What is Tokenization ? Getting to Know Basic Terms in the Crypto World

What is tokenization

For those of you who are new or are in the crypto world, of course you have heard the term tokenization. Of course, if this is the first time you hear about it, you will definitely wonder, what is tokenization? In short, tokenization is turning real-world assets into tokens.

Then, what exactly is the tokenization concept? How does tokenization work in blockchain technology? This article will give you a little explanation.

Understanding Tokenization

Tokenization is the process of converting various forms of assets in the real world into the form of a token that can be transferred, stored, and recorded in blockchain technology. Tokenization can also be regarded as a form of conversion of a value owned by a certain asset to become a token.

These tokens can later be traded or transferred to other parties in the blockchain system. Thus, the token creator can benefit from the tokens he trades post-tokenization.

How Does Tokenization Work?

For example, you have a land area of one hectare. You need money to finance your business by selling the land you own. However, you still want to be able to own the land and build a business on it.

You can turn your land assets into tokens that you will trade or offer to investors via blockchain technology. You can convert every 1 m2 of your land worth 1 token that you will sell.

That way, you can still manage your land and become the owner of your land. On the other hand, you also get funds from the tokens that you sell to investors. However, you of course also need to give your investors a profit from the results of the business you have built using their money.

This concept also applies to other assets that are not in physical form. You can also sell bills of lading similar to securities, but using tokens. You also use tokens for trading like traditional fiat currency.

Usually, you have to build your token algorithm on the Ethereum platform using smart contracts. If you don’t understand, smart contracts are applications that are useful for automatically executing certain agreements in blockchain technology.

The agreements applied can be in various forms, such as buying and selling, investing, and many more. Usually, these smart contracts have been programmed in such a way that they cannot be intervened by third parties.

Types of Tokenization in the Crypto World

As mentioned in the previous point, tokenization can not only be done on assets that are physically visible, but also on assets that are not physically visible. Broadly speaking, tokenization in the crypto world can be divided into three.

The three types of tokenization are tokenization of intangible assets, tokenization of fungible assets, and tokenization of non-fungible assets. So, what do the three types of tokenization mean? Let’s discuss together.

  1. Tokenization of Intangible Assets

The purpose of tokenization of intangible assets is the conversion of an intangible asset into a token for sale. The intangible assets in question can be copyrights, ownership rights, voting rights, and so on.

Usually, this tokenization model is used by sports clubs, musicians, and some people who have a certain fan base or supporters. Several sports clubs, such as Juventus and Paris Saint-Germain are some of the sports clubs that have used this type of tokenization.

Meanwhile, Portugal.The Man is also one of the musicians who have decided to create a special token for their fans around the world.

However, in doing this tokenization, it is necessary to ensure that the blockchain model system in transferring assets must match the transfer model in the real world. In addition, one of the challenges faced by this type of tokenization is legal certainty, which may vary from region to region.

  1. Tokenization of Fungible Assets

Tokenization of fungible assets has the intention of making assets that can be replaced by other identical assets, such as gold, silver, and so on into a specific token. Usually, these fungible assets can be sorted or divided into a certain number of small tokens.

For example, you create a token to represent 1 kg of gold that you have. This condition is referred to as tokenization of the fungible asset. However, if you want to tokenize a fungible asset, you have to create a layer for abstraction.

That way, you can trade some of your fungible assets to various investors who want your tokens.

  1. Tokenization of Non-Fungible Assets

Non-fungible assets referred to here are assets in the form of goods that cannot be broken down into small parts in the real world. Usually, these assets are in the form of paintings, antiques, works of art, and others.

By using tokenization, non-fungible assets that exist in the real world can be broken down into a certain number of holdings on blockchain technology. Thus, people can own non-fungible assets, but the ownership is realized in the form of tokens.

To tokenize non-fungible assets, you as an asset owner need to create a digital signature that cannot be modified by other parties. So, the tokens that will be traded must be digitally signed so they can be uniquely owned by each investor. In simple terms, you can sell shares of a certain object.

Pros and Cons of Tokenization

Tokenization has advantages compared to buying and selling legally in the real world. Usually, buying and selling assets in the real world requires various legal requirements which may be quite complicated for some people. The number of documents and letters that must be taken care of makes the cost of buying and selling assets very high.

By using tokenization, you can sell assets without having to take care of certain documents and spend a lot of money to take care of legal requirements. You only need to create tokens in blockchain technology using smart contracts.

However, this tokenization process also needs to be protected by law. The absence of clear legal certainty is also a drawback for tokenization. However, not a few parties are already using STP or the standard tokenization protocol to create their own tokenization.

In addition, if the token is legal and has legal protection, you must follow the so-called security token offering or STO rules. Thus, you can be free to trade the tokens that you own legally.

If you trade tokens from your assets illegally, you can be subject to criminal sanctions and all your assets will be revoked by the authorities. In fact, you still need to pay compensation to all your clients who have purchased tokens from your assets.

Well, that was a glimpse of tokenization in the crypto world. If you already know and understand about tokenization, you can try investing or creating your own token. Good luck and good luck.


Muhammad Zaki Fajrul Haq
Author: Muhammad Zaki Fajrul Haq

Follow me at @mzfajrulhaq (Instagram) or @ZakiFajrul (Twitter).

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