What is Tokenization in Blockchain?

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If someone was asked to make one outstanding statement about the working of decentralization and blockchain technology and how it has revolutionized the modern world of finance, then what do you think the statement would be? The most outstanding statement about blockchain technology is the fact that it has provided end users with practical tools to manage their finances in a way that wasn’t possible before.

No Need for a Middleman with Tokenization

Gone are the middlemen, gone are the centralized organizations having every ounce of control at every turn and corner of other people’s finance, and gone are the laborious, time-consuming processing times, all thanks to blockchain technology. There are myriad aspects that could be studied and kind of looked over with the help of blockchain technology, and one such thing is tokenization.

When it comes to the management of traditional assets, it goes without saying that it is an extremely complicated task that consists of various traps and over-the-top kinds of exercises that are futile in some instances and don’t transpire into a job well done. You might require multiple middlemen to work for you in order to make sure that whatever asset that you want to protect and manage is taken care of in the most subtle way possible.

Regulatory Oversight is Crushing Financial Institutions

Apart from middlemen, multiple regulators and other state bodies tackling various operations from these assets are also inquired about. If we talk about specific assets that are centralized and are traditional such as bonds, stocks, forex, land, or property-oriented elements, then it becomes extremely expensive while at the same time time-consuming for the sake of managing them and making them available for active investment or trading in a real-time frame.

On top of everything else, these kinds of traditional assets have extremely complex legal agreements which need to be taken care of in real time to propose the transfer of ownership from one body to another and to tackle other such affairs.

Lack of Transparency in the Centralized Financial World

At times it might become extremely tiresome to be able to track the ownership of those assets and transfer that ownership to a newly acquainted owner. It’s a slow process, with lots of legalities involved, and at the end of the day, it is just not worth it putting in all that hard work, focus, and time to cater to their specific needs. On top of everything else, you would presume that just because a pertaining asset is centralized, it would mean that it is also transparent; most of these assets lack sufficient transparency.

It means that you won’t be able to locate the exact intrinsic value of a dedicated asset which often leads to scams and frauds, and this corrupt nature of this centralized business is just vile, to say the least. There is only one answer to this cumbersome situation, and it is tokenization. It might have its own errors and faults and include regulatory oversight from time to time, but it is an immense improvement over the centralized management system for these traditional assets.

It is kind of the reimagining of every bad factor that has lingered over and has made the experience of each and everyone involved just vile, including middlemen, tracking down the original owners of the assets, tackling the transparency-related issues, and the transfer of ownership from one person to another. To better ascertain the term that is tokenization and how it has evolved with time but more primarily how it has changed the financial world for good, take a look below.

What is a Token?

In all fairness, it is possible that you might be associating a token with either an object or element that has a particular financial or monetary value and is digital in nature. While it does satisfy one version of the definition for a token but in the true depiction of the word ‘token’ and its literal meaning, it can be anything that you want it to be, serving a proper purpose and after that purpose has been fulfilled that piece of paper, coin or any other element that you have adopted as a token needs to be forfeit.

Have you ever been to the circus? There are a bunch of different shows and elements for you to explore, you might want to enjoy the main event, or you would want to stick with viewing zoo animals, whatever it is that tempts you there. For every different element of the circus, there is a different kind of ticket; you can consider that ticket to be a token that gets ripped because you want to enjoy that particular show or event that the token generally represents.

Intrinsic Value

This clarifies the fact that a token can be a piece of paper, it can be an idea, or it can be anything else that you potentially wanted to be, but at the end of the day, for it to be called a token, it must serve a purpose, and it must represent something. Your credit card, for example, can serve as a token that has been indexed into a centralized Ledger containing all the specifics for your financials in it, and it allows you the permission to spend money on stuff under the agreement that you have with your dedicated bank or credit card provider.

Similarly, any token that has been minted on a blockchain environment can be considered a digital receipt for a particular slice of the asset. These tokens, however, are minted digitally, and therefore their presence along with every possible ounce of data is logged immutably onto the blockchain environment that can be auditable if need be.

Evolution of Tokens

It goes without saying that Bitcoin was the first flagship cryptocurrency to have ever launched on blockchain media, having a completely decentralized setup and a peer-to-peer system for the sake of facilitating the transfer of value across the Internet. 2009 marks the achievement of this incredible milestone; the Bitcoin token was created with the shortcomings of the centralized world in mind. You would have to trust someone with your money, the process could be reversed if needed, and all of it was taking place in a completely centralized manner.

Bitcoin changed the game by making the transfer of value from one person to another completely decentralized, immutable, and trustless. All while trying its best to avoid the problems of double spending, preventing the transactions from being copied in a fraudulent manner and duplicating these transactions in a digital fashion. A double spend attack is the biggest racketeer of the centralized financial world where a person is able to spend a particular amount of money again and again if the expenditure of that amount has already not been reported by the centralized financial body.

It means that unless a proper data set has been developed on the centralized financial command, there is just no proof of that amount being spent which allows people to spend the same amount again and again for buying stuff until the system refreshes all this data. This is a huge hiccup that financial companies have to deal with. Other than that, any and all that resides on a centralized line of command could be copied in a fraudulent way, or a digital duplication for that particular transaction data could be made.

Bitcoin has managed to avoid all of that and more by keeping its transactions completely transparent and free from any fraudulent interference. This particular innovation that Bitcoin provides has helped the developers to envision various different use cases for Bitcoin and the technology that drives it.

Launch of Ether

Ether was launched in 2015, and it already marked a great breakthrough in blockchain technology and how it could be customized for the sake of making the blockchain network programmable to serve the greater good of the financial world. Smart contracts, exchange-traded funds, non-fungible tokens, and many such offerings are the result of the same approach taken up by Ether in the coming years.

You can say that this specific approach allowed Ether to become much more than a cryptocurrency and a mere store of value as it provided with other various opportunities to the end user by not only conducting business on the blockchain but taking it up for future investments, digital art, aggregation of business deals in a completely transparent and immutable way along with various other effects of the same nature.

You would be amazed to know that Bitcoin Ether has the highest value and potential within the crypto market both as a cryptocurrency and a token but also as a potential blockchain platform that can be used to develop other various technologies in the crypto-verse.

Development of DApps, NFTs, and More

Another interesting fact that you must be aware of about Ether is that this blockchain platform has been used since its creation for the development of about a thousand or so tokens, each and every one having its own vitality and benefits along with a difference in function and the feature that it supports.

The most incredible difference between a token and cryptocurrency is that a token can be used for a variety of potential use cases. When combined, it can be used to manage your shares in a potential financial element for the sake of managing your property if you have any of your other interferences and interests on the blockchain network, such as with decentralized games and applications.

Use Cases of Tokens

It has already been established that tokens come with a wide variety of use cases, both on a blockchain platform or off one. A token represents something that has an intrinsic value; it has a financial aptitude, and it delivers the fundamentals of having some kind of ownership of a practical asset; a token is not without purpose. To better understand a variety of different use cases for these tokens, you must take into account two different types of tokens that are out there, such as utility tokens and security tokens.

Utility Tokens and their Significance

The utility tokens can be thought of as digital assets that provide their owners access to a myriad of products and services that might or might not be produced by a centralized authority. You can use that particular token as a mode of transfer of value from one person to another.

Suppose you have got your hands on a utility token, and it confirms ownership of the user, which is you, in this case, to a practical financial element out there; it can be a security or a bond or anything having some intrinsic value. You can pass on this ownership to some other user by merely handing them out your rights to the utility token that you are holding in the first place.

It is as easy as that; the very term utility applies to the context of this token being used for something; you can either use it or trade it. You can use a token on a blockchain medium to either pay for your outstanding fees in terms of the transactions that you made or you can use that token for the sake of renting out the computational power of a blockchain element. So in a way, these utility tokens are the proof of ownership for a user towards something out there.

Security Tokens

Security tokens are completely different from utility tokens; these might interpret investment of some sort that has been done into a dedicated element or something that was a bit less decentralized. These have nothing to do with monetary value because these have more legal and emotional standing.

These can represent the investment that you have in a practical business environment, such as a company where you have bought shares, and in return, they have given that many security tokens as proof of that practical investment. These might lend you the voting rights in a practical business organization, and other than these, security tokens could also be pointed as a unit of value, or it can be a combination of all three at once.

Any investment that you have made in stock, forex, or even commodities market could be represented by these security tokens, you might have the investment made in gold bullions which can be mirrored as a security token, and the royalties that you earn from a practical stock that you have had the ownership of for quite a long time can also be represented in the form of a security token.

One catch that these tokens have in contrast to other types of utility tokens is the fact that these have to be kept under check and balance and, therefore, must oblige themselves with the regulatory framework that applies to other securities involving stocks, forex, and the commodities market.

Compliance

Compliance and legal elements of the trade must be taken care of whether it has any involvement with security tokens or not. So in a way, security tokens kind of drift you off from the decentralized nature of blockchain technology. You would be amazed to know that there are companies out there who are holding the charge for the insurance as well as the management of digital securities while sustaining the active use of security tokens and helping the very user or owner of that security token to remain compliant with the latest regulatory framework applicable.

Significance of Tokenization

The prospect of going further with tokenization rests on the shoulders of the user; you might want to consider tokenization if you are a solemn believer in transparency, security, accountability, and proper management of your finances. If this is something that you want or consider yourself leaning towards, then sure, tokenization is for you. The possibilities are limitless; there are things that you can do with the prospect of tokenization by your side that are a little far too impossible to come otherwise.

Let us provide you with a real-world example of the tokenization process and how it is different from the ownership that you currently boast for various assets you have invested your money into. Whenever you buy a stock, you are actually giving a chunk of your money into that proper element, and in return, you are getting a digital receipt that merely says that you have this much share in that particular stock, and that is about it.

It is more of a ‘trust us’ process, and the digital receipt is kind of worthless because you directly don’t own the products or services of the company whose stock you have bought. With the help of tokenization, you would be able to own the asset in its most intrinsic form minus the legalities and the shenanigans of providing the user with a ‘trust us’ process or a receipt that is of no subtle value.

You don’t have to trust in a middleman or an intermediary to provide you with the services of putting down your money into a delicate asset and then providing you with a digital receipt of ownership; you would own your assets in a direct fashion over a decentralized medium.

To say the very least, this process has changed the game for good; you might be thinking that why one should hover towards tokenization whereas decentralization is present right then and there in body and soul, so why not just deal with the products of decentralization and why lean towards tokenization at all? The answer is immense security, no need for an intermediary whatsoever, and complete transparency for owning the assets in their most intrinsic form.


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