For the layman to own a plot of land in the most exclusive and upscale neighborhoods, like Soho or Beverly Hills, is no longer just an aspiration.
For the layman to own a plot of land in the most exclusive and upscale neighborhoods, like Soho or Beverly Hills, is no longer just an aspiration. The power of blockchain and tokenization can turn any longing for ownership into a reality.
Tokenization essentially means breaking down a big asset or big data into small fractions that are easier to own or manage. Take, for example, a million-dollar property only accessible to the wealthy. The ordinary person couldn’t imagine having a stake in such an asset. However, thanks to tokenization, a large asset can be broken down into several security tokens representing a small percentage of stake in that asset and distributed to the masses.
Most of us sank our teeth into the world of tokenization with NFTs or non-fungible tokens. What made them a hit among people was that they offered people the chance to own a unique virtual asset that cannot have a duplicate copy. Artists from all fields, brands, and games saw a fresh monetization opportunity in minting an NFT. In no time, we had people buying NFTs representing virtual plots, digital artwork, game collectibles, etc.
Beyond NFTs, the scope of tokenization, in general, is much larger. Tokenization can apply to several other fields besides investment and ownership. For example, organizations can implement it to boost data security, maintain records immutably, allocate licenses and certifications, strengthen supply chain management, etc. The question then is, can everything under the sun be tokenized, and what are its implications? Let’s find out.
Tokenization means turning sensitive information, like personal/confidential details or data associated with an asset, into unique cryptographically encrypted symbols. Tokenization adds an extra layer of security in safeguarding the integrity of sensitive information. Therefore, several businesses are already implementing tokenization to ensure the safety of e-commerce and credit card transactions.
However, committing tokenization to blockchain implies transferring a real-world asset on-chain, breaking it down into fractions, and having these fractions represented as tokens. These tokens, of course, contain sensitive information about the asset involved and are uniquely and cryptographically identified. The only difference with blockchain is that the tokens are made live on an unalterable public ledger. Therefore blockchain-powered tokenization can benefit functions where transparency of information is a prerequisite.
Following are some of the benefits of tokenization using blockchain technology:
In traditional markets, businesses have to involve a centralized nexus of intermediaries who control fees and market values if they wish to publicize their stocks or assets. Such a venture increases expenses and often means navigating bureaucratic red tapes. Stocks, represented as tokens, existing on a decentralized blockchain network are already available for public consumption and thus, can exist as frictionless exchange-traded funds.
From traditional assets like commodities, venture capital funds, bonds, and real estate to exotic assets such as artwork, sports teams, fashion collectibles, etc., global brands are using blockchain technology to transform the vision of a tokenized world into a reality.
We have already talked about fractional ownership of assets. For assets, this means increased liquidity. An enormous asset like a property, an expensive car, or a sports team suffers from the lack of an available market since one cannot derive immediate liquid value from these assets. However, fractionalizing these assets reduces the entry barrier to investing in them, thus rendering them more liquid.
A perfect example is the Tesla Token, which represents a stock in Tesla and is pegged to the Tesla Stock Price. The token was launched to allow crypto users to trade Tesla stock at zero commission fee and receive returns and dividends on the underlying share. The tokenization of Tesla stock created a relationship of mutual benefit between Tesla and the general public.
Tokens are committed to smart contracts, which are self-executing electronic versions of traditional contracts. In other words, they execute themselves only when the terms of an agreement encoded into the contract are met. These contracts become absolute and unalterable as soon as they enter the blockchain infrastructure. Additionally, they help businesses automate and scale collaborations and partnership management.
Double-spending, duplicating records, and forgery are common sore spots of data handling. Centralized databases are vulnerable to hacks — read Google Hacking. However, blockchains use a proof-of-work or proof-of-stake model or verify and add new data. These mechanisms make validation a cost-heavy venture and make it infeasible for malicious actors to collude with a network.
Tokens can be classified based on their fungibility. A token representing a share in a commodity is a fungible token because it has the same properties as the other tokens pegged to the item. On the other hand, we have unique non-fungible tokens that cannot have a replica. An example of a non-fungible token can be a ticket to an event with exclusive details such as the seat number, which cannot be the same for two people. Similar is the case of digital artworks or limited edition merchandise that can exist as an NFT. NFTs have opened up investment opportunities to the masses in items like:
In addition to the above, businesses can implement blockchain instead of traditional databases to combat scalping, identity theft, and counterfeit activities and use NFT to:
We have learned so far that tokenization can fractionalize any data or asset that can be owned and reduces the barrier for purchasing such items. Beyond ownership, tokenization can have other real-world implications.
In the world of connected devices, there’s no bar to conducting monetary transactions. With that, we are becoming more and more vulnerable to security breaches. All our sensitive data is out in the open, and it does not take much effort for hackers to penetrate a centralized database and steal all the information. This is where tokenization technology comes into the picture. It replaces sensitive data with unique symbols that are rendered irreversible through a cryptographic hash function and, at the same time, retains the critical information.
Thanks to blockchain, tokens with a unique identifier can represent commodities in a supply-chain environment, such as orders, bills of lading (in the case of shipping), inventory units, etc. These tokens can be assigned to a smart contract to safeguard their usage according to specific terms and parameters. On the other hand, participants can sign transfers, receipts, delivery completion, etc., using their private keys to record everything associated with the product journey on the blockchain.
According to Wikipedia, “the intangible nature of intellectual property presents difficulties when compared with traditional property like land or goods. Unlike traditional property, intellectual property is “indivisible” since an unlimited number of people can “consume” an intellectual good without its being depleted.”
Blockchain and tokenization can revolutionize intellectual property in a way that protects them from being copied or unethically consumed. Intellectual property owners can find fresh avenues of commercializing them by breaking down a large IP into fractions through tokenization and opening them up to the public, who are obliged to pay a royalty for using them.
In its early days, blockchain technology became a global hit because it created the opportunity for using financial instruments without banks and regulatory bodies. With the ongoing development of crypto tokens, stablecoin, non-fungible virtual assets, and the promise of distributed ledger technology in managing extensive data, the scope of blockchain implementation expanded.
Today the world is gradually seeing the effects of tokenization through which any person can own any item with an intrinsic value, regardless of its size or status. Projects are tokenizing assets on the blockchain and listing them on cryptocurrency exchanges for traders. No one goes empty-handed.
The demand for maintaining databases in every field is enormous. Many businesses are in the process of replacing legacy data storage systems with tokens and NFTs-based systems of recording. We can say that blockchain and its byproducts will rule the operational modes of the future when decentralization becomes the norm, thanks to the standardization of Web3. X.LA is working on many exciting things in the web3 space, including tokenization. For more information about X.LA, visit our official website.