reduces the red tape.

Physical assets were, in a sense, tokenized by the respective currency of the countries, which made it easier to trade goods and services. The U.S. dollar took the next step to becoming a virtual currency with the abolishment of the Gold Standard in 1971, when President Nixon disabled dollar’s ability to be exchanged for an equivalent in gold. That meant that from then on fiat currency was only valid as long as the government was willing to exchange it for assets and services rendered. Tokenization allows doing the same to the dollar as what dollar did to physical access, providing a much higher degree of transferability, liquidity, security and safety, and so on. Blockchain’s built-in advantages, such as instantaneous transactions (compared to what can take weeks or more), immutability and integrity checks make tokenization a progressively less resistible prospect for many companies today.

How it works

Proactive Investors report:

One of the often presented possible futures of blockchain technologies foresees an opening up of alternative, less liquid or less accessible forms of assets.

Such examples are plentiful, albeit most are at a nascent phase - real estate, unlisted shares, physical commodities, carbon credits, art collections are among just a few that quickly spring to mind.”

The main and most promising direction of tokenization is the launch of so-called STOs. Security Token Offerings are similar to ICOs but they have much stricter rules and governance, which take care of the problems usually associated with ICOs: fraud. STOs can be found here.

Applications of tokenized ownership (tokenized diamond rights)

Improved effectivity aside, when it comes to unique assets, not only is it possible to finalize the ownership using an ID, which can instantly be verified, but also to divide an asset into shares, which can be bought and sold with the same level of security.

Alexei Chekunkov, a member of Alrosa’s Board of Directors, said the company believes that the innovation of blockchain can transform the precious gem industry by making natural diamonds into an investment asset class with wider appeal across “various investor groups, driv[ing] higher demand.

Applications of tokenization in supply chains (tokenized sourcing, verification and governance of precious metals)

Blockchain is not limited to diamonds. Senior VP of Global Industries, Platforms, and Blockchain Bridget Van Kralingen commented on the union of some of the most prominent leaders of the industry (precious metals refiner Asahi Refining, jewelry retailer Helzberg Diamonds, precious metals supplier LeachGarner, jewelry manufacturer The Richline Group, and independent verification service UL) with IBM in order to create Trust Chain:

“TrustChain is the first blockchain of its kind within our industry, designed as a solution that marries IBM’s leading blockchain technology with responsible sourcing, verification and governance by third party organizations, led by UL as the administrator.”

Applications of tokenization in fintech companies:

A cloud-based data solution provider Liason also comments on another application of tokenization, familiar to many users today:

For mobile payments, Apple Pay provides a perfect example of how tokenization works. A customer takes a picture of his debit or credit card using an iPhone. Apple captures the customer’s PAN and sends it to the bank or financial institution that issued the credit card. The bank generates a token and sends it to Apple. Finally, Apple stores the token, not the PAN, on the customer’s iPhone.

Applications of tokenization in tokenized funds

Оne of the very first uses of tokenization was the creation of tokenized funds. The key phenomena here is that investors acquire a share calculated by reference to the assets in the fund, implemented through tokenized smart contracts. Among the first tokenized crypto-currency funds, which have been built using blockchain technology and smart contracts are The Token Fund, Satoshi Fund, TaaS. We believe that these tokenized funds which implement the principles of decentralisation and openness in their activities will become the leaders in the growing market for professional investment management services.

Of the contemporary firms, Tokenbox is one of the most prominent examples of how users can tokenize their funds using a team of professionals and a trusted founder.