Web 3.0 technology seeks to synchronize every part of our lives with the blockchain; before the digital revolution, all forms of assets were physical; if you wanted to make a purchase, you had to spend cash; if you wanted to communicate with your loved ones, you had to send a letter through the post office; if you wanted to take a photograph, you needed a camera with film rolls that are manually processed to get a result.
However, with the rise of digital technology, things have pretty much changed; you can now make money transfers without seeing or touching cash, send emails, take clean photos on your mobile devices, and do so much more.
Web 3.0 technology seeks to take this technology even further via tokenization.
What is Tokenization?
Currently, digital technology works excellently for divisible assets but is not optimal for indivisible assets. For example, if you wanted to buy the famous Mona Lisa painting today, you would need to shell out about $900 million (which may be a figure too high for any interested buyers); therefore, in the absence of a single person willing to pay the full $900 million amount, the purchase cannot be executed.
Of course, you could argue that 2 or 3 people could pool funds together to own the asset, but then, you would also agree with me that all parties here MUST trust each other; without adequate trust, they won’t pool funds together to co-own a single item.
Tokenization solves the problem with indivisible assets (like the Mona Lisa painting); hence, several people who don’t even know each other can buy a piece of Mona Lisa; how?
Tokenization is the process of transforming real-life, indivisible assets into digital blockchain tokens, making them divisible such that each fraction of the asset can be individually owned and traded.
Going further with our Mona Lisa example, if the painting is tokenized into 100,000 units, each of the tokens will be worth $9,000. Hence, if I acquire 5 Mona Lisa tokens at $45,000, I could sell them off in the future for a profit or loss, independently, without having to consult each of the other Mona Lisa token holders. Similarly, every other Mona Lisa token holder has exclusive rights over their acquired tokens.
What Is A Token?
To put it simply, a token is an entity that adequately represents data in an entirely different form; for example, if you were playing a real-life simulation game such as Call of Duty, you have an in-game character that represents you and executes all your actions on the gaming stick; so, when you shoot, the in-game character does the same.
More accurately, a token can be represented in the digital banking system, which allows you to own some money that you can view, send, and spend from your phone; however, there is no physical cash – not even a picture. Instead, your entire holding is represented with digits in a mobile app that you can spend similarly to the hard cash you deposited in the bank.
Basically, tokenization allows ease of operations, increased security, and other benefits; when combined with blockchain technology, tokenization opens a new series of opportunities for real-life applications.
Types of Tokens
Tokens can be classified into two different categories:
1. Classifying tokens based on their nature
Tangible Tokens: The term “tangible” implies something that can be physically held; for example, when playing in a casino, “chips or tokens” are used in place of actual fiat currency; in the end, the winner can exchange their chips for currency before leaving the casino.
Intangible Tokens: Of course, intangible tokens cannot be physically held, they are digital in nature, and if they are blockchain tokens, they are stored in blockchain wallets; however, they can represent real-life assets.
Intangible tokens may either be fungible or non-fungible, which helps users to identify if a token from one collection is equal to another token from the same collection. For example, the “Mona Lisa token” used in the earlier example if each of the 100,000 units is equal to each other; hence, anyone with a Mona Lisa token can easily exchange it with any random Mona Lisa token because they are valued equally.
Conversely, if the Mona Lisa token was non-fungible, then the tokens cannot be directly exchanged for each other because one is more valuable than the other; perhaps, the person who holds the tokens that unlock the “eye” would have a more valuable token than a holder who owns the tokens that unlock the fingers.
2. Classifying tokens based on their speculation
Security tokens: Security tokens work similarly to stocks, bonds, and options which are used to represent ownership of assets with a financial value of sorts. Hence, like traditional securities, security tokens are primarily used to hold shares or voting rights in a company. In addition, security tokens on the blockchain are usually tokenized with a unique standard that allows them to remain regulation-compliant.
Utility tokens: As implied, utility tokens allow users on a blockchain network to access services via several methods. Typically, it could be responsible for paying transaction fees, voting on network proposals, buying new assets, etc. Hence, a utility token acts as fuel for the blockchain network; for example, ETH is the token used for all crypto transactions on the Ethereum network, so if you engage in a SHIBA INU transaction or a MANA transaction, both of which are based on the Ethereum network, all your fees will be paid ETH.
Currency tokens: These are tokens created as a means of payment and spending; a good example includes asset-backed stablecoins, where each unit of the stablecoin represents a physical asset in the physical world. For example, a unit of stablecoin USDC is backed with an equivalent of $1 cash in the real world; hence, it is safe to say that the physical $1 note is tokenized with 1 USDC, which is available to be spent as a digital currency.
Applications of Tokenization
More than just painting, tokenization can be applied in several real-world applications, including Real estate, commodities, valuables, companies, etc.
Benefits of Tokenization
- Better liquidity
- Ease of transactions
- Fractional ownership of assets
Challenges of Tokenization
- Poor adoption
- Excess regulation attempts
- Difficulty in integrating some real-life functionalities into smart contracts.
Tokenization is a major application of blockchain technology in Web 3.0 and the future; it is expected that every real-life asset will be represented on the blockchain, similarly to NFTs, making the processes of assets sales and transfers indubitably transparent; however, implementing this will take some time, because, like many other blockchain applications; they involve high-level technology to implement. Nevertheless, proponents of blockchain technology have continued to push several blockchain applications, and with time, the tokenization of real assets will become commonplace.