A Beginner’s Guide to Tokenization

Dec 14, 2021 | Blockchain, Digital Finance, NFTs

When you think about it all financial matters concern assets of one form or another. And all assets – whether personally or commercially owned – need to be managed, from the initial purchase to storing and reporting on them to any transaction involving these assets. Asset management usually involves lots of legal and accountancy paperwork, which can be timely and complicated.    

Traditional Tokenization  

Traditionally tokenization has been used to obscure complex and sensitive information, to securely transfer it. A Primary Account Number (PAN), Social Security Number (SSN), or even a passport number are all examples of traditional tokenization. Such tokens have little to no tangible value and serve solely to protect the underlying data. A good analogy is casino chips, which can be used to place bets, with one chip able to represent a huge amount of cash, the value of cash has been preserved, but the risk of theft or loss minimized. Tokenization is sometimes confused with encryption, but continuing with the analogy, if tokens are like casino chips, encryption is like a safety deposit box.  

Tokenization on the Blockchain 

Blockchain (a type of distributed ledger technology), is changing how information is stored, transactions are executed, and value is transferred, opening up a whole new world of opportunities for asset management. 

Tokenization using blockchain technology creates a bridge between real-world and digital assets. It’s the process of creating a digital representation of either a digital or physical asset by converting the asset rights (or ownership details) into a digital form – or token – so it can be sent, received, and stored on-chain.  

In practical terms, tokenization converts the value of an object, like a house, dollars, or even computing power, into a digital token that can be transferred and manipulated on a blockchain network. 

How Does Tokenization Work? 

Many assets have traditionally proved difficult to trade, transfer, and subdivide. Often, trades are conducted through papers representing those assets, for example, stocks and bonds. This process tends to involve a lot of legal paperwork, transferring, and tracking complexity. Tokenization on the blockchain eradicates these challenges.  

Once an asset is converted into a digital token, it can be stored, traded, and transferred anywhere, to anyone, instantly. As the ledger is distributed to all parties involved, the ownership of the token can’t be changed or altered by one single authority. 

Tokens can also be split into any number of smaller parts. By tokenizing an asset that would normally be difficult to trade, it instantly becomes easier to exchange, then splitting that digital asset into smaller tokens, can increase its total transferable value. 

So, What Type of Assets Can Be Tokenized? 

Digital tokens can be almost anything that has a perceived value to someone else – the option for tokenizing assets is practically limitless. They can be equal to US$1 or a ticket to enter a competition, or they can be a fraction of an asset. The value of a token doesn’t have to equate to money – it can have value as part of a reward or incentive program – as long as it is transferable. Token holders can choose to exchange their tokens, collect them, or hold onto them to exchange at a later date. It might help to think about frequent flyer rewards as an example – flight miles are converted into digital tokens that can be collected, then used towards the purchase of future flights.  

Let’s take a more detailed look at how tokenization works for three core categories of assets. Intangibles, Fungibles, and Non-Fungibles.  

Intangible Assets 

These assets only exist because of legal clauses, such as emission rights, copyrights, intellectual property, etc. There are no shipment and storage concerns in this category since the assets are typically legal documents. Tokenization of an intangible asset is effectively a smart contract. The tokens are expanded with smart rules and conditions, for example, if a token is sold a percentage of the revenue is shared, or it can be more complex like voting rights within a company.  

Fungible Assets 

A fungible item never changes its core components but is something that can be replaced by another identical item, for example, a kilo of rice, a $10 bill, or an ounce of gold. These assets can easily be tokenized, as they can be broken down into smaller units. The token itself might then stand for a unit of the total asset, for example 1 token might represent a physical gram of gold.   

Non-Fungible Assets 

Non-fungible assets are assets which in the real world can’t be broken apart and traded or sold as smaller units without drastically reducing the original value. Art and real estate are examples of non-fungible assets. Consider Davinci’s “David”, we can all agree that it is more than just stone and would become valueless if it were broken up into rocks. There’s only one statue, and the smallest divisible unit of the statue is one. A photo or drawing of the statue is not nearly as valuable as the original.   

Tokenization allows us to digitally break up non-fungible assets, where we create a unique digital representation (token) of the whole, authentic asset – a non-fungible token (or NFT). NFTs are associated with a single, unique item. Because each token is unique and cannot be replicated, there are only so many available. NFTs can be purchased and traded like collectibles. Think art, music, photography, computer files.  

The token can then be sold like shares. This can significantly reduce the financial barriers people around the globe experience. Just imagine being able to own fractions of real estate 2000km away to generate a passive income – this could help you to redefine your financial future, without needing a hefty upfront deposit or a huge mortgage to benefit investing in a second or multiple properties.  

Tokenization allows for physical, non-fungible assets to be broken up and distributed in the digital world, creating a whole new world and reality of ownership.  

Why is BSV Ideal for Tokenization?  

Blockchain technology is transparent and immutable. The BSV blockchain is built for Enterprise to support the needs and pace of tomorrow. Its low-cost transactions, high speeds, and unlimited scaling potential make BSV the ideal blockchain for tokens.  

A great example of Fabriik’s use of BSV for tokenization services can be seen here.

The collaboration between Fabriik and Transmira’s Omniscape is resulting in the tokenization of real estate in the virtual world, as well as virtual goods and a 3D NFT marketplace. Together, this creates a unique experience where items collected in the digital world can be redeemed in the physical world, and ultimately, other 3D virtual worlds. 

 

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