👋 Introduction
Tokenization is splitting an object into smaller units. In blockchain terms, tokenization is a process where some form of asset is converted into a token that can be moved, stored, or recorded on a blockchain.
Originally, tokenization was used in other fields. It had usage in data security as a means of substituting a sensitive element with a non-sensitive equivalent (which is referred to as a token that has no extrinsic or exploitable meaning or value). Simply put, useless data, otherwise called surrogates, are used to represent sensitive information. It was also used in the payments industry, as a means of protecting sensitive cardholder data to comply with industry standards and government regulations. In essence, tokenization is synonymous with data protection.
Blockchain-enabled tokenization allows for a secure and safe means of digitizing assets on blockchains and it has broadened the use of tokenization across various industries related to blockchain.
💰 Tokenization & Ethereum Blockchain
Just as lots of technological applications have recently been involved in blockchain, tokenization was not left hanging. Ethereum blockchain (the pioneer of web3) gave tokenization leverage to be used to solve some blockchain advances. It became easy to represent an existing asset on a blockchain linking the characteristics, economic value, and rights associated with these assets. It made representing a smaller piece of an asset on the chain easy and made access to wealth flexible. Anything can be tokenized with usage ranging from venture capital funds and bonds, to commodities and real estate properties, even to exotic assets like sports teams, racehorses, artwork, and celebrities. For example, a football club that is going to be sold for $1m can be tokenized into 1,000 pieces with each token representing about 0.1% of the asset, such token holder can be said to own 0.1% of the football club.
There are two types of tokenized assets; fungible and non-fungible assets. Fungible assets are objects such as money or a commodity that may be replaced by another equal part, which means they are capable of mutual substitution. They are assets that are recognized as a means of exchange for goods and services by financial institutions. Non-fungible assets, on the other hand, are unique digital identifiers that cannot be copied, substituted, or subdivided but are recorded on a blockchain. Tokenization has much importance for the non-fungible tokens, as a result of ERC. ERC-721, which is a non-fungible token standard, allows developers to tokenize ownership of data within a smart contract on the Ethereum blockchain. The whole process allows assets or items to be digitized on the blockchain, and with time the blockchain becomes congested, and the fee per transaction is high.
There was a need for improvement, and sensing that need, Witek Radomski the co-founder of Enjin developed ERC-1155 which allows for an infinite number of both fungible and non-fungible items to be deployed through a single contract. It makes transactions cheaper and more efficient as it reduces gas fees, making it an affordable and approachable way to mint non-fungible assets and even fungible assets.
âš’ Tokenization Use Cases
With the help of tokenization, the digitized future is even closer. Tokenization will be one of the major factors driving the digitization of physical assets and even our imaginations. From real estate to logistics and even Art (NFTs, which are the trend now) are all going to be on the blockchain for optimization and smooth running. Non-fungible tokens (NFTs) are the biggest use case for tokenization in recent times. The total market cap for NFTs this year is about $35b and it's estimated to reach $80b by 2025.
👀 Tokenization Pro’s & Con’s
The quest for decentralization is the major reason tokenization came into play in the blockchain industry.
The advantages of tokenization include:
The ability to own a smaller piece of a huge or expensive asset.
The cost of transaction is reduced and increased transaction speed is achieved.
It protects the privacy of users and ensures their safety.
Transparency, since it happens on the blockchain.
Disadvantages of tokenization include:
The advancement in technology has also led to some loopholes which have encouraged hacking in most cases.
I believe blockchain technology is still in its nascent stage and with time the issue of hacking in blockchain could be solved.
Another major issue has been regulations from government authorities, which is a stiff-necked problem for some projects.
👉 Conclusion
The token ecosystem is going to get rid of the need for a centralized operator for day-to-day transactions. The essence of Blockchain and Decentralization is to give people the power to control their information on the internet and Tokenization is one of the agents ensuring it's a reality. This disruptive technology has the centralized financial system's legs shaking but there are still issues that need to be addressed to make the tokenized future a reality.
Written by: Nathan-klife