Tokens, tokenization and Blockchain
In Brief: Blockchain connection and digital assets. Tokens versus assets. What is tokenization anyway?
The tokenization of assets reconfigures businesses, products and services, making it possible to represent values from the physical and virtual worlds.
Blockchain technology’s solution to “double spending problem” has made it possible to transfer ownership of an asset digitally through direct intermediation.
But how do blockchains and assets connect through tokenization and transform the business world?
Connecting blockchain and digital assets
Tokens are units that represent a digital asset on a blockchain, and can serve not only as exchange and payment, but also to portray a physical or virtual object.
A token, therefore, can literally represent anything: a stake in a company, the right to use a service, ownership of a work of art, physical gold, among others.
Tokens versus assets
Tokens are not to be confused with the asset itself. A token is a representation of an asset; it serves as an instrument for its owner to make a claim against its issuance.
Digital assets are everything that exists in digital format and comes with the right to use it. Data that does not have this right is not considered an asset.
Using the classification used by the OECD, we can divide digital assets into two large groups: value-based digital assets and utility-based digital assets.
📍Value-based digital assets
The first group, value-based digital assets, includes digital assets representing any kind of real-world value (digitized assets) and natively digital assets.
1️⃣ “Digitized” assets
These are tokens representing commodities, shares, bonds, real estate, and all those things that can come from the digitization of “things and paper” and be placed in the digital world via blockchain.
2️⃣ “Natively digital” assets
These are other types of digital asset, the best example of which is bitcoin (because it doesn’t exist in the real world in any other form).
📍Utility-based digital assets
This group of utility-based digital assets, which consider the utility of assets, includes those representing institutional liability (such as CBDCs), those representing other value (such as stablecoins) and crypto-assets.
1️⃣ CBDCs
Central bank digital currencies that gained prominence mainly after the 2016/2017 BIS annual report. As the subject is vast and a little beyond our scope here, anyone who wants to delve deeper into it can read a book and an article that cover the subject in detail.
2️⃣ Stablecoins
Another type of utility-based digital asset, these are “utility assets representing other value”, because they represent financial obligations issued on a blockchain, which are guaranteed by fiat currency deposits in a bank or by short-term government bonds held in a custodian. Some stablecoins issued on the Ethereum blockchain are: DAI, tether, busd, USD coin, gemini dollar, terra, paxos standard, among others.
3️⃣ Cryptoassets
These are a class of utility assets, which are very similar to the class of “natively digital assets”, but whose main characteristic is a utility other than monetary (facilitating the calculation of decentralized applications, acting as fuel for transactions, etc.).
What is tokenization?
Tokenization is the process of transforming the ownership rights of an asset into a digital token. For example, you could transform a property (a house, an apartment) worth US$100,000 into a total of 100,000 tokens, with each token representing almost 0.0005% of the value of this property.
Basically, you can use blockchain tokens to represent ownership of “any” digital asset. Although the most common applications of blockchain tokens are in payments and the settlement of transactions between participants.
However, tokens can also represent ownership of non-fungible assets (unique, which cannot be exchanged for another without losing their essence or quality), such as a photograph, a video, a song, or virtual land in the metaverse — which is also known as NFTs.
In this case, tokens facilitate the transfer of ownership of indivisible assets via a blockchain network.
The technology behind blockchain tokens
We implement tokens using smart contracts on the blockchain, also known as token contracts. These contracts are computer programs that help verify business logic and transfer value from one user’s wallet to another.
📍How do you transfer value using a smart contract?
1️⃣ the UTXO model
The first way is by using the UTXO model, which was implemented through Bitcoin’s technology. Many cryptocurrencies use this model. Basically, the UTXO model works by determining the amount of digital currency remaining in a user’s account after a successful cryptocurrency transaction.
2️⃣ the account-based model
The second way is using the account-based model, which was implemented by the Ethereum blockchain. This model works as follows: when an order is placed, validators — which validate transactions on a blockchain network — “deduct” the amount from the sender’s account and credit it to the recipient’s account.
👉🏼 The types of tokens will be the subject of a specific article
Takeaway
Therefore, the tokenization of assets on blockchain can bring new perspectives for the optimization of business processes, even making it possible to reach new markets.
But what about you? Did you know the difference between tokens and assets? Did you know that since the emergence of blockchain technology, it is possible to tokenize absolutely everything?
Knowledge is power! See you soon!
