The world of digital currency is evolving with new terms and concepts. If you want to invest or gain knowledge in cryptocurrency, you must be familiar with the process of tokenization. This article provides deep knowledge about tokenization for both investors and beginners.
What is meant by the term tokenization?
In terms of digital currency, the term tokenization refers to the process of transferring assets into digital tokens. For instance, you can tokenize a piece of land against its fiat currency value. The tokens are represented in a blockchain system that depicts shared or sole ownership.
How does it work?
The definition of this process clarifies how this process works. For a better understanding, assets are divided into different types, which are explained below:
- Intangible assets are the ones having no physical existence. Such assets are identified when they are sold or contracted, for instance, trademarks, copyrights, software, licenses ,etc. Tokenizing such assets is similar to transferring worldly assets.
- Fungible assets are defined as assets that have a replacement, such as precious metals. It can be easily converted into tokens by fractionating them into tiny portions. For instance, one pile of gold can be transformed into one token.
- Non-fungible assets are the ones that cannot be divided for tokenization. Therefore, it is converted into small digital assets which can be wholly owned or owned by multiple people. One example of a non-fungible asset is real estate.
What are the types of tokenization?
There are three types of tokenization which are explained below:
- Security tokens: These tokens are represented by business owners who use blockchain technology to share ownership.
- Utility tokens: These tokens enable the users to work on a specific network. They work in a particular blockchain ecosystem.
- Cryptocurrencies: Digital coins or money is termed cryptocurrency. The assets can be tokenized into digital currencies. Every currency is traded on its specific platform, such as Bitcoin (BTC) on the crypto trading robots.
Why are assets converted into tokens?
The assets are converted into tokens to increase their security. The sensitive data is protected while keeping the business ongoing. It is different from encryption as it allows the business to continue, whereas encryption stops further activities. Tokens, once created, are not reversed.
What is detokenization?
Detokenization is the reverse process of tokenization, where tokens are converted into physical assets. It can be carried out only by using the original method and not any other means.
What are the uses of tokenization?
The digital tokens can be used in the following ways:
- Real Estate: Because of the significant business size, the investors can divide and own the property. Property utilization is among the prominent utilizations in a tokenized market.
- To own a fraction: Tokenization can be used to share a big business and hold a little or more fraction of it.
- Contracts: The set of information can be stored by tokenizing the contracts. It is also used in functionalizing the terms and conditions associated with that particular contract.
What are the risks associated with tokenization?
Like all other factors of cryptocurrencies, tokenization also poses some significant risks to the assets. For example, one might not be able to exchange the digital token or the sudden decrease in the rates of tokens.
What are the advantages of tokenization?
The process of tokenization is quite profitable in so many ways, which are explained below:
- Enhanced Efficiency: The use of blockchain technology eliminates intermediaries, which means increased efficiency and reduced cost and time.
- Cost Reduction: The tokenization of assets is a process that requires little to no cost as compared to the division of assets in the traditional market.
- Enhanced transparency: The blockchain network verifies all changes in all nodes and is accessible to every user, increasing transparency.
The assets can be tokenized by considering the advantages and risk factors. One must have deep knowledge about the digital market and currencies before tokenizing the assets. It can lead to security of assets but the decrease in rates can lead to big losses.