Digital transformation has brought about a lot of changes in a number of sectors around the world. With the evolution of blockchain technology, many powerful tools, and use cases have been introduced. One of the most important applications of blockchain is tokenization.
It is a relatively new way of tracking, transacting, and representing securities and assets. With tokenization, many of the manual and laborious processes have been automated. Moreover, it helps in reducing the chances of errors and increasing the efficiency of processes.
The application of tokens has been increasing significantly in recent times. Tokenization has the potential of transforming the markets and introducing new product offerings. However, in order to make the most of tokenization, it is important to know the tokenization fundamentals.
In this guide, you will get to know about the tokenization basics, starting from what is tokenization to its benefits and more. Let’s begin!
What is tokenization?
Before going into the details, it is essential for you to understand what is tokenization. In simple terms, tokenization is the process of converting ownership rights of assets into digital tokens. In other words, it takes an already existing function or asset and represents it in the form of tokens.
It is the process of substituting sensitive data with non-sensitive data known as tokens that don’t have any exploitable value or meaning. It stores the original data outside the original environment in a safe and secure manner.
Tokenization is irreversible and undecipherable. When it comes to the purpose of tokenization, it mainly aims at protecting sensitive data while preserving the data for business utility. Tokenization is mostly popular among banks as it enables them to protect sensitive data such as bank account numbers and credit card numbers.
However, they are also used by other financial institutions around the globe.
Benefits of Tokenization
After knowing the tokenization fundamentals, it is important to know the benefits. Tokenization has a long list of benefits to offer. It helps in increasing the liquidity of non-fractionable assets such as real estate. For investors, it means that they can diversify their portfolios and gain access to assets that were previously unavailable.
In order to gain detailed insight into tokenization and its benefits, taking up a tokenization course can prove to be valuable. The tokenization course can help you become familiar with tokenization fundamentals better and in a detailed manner.
Here are some of the most significant benefits of tokenization.
One of the prominent benefits of tokenization is operational efficiency. The token allows streamlining the IT infrastructure and systems to facilitate sharing among different participants without the need for a third party. This, in turn, helps in reducing the transaction cost significantly.
Moreover, automating the manual works reduces the chances of potential inefficiencies. In addition to this, tokenization also automates the process of sending and receiving transaction clearance and settlements, thereby enabling faster transactions.
Transparency is a by default benefit of tokenization. All the transactions on the network are readily accessible to the participants. It helps in the easy identification of ownership of different assets. However, in a number of industries, transparency may not be acceptable for specific use cases.
For instance, transparency can be tricky in the case of the asset management sector. The solution is to leverage privacy-enhancing technologies in order to avoid the exposure of sensitive information.
Reduces Costs and Ensures Better Compliance
As tokenization allows automation of different processes and transparent record-keeping, it helps in reducing costs significantly. It can reduce fundraising costs as well as bond issuance costs. Moreover, by lowering the chances of human errors, tokenization makes it quite easy to manage various compliance requirements. The compliance rules can be directly programmed into the tokens.
Different Types of Assets
The next part in understanding tokenization fundamentals is knowing the different types of assets that one can convert into tokens. It can provide you with a better understanding of how tokenization works and its scope. From the definition of tokenization, it is clear that it converts assets into tokens. However, there are several assets that are difficult to divide or transfer. Some of the major assets that you can convert into tokens are:
The intangible assets do not have any physical representation but exist as per the legal precedents. Some examples of intangible assets are patents and copyrights. In order to tokenize the intangible assets, it is vital to make sure that the blockchain network’s asset transfer model is similar to the real-world transfer model.
The conversion of intangible assets into tokens is quite easy. However, the differences in the jurisdiction may give rise to potential challenges during the transfer.
Non-fungible assets are assets that cannot be broken down into smaller pieces. Tokenization makes it possible to break down the non-fungible assets into digital shares. Moreover, you can then trade those shares completely or in a limited manner.
The tokenization of real estate and artwork also shows that it is possible to convert non-fungible assets into digital tokens.
Fungible assets are the assets that are replaceable by similar items. Some of the prominent examples of tangible assets are gold and wheat. Transforming the fungible assets into tokens is relatively easy. Moreover, a single token can act as a representative of a group of fungible assets like a pile of gold.
By now, you must have gained a lot of knowledge about tokenization fundamentals. The value that tokenization offers to enterprises is the main reason for the increase in the demand for digital tokens. However, apart from enterprises, individual users can also benefit a lot. For instance, individuals can now trade the assets that were inaccessible before in order to meet their capital requirements.
Having in-depth knowledge about tokenization is the key to making the most of its exceptional benefits. In order to explore more about the tokenization basics and dive deeper into the topic, taking up a Blockchain Course is an ideal option. Start gaining more information and explore the future possibilities of digital tokens!