Digital transformation has been introducing profound improvements across various sectors, especially in the case of digital payments. However, the growth of payment technology has also created noticeable threats to sensitive customer data. As your data passes through various points when making digital payments, it becomes vulnerable. Therefore, tokenization blockchain combination has been historically accepted as a reliable approach for the isolation of data in ecosystems.
Most recently, the applications of tokens have increased in the payments processing industry for storing credit card information without exposing the original data. In addition, the use of tokenization in blockchain has been making news for prospects of converting tangible and intangible assets into digital tokens. So, what does the new age of tokens mean for the future of blockchain and the world? Let us discuss the definition of tokenization in detail along with the value it brings by referring to examples.
What is Tokenization?
The arrival of blockchain has transformed the ways in which we invest in assets. How? Tokenization is the answer you are looking for here! It is the process of transforming the ownership rights of an asset into a digital token. For example, you can transform an apartment worth $200,000 into a total of 200,000 tokens, with each token amounting to almost 0.0005% of the apartment’s value.
Basically, blockchain tokens provide a digital representation of complete or shared ownership for any entity having specific value. The common applications of blockchain tokens are evident in payments and the settlement of transactions among participants. Tokens also provide representation for multi-party ownership for indivisible assets such as artwork or a music video. In addition, tokens also provide an easier exchange of ownership of indivisible assets through a blockchain network.
The tokenization blockchain combination could open new prospects for optimization of business processes, which include multiple partners, and the introduction of new business models. According to the IDC, the global tokenized asset market would reach a valuation of $500 billion. Although you can notice promising opportunities for tokenizing assets on the blockchain, the concept of tokens didn’t start here.
How does Tokenization work?
The intangible assets find existence only according to legal precedents without any physical object for representation. Examples of intangible assets include copyrights and patents. When you want to tokenize intangible assets, it is important to ensure that the asset transfer model of the blockchain network is the same as the real-world transfer model. Intangible assets are easy candidates for conversion to tokens without any storage or shipping concerns. On the contrary, jurisdictional differences could create profound difficulties for transferring tokens representing intangible assets.
Fungible assets are the ones that are replaceable by a similar item. The most common examples of fungible assets include wheat or gold. Converting fungible assets into tokens is easier as you can divide them into smaller units easily. Furthermore, one token could serve as a representative for a group of fungible assets such as a pile of gold. The tokenization algorithm for fungible assets must also include an abstraction layer. In addition, a set of tokens is related to a collection of interchangeable asset components.