Tokenization is a process of digitizing an asset or a commodity, either physical or digital, representing the value of the underlying asset as a cryptographic token. The bearer is entitled to own the token and consequently a claim to the ownership of the underlying asset or commodity that the token represents. It is possible to fractionalize some tokens and enable joint or part ownership of the asset if required.
Examples of asset tokenization include real estate, art, securities, financial instruments, and loyalty points. But it is also important to note that coins like Bitcoin and Ethereum and other altcoins like LiteCoin and Matic are also tokens, although of a special type.
Tokens can be classified into 2 broad classes namely, Fungible and Non-Fungible. The difference is simple to understand and can be explained with reference to a simple function of the token, i.e., Interchangeability.
- Fungible Tokens are freely interchangeable, for example, one can always interchange 1 dollar bill for another, or 1 bitcoin token is equal to another bitcoin token, there is nothing unique about each, they are of the same value.
- Non-Fungible Tokens (NFT) on the other hand are not interchangeable because they consist of unique attribute values for each token. For example, a non-fungible token representing one’s identity cannot be interchanged with another’s or a token for a car cannot be interchanged with one for a house, and so on and so forth.
Tokens are of different types and how they are used in real-world applications, defines the type of the token. A few that are prevalent currently are security tokens, utility tokens, and store of value tokens.
Tokenization of an illiquid asset leads to the issuance of security tokens; they are primarily distributed via Security Token Offering (STO) and are tradable on the secondary market. These are pure investment tokens, they are required to have an investment contract representing legal ownership of physical or digital assets and are regulated by the regulators, today in the US these are regulated by Securities and Exchange Commission (SEC). Several other legal constructs are applicable from time to time.
An NFT token is a non-fungible token (the second class of tokens). Besides creating NFTs for digital art like cats, kittens, apes, etc, it can also be created for real-world non-divisible physical assets where there is a need to unlock value in illiquid assets.
Another popular concept in recent times has been Decentralized Finance (DeFi), stores of value tokens such as Bitcon (BTC), Ethereum (ETH), and other altcoins are primary constituents of various DeFi protocols along with stable coins such as USDC, DAI, USDT, etc. Stable coins are examples of utility coins and are the other key element of several DeFi protocols.
Utility tokens have applications in many use cases, let us take an example of a receivable (typically an instrument with a future payment date), if a receivable was tokenized one could mint stable coins at the Net Present Value (NPV) of the receivable and use the stable coins to make other payments or enhance working capital.
Yet another industry example of payment tokens is currency tokenization, which once tokenized can be used to transfer or make payments using such tokens. Let us take the example of 1 USD ($), 10 USDs can be tokenized to create 10 USDTOKENS by making sure that 10 USD worth of fiat currency (fiat currency is the real currency we use today) are held as collateral in a reserved account.
Once the tokens are created it can be transferred peer-to-peer or used to make payments in USD. When the holder of the tokens wants to redeem it for fiat currency, 10 USD (TOKENS) or less can be returned to the creator, the creator returns the equivalent fiat amount, reduces that amount from the reserved account, and then burns the token taking it out of circulation.
Tokenization is a process of digitizing an asset or a commodity, either physical or digital, representing the value of the underlying asset as a cryptographic token. The bearer is entitled to own the token and consequently a claim to the ownership of the underlying asset or commodity that the token represents. It is possible to fractionalize some tokens and enable joint or part ownership of the asset if required.
Examples of asset tokenization include real estate, art, securities, financial instruments, and loyalty points. But it is also important to note that coins like Bitcoin and Ethereum and other altcoins like LiteCoin and Matic are also tokens, although of a special type.
Tokens can be classified into 2 broad classes namely, Fungible and Non-Fungible. The difference is simple to understand and can be explained with reference to a simple function of the token, i.e., Interchangeability.
- Fungible Tokens are freely interchangeable, for example, one can always interchange 1 dollar bill for another, or 1 bitcoin token is equal to another bitcoin token, there is nothing unique about each, they are of the same value.
- Non-Fungible Tokens (NFT) on the other hand are not interchangeable because they consist of unique attribute values for each token. For example, a non-fungible token representing one’s identity cannot be interchanged with another’s or a token for a car cannot be interchanged with one for a house, and so on and so forth.
Tokens are of different types and how they are used in real-world applications, defines the type of the token. A few that are prevalent currently are security tokens, utility tokens, and store of value tokens.
Tokenization of an illiquid asset leads to the issuance of security tokens; they are primarily distributed via Security Token Offering (STO) and are tradable on the secondary market. These are pure investment tokens, they are required to have an investment contract representing legal ownership of physical or digital assets and are regulated by the regulators, today in the US these are regulated by Securities and Exchange Commission (SEC). Several other legal constructs are applicable from time to time.
An NFT token is a non-fungible token (the second class of tokens). Besides creating NFTs for digital art like cats, kittens, apes, etc, it can also be created for real-world non-divisible physical assets where there is a need to unlock value in illiquid assets.
Another popular concept in recent times has been Decentralized Finance (DeFi), stores of value tokens such as Bitcon (BTC), Ethereum (ETH), and other altcoins are primary constituents of various DeFi protocols along with stable coins such as USDC, DAI, USDT, etc. Stable coins are examples of utility coins and are the other key element of several DeFi protocols.
Utility tokens have applications in many use cases, let us take an example of a receivable (typically an instrument with a future payment date), if a receivable was tokenized one could mint stable coins at the Net Present Value (NPV) of the receivable and use the stable coins to make other payments or enhance working capital.
Yet another industry example of payment tokens is currency tokenization, which once tokenized can be used to transfer or make payments using such tokens. Let us take the example of 1 USD ($), 10 USDs can be tokenized to create 10 USDTOKENS by making sure that 10 USD worth of fiat currency (fiat currency is the real currency we use today) are held as collateral in a reserved account.
Once the tokens are created it can be transferred peer-to-peer or used to make payments in USD. When the holder of the tokens wants to redeem it for fiat currency, 10 USD (TOKENS) or less can be returned to the creator, the creator returns the equivalent fiat amount, reduces that amount from the reserved account, and then burns the token taking it out of circulation.
