Blockchain is undoubtedly one of the top innovations of the century. Among its multiple applications, tokenization is one that has immense potential.
In simple words, tokenization involves replacing a real asset with a digital token using blockchain technology. Also, tokenization is cost-efficient, transparent, and accessible, making it a revolutionary prospect for finance systems. This article looks at a tokenized future’s possibilities, and the challenges involved.
What is Tokenization?
Tokenization involves converting assets or rights into a digital form—tokens. These tokens can be owned, used, exchanged, and transferred by their owner via a blockchain without an intermediary. For example, you can convert assets like real estate, artworks, credit card data, commodities, precious metals, and classic cars into tokens.
With intermediaries out of the equation, tokenization makes trade and commerce cost-efficient. Further, blockchain allows for transparency and smooth data flow. Also, tokenization allows you to create multiple valued fractions out of your asset.
For example, imagine you own a house worth $10,000. You can decide to tokenize your house and split it into 10 tokens worth $1000 each. In this way, you can carry out meaningful exchanges for other assets. For example, if another buyer feels your house is worth investing in, they can buy your tokens in exchange for any other asset. The token you buy could be one that you find valuable. By this way, both parties benefit from the trade.
Roots of tokenization
Tokenization has opened up the possibility of representing real-world assets as virtual assets. The first use case of tokens happened in the 17th-century British empire, where tokens served as alternatives to coins for exchanging goods. Hence, tokens already have an identity as an instrument of goods exchange.
As times changed, tokens found a place in electronic commerce. Today, it can potentially serve as a tool in security protocols for safe payments and the protection of private data. For example, by using tokenization, online users can transfer card details in an encrypted way.
Possible applications of a tokenized future
There are multiple applications and use cases of tokenization, let’s take a look at four important ones:
Tokenization of real estate assets
One of the best use cases of blockchain tokenization is the tokenization of real estate assets. It focuses on creating fractional ownership of assets by allowing blockchain-based tokens. In addition, it involves converting financial instruments, digital assets, and securities into digital assets. You can also know about how blockchain technology is used in everyday life here.
Using the Ethereum blockchain, you can include transaction history and digital ownership rights for digital assets. Other factors that the token can contain include token distribution, asset issuing, token transfer and other regulations. For instance, you can program real estate tokens to allow transfer to certain parties only.
A good example of real estate tokenization is the asset management firm Elevated Returns, based in New York. The company first entered tokenization by completing a deal in 2018. The firm converted the St. Regis Resort in Aspen, Colorado, into tokens worth $18 million over the Ethereum blockchain.
Initially, the firm planned to sell half the shares of St. Regis Resort as a single token. However, the final deal offered 18.9% of shares in tokens.
Tokenization of logistics
Traditionally, the logistics industry relied heavily on the Bill of Lading to ensure proof of ownership. However, it has many loopholes like delivery delays and goods reclamation issues if you misplace the Bill of Lading. This is where tokenization helps.
CargoX is a logistics company that successfully uses tokenization to solve the loopholes in traditional methods. The firm employs an open system called the Smart Bill of Lading or B/L. The system is based on the Ethereum blockchain and works similar to the token system.
In the new system, the carrier first creates a Smart B/L via their application. Then the carrier sends the Smart Bill to the exporter. Once the exporter receives money from the importer, they transfer the ownership of the Smart B/L token to the importer. Once this step is complete, the importer can claim ownership of the received goods as they now have ownership of the Smart B/L. They can show this to the carrier and proceed with delivery.
Non-fungible tokens or NFTs
NFTs, or non-fungible tokens, are one of the most successful examples of tokenization using blockchain. NFTs are non-fungible, which means they are unique in nature. Any person who buys an NFT art gets complete ownership of the piece, which is recorded on the blockchain using smart contracts. Tokenization of artwork ensures that the art stays authentic—even if someone replicates it, there can only be one owner.
NFTs leverage blockchain technology and cryptography to ensure the safe, authentic transfer of digital art. CryptoPunks and Bored Ape Yacht Club are examples of successful NFTs. Get to know the future of NFTs in gaming.
Tokenization in games
Asset tokenization has the potential to raise the gaming industry to new heights while unlocking numerous benefits for gamers. Furthermore, with the help of blockchain technology, new funding initiatives are possible such as tokenized merchandise sales, tokenized contracts, and community sponsorships.
By converting in-game assets into blockchain-based gaming crypto tokens, these would be available to trade on open platforms. Through this, game developers can also make crypto gaming tokens available to investors. In addition, players can transfer in-game NFTs among each other. This further opens the possibility of cross-platform gaming.
Challenges to tokenization
While tokenization promises improvement in multiple domains, it is not without challenges. Some of the major roadblocks to tokenization are:
Lack of regulations
There are no standard frameworks in place for the adoption of tokenization globally. Without that, a uniform procedure across the world becomes difficult.
Security challengeSetting up robust cyber security becomes challenging in the current ecosystem where centralized and decentralized institutions co-exist.
Tokenization is a new domain; it will take time to mature fully. In addition, investors need mass awareness to bring mass adoption of the technology.
Approving and encrypting the system of tokenization to different blockchains is time-consuming. This poses a hurdle to mass adoption and scaling.
As discussed above, tokenization can benefit multiple domains on the global level. However, it is a new concept and requires solutions to many hurdles. But there is no doubt that tokenization has the potential to be a disruptive technology that makes our lives easier. To know more about Crypto and NFTs as a source of exchange, head over to this blog.