Tokenization

1 min read

Pronunciation

[toh-kuh-nuh-zey-shuhn]

Analogy

Tokenization is like converting a physical deed to a house into a that can be easily divided, transferred, and tracked. While the house itself remains physical, the rights to own it become digital tokens that can be bought and sold in smaller portions, all with secure records of who owns what percentage.

Definition

The process of converting rights to an asset into a digital on a . Tokenization transforms real-world assets (like real estate, art, or commodities) or rights (ownership, voting, access) into digital tokens that can be issued, traded, and managed on networks.

Key Points Intro

Tokenization bridges traditional assets with technology, enabling new forms of ownership and exchange.

Key Points

Enables fractional ownership of previously indivisible assets like real estate or artwork.

Creates liquidity for traditionally illiquid assets through easier trading.

Provides immutable records of ownership and provenance on the blockchain.

Reduces administrative costs associated with managing and transferring assets.

Example

A $10 million commercial building can be tokenized into 10,000 tokens worth $1,000 each, allowing small investors to own fractions of the property, receive proportional rental income, and trade their ownership stakes without traditional real estate transfer processes.

Technical Deep Dive

Tokenization typically implements one of several standards depending on the asset characteristics: fungible standards (like ERC-20) for identical, divisible assets such as security tokens representing company shares; standards (like ERC-721) for unique items like art or collectibles; or hybrid approaches (like ERC-1155) supporting both fungible and non-fungible properties. The process involves creating a legal framework connecting the to the underlying asset, establishing a corporate structure to manage the asset (often through Special Purpose Vehicles), deploying smart contracts governing the behavior, and implementing compliance mechanisms to enforce regulatory requirements like KYC/AML procedures, transfer restrictions, or investor accreditation. Advanced tokenization platforms incorporate services to automatically distribute dividends or revenue shares and governance mechanisms allowing tokenholders to vote on management decisions.

Security Warning

Tokenized assets exist at the intersection of digital and physical worlds, creating unique security considerations. Even with perfect security, the connection between tokens and real-world assets relies on legal frameworks and that may introduce vulnerabilities or jurisdictional risks not present in purely .

Caveat

While records provide technical , the legal recognition of tokenized ownership varies widely by jurisdiction. The legal enforceability of rights represented by tokens remains untested in many contexts, potentially creating gaps between technical ownership and legally recognized ownership .

Related Terms

Blockchain & Cryptocurrency Glossary

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