Deciphering tokenization in the blockchain world

introduction

The idea of ​​tokenization on the blockchain took the world by storm when one such token, depicting a collage, sold for $69 million!

The word “tokenization” has multiple meanings depending on the context in which it is used. In very simple terms, a “token” is a representation of an entity, often referred to as an “asset.” This asset can be physical or digital. With the advent of IT systems, these tokens are created and managed in a digital format. But what does tokenization mean in the context of blockchain and what is the secret behind tokens managed using blockchain technology?

Native tokens in public blockchain platforms

Blockchain technology emerged with the invention of Bitcoin, a platform that enables the trustless exchange of cryptocurrencies. In public blockchains such as Bitcoin, Ethereum, etc., cryptocurrency (e.g. Bitcoin, Ether, etc.) is called the native token of that platform, which has a variety of uses:

• Value transfer: The most common use of this native token is for decentralized exchanges between users on the platform. First, each user needs to create a wallet and purchase these tokens using their fiat currency through a cryptocurrency exchange. The wallet allows the user to send and receive tokens over the blockchain network.
• Attraction: Because public blockchains are completely decentralized, there is a built-in mechanism to validate every transaction and reach consensus to achieve this trustless transfer of value. However, this consensus mechanism requires computing power that must be spent by the validation nodes in the blockchain network. Therefore, the native token is also used to incentivize validators in the form of transaction fees. This ensures that validators have the financial motivation to participate and validate the transactions.
• Prevent attacks: Public blockchains can be accessed by anyone, opening doors for both legitimate and fraudulent users. To prevent abuse, there are costs associated with each transaction that must be borne by the user submitting the transaction. These transaction costs are deducted from the native tokens linked to the user’s account in their wallet. This prevents malicious users from posting fake transactions or generating distributed denial of service (DDOS) attacks. A portion of these transaction costs is used as an incentive for validators.
• Investment vehicle: One of the economic reasons for launching the native token is to raise money through crowdfunding investments. In the cryptocurrency world, it is called an ICO (Initial Coin Offering), which is similar to an IPO (Initial Public Offering) on ​​the stock market. The “coin” here is the native token, the value of which is determined by the gap between supply and demand, as well as the market perception of the functionality provided by the blockchain platform and the potential of its adoption. The price of this native token is usually measured in US dollars and is highly volatile, but represents an attractive investment option for millennials.
• Decentralized governance: This is made possible by allocating a percentage of native tokens to blockchain node operators so that they can vote and collectively decide on the roadmap of the public blockchain network in a democratic and decentralized manner.

Therefore, there is a very specific purpose and use of native tokens in public blockchains, which is quite different from the typical concept of tokenization.

Asset tokenization using blockchain

A digital representation of an asset can be referred to as tokenization, and this representation can be achieved through various mechanisms. Some of the key aspects of this digital representation are:

1. uniqueness – If the same asset can be duplicated and not clearly represented, all other features surrounding that token are vulnerable to misuse and misrepresentation. For example, counterfeit or duplicate representations may enter the value chain, defeating the purpose of creating the tokenized version of that asset.
2. Indisputability – The origin and validity of the digital representation must always be guaranteed.
3. Property – Establishing current ownership of the asset and enabling ownership transfer are also important aspects of token governance.
4. monetary value – If the asset has monetary value, it should be a reliable and effective way to specify and link it to commonly supported digital currencies.

Creating a unique representation of a physical asset is the most difficult aspect, as translating the attributes of a physical asset into a non-duplicatable and repeatable digital representation is not always foolproof. Technology options are constantly evolving, becoming both precise and cost-effective in deriving a unique digital representation of an asset. Once the unique representation of the asset is determined, blockchain becomes one of the best technology options for managing that asset for the following reasons:

• Blockchain provides a decentralized model through which transactions and their associated states are maintained or recorded immutably using a transparent consensus mechanism. Therefore, the token, which represents a physical/virtual/digital asset on the blockchain, can act Source of truth and provide irrefutable evidence of the existence of the transaction, which can be verified at a certain point in time to prove its authenticity and prevent fraud.
• Every transaction submitted to the blockchain is signed by the relevant party, which serves to authenticate and establish the transaction origin of the asset, throughout its entire life cycle. Any changes to the asset state are recorded as a new transaction on the blockchain, making them irrefutable.
• Token ownership on the blockchain is determined by a signed, timestamped entry and a Automatic ownership audit trail Changes are set up as a blockchain as a pure append ledger that manages the historical state change transactions. This feature is useful in resolving ownership disputes and double spending of the same asset.
• Blockchain platforms that support Smart contracts ensure flexibility, Not only is the data structure of the token defined, but a monetary value is also assigned to it. This monetary value can be managed via smart contract logic, just like any other state changes related to the asset’s metadata.
• For blockchain platforms that support a native token, the value of the asset can be linked to crypto tokens. Thus, the monetary value of the asset is pegged to the cryptocurrency value of the native token (e.g. Bitcoin, Ether, etc.). The implication of such an approach is that the asset token is vulnerable to the volatility of the cryptocurrency markets.
• Wrapped tokens is another concept where the base cryptocurrency is tokenized on another blockchain platform that is more scalable, cost-effective and interoperable. For example, WBTC (Wrapped Bitcoin) and WETH (Wrapped Ether) help in cross-chain exchanges as WBTC can be created by following Ethereum tokenization standards and vice versa.

Therefore, the blockchain offers various techniques to manage the token lifecycle, which depends on the type of token created. There are three broad categories these tokens can be divided into:

1. Fungible tokens – Any asset token that can be subdivided and exchanged. For example, digital currencies or cryptocurrencies can be bought or sold or transferred into the nth fraction.
2. Non-fungible tokens (NFT) – Any asset token that has unique ownership and cannot be subdivided. For example, a work of art or a house or car.
3. Hybrid tokens – Any asset token that is semi-fungible so that it has the characteristics of an NFT but can still be shared under certain conditions. For example, a larger property can be divided so that it can have multiple owners

Each token type has specific behaviors and restrictions associated with it, which are enforced by smart contracts on the blockchain. There are several blockchain platforms that have token SDKs (software development kits) that help developers manage the lifecycle of the token from its creation until it is decommissioned or marked as consumed. This ensures decentralized and transparent processing of tokens, making token trading marketplaces based on a public blockchain an attractive proposition.

Summary

Can asset tokenization be managed without a blockchain? A simple answer is yes, as tokens are used to digitally represent an asset. But how reliable or trustworthy is this representation? Can ownership of this token be irrefutably proven? Is the origin and traceability of the token transparently available? Blockchain certainly meets all of these requirements and thus offers a unique value proposition that would delight both start-up-savvy millennials and traditional companies. It is imperative to achieve standardization of token taxonomy and vocabulary so that token interchangeability and interoperability between different blockchain platforms becomes seamless for the end user.

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