You would need to have been living under a rock for the past 15 years to have not heard of the blockchain and digital currency. What began with Bitcoin has now expanded into a universe unto itself. It has now become possible to create tokens for a variety of purposes and means.
We hear a lot about tokenization in this day and age, but what does it mean? What are you even getting into? Learning what there is to know about tokenization, how it works, and the benefits behind it can unlock a plethora of useful information.
What is Tokenization?
Tokenization, specifically asset tokenization, is the ownership of an asset in digital form. These digital assets are “tokens” which are then stored on a secure, decentralized blockchain. These tokens can be anything of value. That even includes fungible, non-fungible, and physical assets and owners can have many different assets stored on one blockchain (through a secure wallet).
As it turns out, tokenization can also be beneficial to businesses and startups as well, as seen by clicking here. Though it seems complicated, the process is actually quite simple and has become a popular way to bolster e-commerce and credit card transactions, generate startup capital, and help to minimize costs without compromising security standards.
Creating a Tokenized Asset
Remember, the goal of tokenization is to allow for the movement and secure storage of assets. It helps to know what the process of creating a tokenized asset looks like.
Choose the asset and token type. The great thing about tokenized assets is that it could be virtually anything. Commodities, currencies, fine art, intellectual properties, equity, etc. You then decide what token standard you want to use, how many tokens will need to be created, what kind of minting mechanism to use, and all of the other rulesets that come with creating a token.
Choose the blockchain. The next part is critical. Choosing a blockchain depends on what kind of requirements you have for the tokenized asset. Do you want it to be public or require permission? Will you need a custom network or will a rollup be necessary?
Verify assets. It is then time to make sure that reliable, secure offchain connections are being used. This can get a bit complicated but these tokenized assets will move from chain to chain, so Chainlink Cross-Chain Interoperability Protocol (CCIP) will make sure that the data remains secure.
Token minting. The minting process will enhance not only security but transparency of the assets, fully backing them by reserves. This provides a cryptographic guarantee, ensuring that unbacked tokens are not minted in the process.
The Benefits of Tokenization
There are three key benefits to asset tokenization: liquidity, accessibility, and transparency. Let’s look at each of them.
Liquidity. In traditional markets, settlement times and costs can become untenable. Through tokenization, liquid assets become even more so. Assets can be represented over nearly an unlimited number of tokens, eliminating intermediaries while also expanding the potential buying pool.
Accessibility. Traditional assets may not necessarily be available to everyone. With tokenizing an asset, that is no longer a concern. Assets can be divided several times over, making smaller “pieces” available to investors who may not have previously had financial access.
Transparency. Information pertaining to record of ownership is easily available depending on the smart contract. These records cannot be altered or changed, reducing the risk of fraud, particularly in industries rife with it.