Tokenization technology and the crypto token economy will change the way assets are exchanged and ownership rights are managed. In this article, we explain how asset tokenization works, and list a number of real-world use cases in which crypto tokens add value by solving existing problems more efficiently.
What is asset tokenization?
The process of asset tokenization involves creating digital tokens on a distributed ledger or blockchain that represent any form of assets, whether they are digital or physical.
If this definition sounds too complicated, let us explain it more simply.
Have you ever used loyalty cards? Those paper-based cards on which they give you a sticker every time you buy frozen yoghurt or coffee? Wouldn’t it be great if you could swap those loyalty points from Starbucks to get a discount on your next Ikea closet? This scenario is possible if every single one of those real-world assets were to be bound to a virtual coin, or token. That’s what asset tokenization is all about.
But virtual reward cards are not the only assets that can be tokenized. Every asset under the sun can be turned into a token. Your house can become a token that can be traded on the blockchain. Sooner than you might expect, buying a house from someone can become as simple as purchasing the NFT that represents the ownership of that house, and then the smart contract would automatically pay your taxes and fees.
But let’s not stop here. A house is a right to own a piece of land and everything on it. Therefore, you can tokenize your rights, such as your presidential voting rights, or municipality rights. Can you think on how different Brexit would have been if it was voted over a blockchain? Voting would have been as simple as pressing a button, with each Brit only needing to show up with their wallet, and voilà, their $BRIT token would have made them eligible to cast one vote onto the ballot!
Types of tokens on blockchain
As hinted in the previous section, there are a multitude of tokens in the blockchain, and each serves different purposes. Let’s break them down one by one:
Utility tokens give you access to features or functionalities on the blockchain. They can be rewards for your attention (BAT), GAS coins to pay fees on the network for making transactions, access to services (filecoin)
Security tokens represent a financial security or assets such as a stock, real estate, or car. They can be thought of as CFD’s but on the blockchain.
Payment tokens enable you to make payments. While the use case is simple, some came with promises of anonymity such as Monero, where the origin of the transaction remains unknown thus protecting privacy.
Non Fungible tokens represent digitally something in the real world that is unique. Such tokens usually cannot be exchanged between each other. This is why they are ideal to represent forms of ownership such as unique artworks, in-game items, a domain name etc.
Governance tokens give you the right to vote on the laws that govern a DAO (Decentralized Autonomous Organization). It is essentially a digital representation of your voting right.
How to create a crypto token?
Creating a crypto token is a technical task that would require you to understand the economics and dynamics of a coin. However, there are DIY tools that allow you to do this quite easily.
That being said, here are the steps you need to take to develop your own token:
- Define what the properties of your token are. Total supply, name, logo, etc.
- Develop a smart contract. This will govern the token and will code its functions such as the staking ability, defining if it is immutable or not etc.
- Run a QA on a test chain. Very important to make sure that your code works. It might be safer to hire a company to do a proper audit of the smart contract. This would reduce the risk of hacks, while at the same time increasing the chances of people trusting your coin.
- Deploy to the blockchain.
How do crypto tokens work?
Crypto tokens live in the blockchain, and depending on the type of token, they help and enable some functionality to happen. The value of a token is, like everything else in the world, a function of how much people perceive it as having value.
The US dollar has no value in and of itself, but it is backed by the strongest economy in the world, along with the most powerful military. People argue that tokens are virtual, however, so are the Dollars and Euros printed by the Fed and ECB during the COVID crisis.
Benefits of asset tokenization
Asset tokenization allows decentralizing everything, removing the bottleneck of the middle man. It also makes markets more liquid and interchangeable. Imagine being able to purchase the right to own something by simply buying its token. No middle man, instant, free!
Asset tokenization also provides liquidity to otherwise illiquid and non-fractional markets such as real estate. Imagine buying a fraction of a token that represents a house. That can be a fantastic way of investing in real estate, but without needing the high capital.
We also get better compliance. Banks and hedge funds make OTC deals run by a few people, where millions of dollars are at stake.Combine this with reputation and greed, and you risk having 2008 all over again. Evergrande and GME are proof of that. If however, everything that was happening occurred on a blockchain, cheating will be harder, and compliance will be faster, better and automated. Therefore transparency is also a big benefit.
Last but not least, costs will come down when everything is decentralized with little to no middlemen. A single entity, the central bank and US government, imposes the unique use of the US Dollar on US soil, while affecting its supply at any moment.
In the crypto world, the coin with the most merit and compelling use case will see users flooding towards it and using it. The more usage there is, the lower will the cost be. At the date of writing of this article, Ethereum gas costs are so high that it is encouraging people to use other networks. There is no tyranny of one chain over another.
Why asset tokenization will be the future of ownership
The rise of centralized web services and applications, such as Uber or AirBnB has created a shift in the relevance of assets. Services like these pre-date technologies that allow for decentralized ownership like smart contracts. Asset tokenization is the next logical step that will enable you to actually own or earn from an asset.
Imagine having a digital way to prove ownership to your house, car, boat, art work or any kind of valuable asset. Imagine if other people could purchase your assets or rent it through blockchain enforced smart contracts.
Or even better, you own fractions of such assets and earn income without having to worry about logistics or maintenance.
In a world like this you would be able to exchange assets securely without any middlemen and with lower risk of third party fraud.
The future of ownership is here. It’s only a matter of adoption.
Diana is the CTO of Vestinda.
She’s an engineer with extensive experience in the payments space, passionate about mathematics and artificial intelligence.