The mechanisms applied to tokenization

25.03.2022
The mechanisms applied to tokenization

With rapid development of cryptoindustry, not only digital currencies appeared, but also arose the definition of token – certain asset or thing represented in virtual environment. With the help of such concept, people could mark both material and non-material things as their own, converting them to the token that could be later put into use. So, the process of tokenization basically means ability to monetize or simply digitalise something held in the possession to later use within the blockchain.

Although many talk about tokenization as of new concept, the first signs of it have actually appeared around fifty years ago. When adjusting financial system to the emerging development of technologies, the industry used special encryption for protection of sensitive information about clients, such as social security number, credit card information and so on, and created with the help of alphanumeric characters a digital block that stored all mentioned data and held a certain value. This is quite similar to the principles of tokenization, though nowadays the assistance of blockchain made it possible to move within given blockchain, giving flexibility to the asset with high security level with varying the spectrum of its opportunities.

Which benefits may the tokenization offer

  • Improved liquidity. While any object can be easily tokenized, it is much easier to promote it on the digital platforms for selling, divide or pass the rights for ownership or exchange without much haste and invest in a non-standard way into the things one likes without additional obstacles.
  • Transaction cheapness. Without intermediaries to interfere into the process and charge additional sums for their services, tokenization becomes a perfect tool for reducing time, efforts, expenses for performing the transfer from one user to another.
  • Guaranteed transparency. It is possible to track the transaction history for any token with keeping the high-level security of data about operation details, no fraudulence or information leaks will be allowed.

Being protected by the blockchain and flexible enough to be immediately transferred to other users, tokenization becomes a multipurpose tool for future of financial industry. If applied correctly with further fix of possible inconveniences or established stability, it would become the leading point of presenting one’s ownership over something.

Existing classification of tokens

  1. Security token – embodiment of particular thing with certain value.
  2. Tokenized security – the non-tangible possession with broadened market accessibility to it.
  3. Utility token – thing empowered with opportunity for being put into practical use.
  4. Currency token – the fixed in price asset designed for digital trading.

For now, there are known four main types, but it will not become a surprise if more token varieties show up with the time and further development. The tokenization sphere still has a long way to go before setting the final borders of its opportunities and being well-explored by different branches of application.

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