One of the most interesting potential use cases for blockchain technology over time is tokenization. Whether tokenizing something like a rare piece of art or a building, blockchain technology will allow for fractionalization and transparency like never before. Though not their entire purpose, non-fungible tokens (NFTs) will also play a role in tokenization and create a unique aspect of security once adopted..
In this guide, we’ll define tokenization, discuss its advantages, and give you a few real world use cases for it. Let’s jump in.
Tokenization isn’t a new concept that has come about because of blockchain technology. Legacy institutions like banks and financial services have long used tokenization for protecting clients’ private information. This process uses cryptography much in the way blockchain does, but on a less flexible scale than blockchain can (more on this in a moment).
Tokenization itself is the process of converting something, whether sensitive information or a piece of property, into a digital token. In blockchain terms, it’s a token that can be used with blockchain applications such as a utility token to vote on governance proposals, or an NFT that allows you to redeem a reward for example.
Now that we’ve defined tokenization you may already have an idea of some of the advantages it will present in the future, but let’s more clearly define some of the benefits of tokenization.
Increased Liquidity and Asset Fractionality
Though you can’t divide real world tokens that banks and financial services use, blockchain tokens can be divided fractionally. This means that investment assets like rare pieces of art or a Michael Jordan rookie card can be sold fractionally rather than as a whole.
Overall, this opens up the market to many more participants because rather than finding a sole individual looking to spend millions on an asset, groups of people can instead buy fractions of it and still make profit when the asset goes up in value by selling that fraction.
This increases liquidity for a variety of assets, but especially higher end investments that are generally difficult for a retail investor to be interested in due to the high barrier to entry.
Faster and Cheaper Transactions
Perhaps one of the most beneficial aspects of tokenization being combined with blockchain technology is the speed and cost of transactions. You can also cut out a lot of middlemen with these systems.
If you tokenized the deed to a property on the blockchain and sold it there, you’d eliminate the need for a lawyer, banks, an escrow account, and even brokerage commissions. This saves both you and the buyer a ton of money, and the process is all verifiable with proof of ownership being confirmed using blockchain. Which brings us to the next advantage.
Transparency and Proof of Ownership
Tokenizing things onto the blockchain takes advantage of one of the most important aspects of the technology: transparency. Everything that happens on a blockchain is documented on a public ledger than anyone can audit at any time. This means that for tokenized assets, provenance can be verified, ownership, number of sales, number of people that hold it, the list goes on. This is information that isn’t generally available through many legacy processes, at least not in such an easy to find manner.
Real World Use Cases
Though we’ve already touched upon some of the ways in which tokenization could be used in the real world, we’ll give more detailed use cases below.
Tokenizing unique assets in the physical world is one of its most likely use cases. An example of such an asset is real estate. There are a variety of documents and processes within the real estate world, making things complicated for both buyers and sellers of property. The 2008 housing crash was a great example of this as many banks lacked the proper ownership documentation of houses that were being foreclosed.
Tokenization and blockchain technology can solve this by providing organization, tracking, and escrow services for the sale and transfer of real estate (or collectibles). These services can be provided by blockchain technologies underpinnings, dramatically reducing the costs associated with administering the sale of real estate by using tokenization and smart contracts.
Lastly, when the ownership of a home or physical item becomes an NFT or token, it makes it a more liquid asset. The token that represents ownership over a physical item is easier to sell on a digital marketplace than a physical one, and can be fractionalized as well.
Tokenization of tickets or passes to events means no more ticket scams. You can verify whether someone holds a real ticket by using blockchain technology that simply requires the attendee to connect their wallet to an event specific device. This device can then verify if the attendee holds the token that represents the ticket. Furthermore, an NFT token could be used for more VIP access.
Smart contracts and tokenization can combine to create a trustless marketplace where users can buy and sell tickets to events like concerts, sporting events, and more. NFT tickets could even be staked and entitle holders to shares of revenue at the venue, or the VIP NFT could give you backstage access. There are so many possible use cases for tokenization of ticketing.
Voting is a use case for tokenization that is already taking place on many blockchains. Utility tokens such as Uniswap (UNI), Cardano (ADA), and many many more allow users to vote on changes to the protocol with their token holdings representing their voting power. Users can even delegate their voting power to another user to allow more weight to be held by their vote.
If there is a proposal to add a new liquidity pool to Uniswap for example, then the holders of the UNI token would have to vote yes or no as to whether they want it added or not.
In the real world, residents of a town could receive a token to their crypto wallet for municipal elections much in the way they receive their ballots through the mail. This would eliminate lost ballots and help reduce voter fraud, but this is a system that will take some time and a lot of adoption to implement.
Tokenization already occurs everyday with legacy institutions. However, blockchain technology has the potential to completely overhaul the way tokenization works and provide numerous advantages over those legacy systems. It seems only a matter of time before you’re using tokenized assets without even knowing it.