The easiest explanation about Token and Tokenization

The easiest explanation about Token and Tokenization

By Roberto D. | CryptoFarm | 1 Jul 2020


We hear more and more often about token and tokenization, but what does it really mean?

Before talking about tokenization, it is good to explain and understand well what a token is.

A token is "the digital representation of a token on a blockchain".

The token is managed by a smart contract which defines a series of rights.

Each token can represent several things:

  • Possession of real or digital assets
  • Access rights to real or digital goods
  • Voting rights
  • Ability to perform actions
  • Cover roles

To be called a token, it must have some fundamental characteristics.

First of all, it must be non-duplicable, non-censurable and non-modifiable; moreover, it must be managed in complete autonomy and issued in order to avoid double spendability.

It must therefore be the representation of "something" on the blockchain, and it must be UNIQUE.

 

Classification (and differentiation) of tokens

The first big distinction that needs to be made is that between fungible tokens and non-fungible tokens (NFT).

 

Fungible Tokens

Fungible tokens are created following the ERC20 standard. Fungible means that all tokens are identical, that is, they do not differ between them.

They can be cataloged according to their function:

  • Utility token;
  • Payment token;
  • Commodity token.

Token utilities represent tokens that can be spent within a digital ecosystem.

They can be used to buy a good or service, take advantage of an account (you have to imagine the concept of coupons) or perform a certain action.

Another example of fungible tokens are the payment tokens, which only perform the function of a means of payment. This category includes stablecoins such as Tether, USD Coin, Paxos Standard or DAI.

Another type of fungible token are commodity tokens, guaranteed by commodities such as precious metals, gold and silver. Examples of gold-related commodity tokens are PAX Gold, Tether Gold and Digix Gold Token.

The latter was the first example of this type of token. It is guaranteed by physical gold which is located in a vault in Singapore. To contribute to the payment of the management costs of the gold placed as collateral, the owners of DGX pay periodic fees.

In essence, payment tokens are tied to a FIAT currency, commodity tokens to an asset.

A well-known example of a fungible token is the Basic Attention Token (BAT).

BAT is the token that is distributed through the open-source Brave browser and also here on Publish0x. Brave's goals include rewarding users. In fact, a small percentage of the income from advertising is destined for users who can decide whether to withdraw it or automatically donate it to the creators of the contents.

BAT introduces a new way of advertising: rather than paying for the advertising platform (for example Google or Facebook), the end user who sees the advertising is paid directly. All of this happens on the Ethereum Blockchain.

According to Brendan Eich, creator of the JavaScript programming language and CEO of Brave Software since 2015, this system guarantees more transparency in the distribution of money and information, dividing profits between content creators, the Brave platform and partners.

 

Non-Fungible Tokens (NFT)

With the birth of the ERC721 standard, non-fungible tokens (NFT) are also born.

The great innovation that brings this standard is the ability to insert metadata within each token, or information that makes it unique and different from the others.

An example of an NFT token may be games like CryptoKitties: an Ethereum blockchain game that allows users to buy, collect, breed and sell virtual cats. Each CryptoKitty is represented by an NFT token, which makes each cat unique. The one who holds the NFT token is the only one who can decide whether to sell the cat or have it mated. This also gives a value to the "CryptoKitty" as it is unique.

 

What is tokenization

Tokenizing means splitting an asset into multiple digital shares and distributing them to different owners.

This system allows you to divide the ownership or access rights to an asset, through tokens that each represent a well-defined fraction of a specific asset or right.

By connecting any object to non-fungible tokens, this becomes manageable and negotiable outside the normal platforms in which it is used.

 

Examples of tokenization:

For example, the STO (Security Token Offering) represent a huge innovation in the financial sector. A Security Token represents a share of a company, therefore, the company in question can decide how to distribute the profits to the various holders of the token, in a completely unilateral way. The token holders would therefore be in the position of being shareholders of a certain company.

Other examples of tokenization are digital art and real estate.

Tokenizing works of art and real estate would bring great advantages in both sectors: the certainty of the origin of the work for digital art, greater flexibility and capital inflow for real estate.

Even in the world of sports, many teams are taking steps to integrate blockchain technology into the sports arena. The recent partnerships of football teams like Barcelona or Juventus.


In the coming years, tokenization will surely bring about huge positive changes in many sectors. This will only be the beginning of a great revolution that will allow a massive adoption of the blockchain and cryptocurrencies.

 

I hope that the difference between token and tokenization is clear, this type of technology brings the blockchain, which has always been seen as something "not tangible", in the real world. This can really change things.

Thanks if you got here and that's all for today, thank you very much and see you next time!

 

 


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Roberto D.
Roberto D.

Born in Italy, I live in Italy, passionate about cryptocurrencies since I discovered ethereum in 2015 Telegram channel: https://t.me/dumbwaystoearn


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