Tokenization In Blockchain: A Beginner Guide

As blockchain technology emerged, it gave birth to the tokenization of assets. As a result, it was possible to digitize real-world and digital assets.

Tokenization is the process by which a digital asset is converted into a token. It gets an artificial value, allowing it to be spread out among a number of holders. Learn what tokenization is and how it works. In this post, we will discover examples of real-world applications that bring you closer to understanding this revolutionary new concept in the world of blockchain technology.

This blog will walk you through this concept, and you will understand why it is important to always rely on token audit firms.

What Is Tokenization In Blockchain?

It is the process in which we can transform the value of an asset, like a painting or any share in a company, into a token that “exists” on the blockchain.

We can classify tokenized assets into two categories: Tangible and intangible assets.

Tangible assets include artworks, real estate, gold, etc.; intangible assets include content licensing, voting rights, ownership rights, etc.

Do you know tokenization didn’t begin with blockchain technology?

It began within the financial services industry to protect their client’s confidential information. Generally, there are some steps that this process involves. These are:

  • Modifying sensitive information such as personal data, social security numbers, credit card numbers, etc., in the form of alphanumeric characters.
  • Then, these characters are processed to create a unique token.

However, there are many resemblances between this traditional process and the one that blockchain provides. Today, it is possible to tokenize assets in more than one method in a better and more flexible manner. As a result, people have become more engaged with digital tokens across various platforms and industries.

Tokenization: The Working

Now that you have a decent idea about tokenization let us proceed with how it works.

Traditionally, this process has always been cumbersome. The reason behind this is the immense amount of paperwork and legal documents people had to keep track of. However, in the case of blockchain technology, this is different. Due to the decentralized nature of blockchain, you can easily transfer digital assets without needing any paperwork, making the process much more efficient and faster.

In the case of blockchain, we can divide the tokenization of assets into three asset categories. These include intangible, non-fungible, and fungible assets. To keep your assets safe, it is mandatory to go for a smart contract security audit.

Intangible assets

If you wish to tokenize an intangible asset, then you must ensure that a real-world transfer model of the asset and the network of the blockchain is the same. It is easier to tokenize these assets as there are no concerns related to shipping or storage associated with them. However, there can be some challenges with jurisdictional differences when you want to transfer token that represents intangible assets.

Fungible assets

Fungible assets are interchangeable and have identical values. For example, a dollar bill is worth the same whether it is in New York City or San Francisco. However, cryptocurrencies do not have an intrinsic value to them like fiat currencies – they’re fixed by supply and demand in a market environment.

A fungible asset is any kind of non-divisible item. Coins, for example, are fungible assets because you can divide the dollar coin into smaller pieces until it’s no longer worth anything. Conversely, a commodity like gold is not very fungible because you could never divide it into smaller pieces — one ounce of gold represents an amount, in which case it has some intrinsic value.

Non-fungible assets

Unlike fungible assets, these cannot be interchanged with the same asset, for they are unique.

With the help of tokenization, it becomes possible to break these assets into digital shares that users can trade as per their wishes. Paintings and real estates are good examples of non-fungible assets.

Pros of Tokenization

There is a myriad of benefits that are associated with tokenization. These are some of the most impactful ones.

  • Higher liquidity and accessibility
  • Faster and cheaper transactions
  • Transparency and immutability

Use Cases Of Tokenization

Among the most popular applications of tokenization, these are some of the most essential ones.

  • Tokenization in real estate
  • Tokenization in precious metals
  • Tokenization in the art market

Final thoughts:

Tokenization is a logical progression in the growth of securitization made possible by blockchain technology. Distributed ledgers enable unprecedented transparency, transactional efficiency, and risk control. In addition, it can make previously untradeable asset classes liquid, significantly increasing financial involvement and information efficiency in these markets.