Tokenization: What is it?

The process of creating a digital token on a blockchain is known as tokenization.

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With fits and starts, we’re making our way toward the next phase of the internet. According to some, Web3 holds the promise of a new, decentralized internet that is run by users via blockchains as opposed to companies with an eye toward profit. However, it hasn’t been smooth sailing. A significant obstacle was the 2022 cryptocurrency market crash, which was brought on by a number of cryptocurrency failures and well-publicized fraud cases. The public’s interest in Web3 players is growing, and regulators are paying more attention to them.

But cryptocurrency is just one aspect of Web3. The way we trade concepts, knowledge, and money might be altered by blockchain technology, smart contracts, and digital assets, the latter of which are produced through a procedure known as tokenization. There is substantial benefit for early adopters and businesses.

To put it precisely, tokenization is the process of creating a digital token on a blockchain that is usually private. Physical assets like real estate or artwork, financial assets like stocks or bonds, intangible assets like intellectual property, and even identity and data might be considered among these assets. Multiple kinds of tokens may be produced by tokenization. One example of a cryptocurrency that is fungible, or repeatable, is a stablecoin, which is based on actual money. An additional kind of token is an NFT, or nonfungible token, which is a digital evidence of ownership that anyone may purchase and trade.

Tokenization has a lot of possibilities. Experts in the field predict that by 2030, the volume of trade in tokenized digital assets might reach $5 trillion.

Since its debut in 2017, digital asset tokenization has generated a lot of anticipation. However, despite the high expectations, it hasn’t really taken off yet. Slow progress is being made: on its distributed ledger platform, US-based financial infrastructure company Broadridge currently processes over $1 trillion each month.

We’ll go into tokenization’s operation and its implications in this piece.

Which technological platforms enable Web3?

Prior to go further into tokenization, let us clarify a few points. As we’ve seen, Web3 is a novel kind of internet that is based mostly on three technologies:

blockchain. A blockchain is a decentralized, digitally distributed ledger that is present throughout a computer network and makes transaction recording easier. A new block is made and added permanently to the chain whenever fresh data are uploaded to a network. After then, the modification is reflected on all blockchain nodes. This indicates that there isn’t a single point of failure or control in the system.

contracts with smarts. Smart contracts are computer programs that, when certain requirements are satisfied—such as terms agreed upon by a buyer and seller—automatically take action. On a blockchain, smart contracts are created in unchangeable code.

Tokens and digital assets. These are valuable objects that can only be found digitally. NFTs, central bank digital currencies, stablecoins, and cryptocurrencies are a few examples of these. Tokenized copies of assets, such as actual items like artwork or concert tickets, may also be included.

As we’ll see, these technologies work together to facilitate several tokenization-related innovations.

What possible advantages can tokenization offer to companies that provide financial services?

Tokenization, according to several industry executives, has the potential to completely change the way capital markets and financial services are organized by enabling asset holders to benefit from blockchain’s round-the-clock operations and data accessibility. Additionally, blockchain provides higher levels of automation and speedier transaction settlement (via embedded code that activates only under specific circumstances).

The following are some possible advantages of tokenization, however large-scale testing is still needed:

quicker transaction settlement driven by round-the-clock accessibility. Currently, the majority of financial settlements take place two business days (T+2) following the execution of the deal; this is done, presumably, to provide each side enough time to organize their cash and paperwork. Tokenization allows for instantaneous settlements, which in high-interest rate conditions might result in large savings for financial organizations.

Savings on operations, made possible by asset programmability and round-the-clock data access. This is especially helpful for asset types like corporate bonds, whose issuance and servicing are frequently done by hand and are therefore prone to errors. Automating tasks like interest computation and coupon payment by integrating them into the token’s smart contract would reduce the need for manual labor.

democratization of entry. Financial service firms may find it more profitable to handle smaller investors if they streamline manual procedures that require a lot of labor. However, tokenized asset distribution will need to expand greatly before genuine democratization of access can be achieved.

Thanks to smart contracts, transparency has increased. Tokens produced on a blockchain with embedded sets of instructions known as smart contracts have the ability to self-execute under certain circumstances. A smart contract for carbon credits is one example, as blockchain technology may offer an unchangeable and transparent record of credits even throughout their trading.

more affordable and adaptable infrastructure. Since blockchains are open source, they are by nature less expensive and simpler to update than the infrastructure used by traditional financial institutions.