NFTs & Tokenization: What the hell are they and how do they work?
The technology that underpins tokenization
Tokenization is based on the usage of smart contracts. These contracts serve as agreements between participants on a blockchain. In the instance of tokenization, a smart contract allows a person to acquire your token and get shares of your property by removing middlemen.
Investing in and managing assets, whether real estate, bonds, art, or other collectibles, has historically been a difficult task. This is mainly because managing assets has traditionally required a large outlay of money upfront due to several go-betweens and time-consuming steps. Because of the high cost, entry into this world was nearly impossible for the majority of the world’s population….Until now.
Tokenization provides a new method to digitization, ownership and enterprise rights. Non-fungible tokens (NFTs) seemed to blow up after an NFT digital art collage by, at the time a relatively unknown digital artist sold for more than $69 million. The project, titled “Everydays — The First 5000 Days,” documented many years’ worth of daily sketches by artist Mike Winkelmann, also known online as Beeple. — including the recent US$6.6 million sale of the Donald Trump NFT by Beeple as well. The National Basketball Association allows fans to purchase NFT video clips of your favorite players.
This has also opened new opportunities and made it possible to own collection and other unique assets in a blockchain managed manner.
So…. What is tokenization?
Tokenization in its simplest meaning, is the conversion of actual or virtual assets to digital units that can be purchased and traded. Tokenization removes geographical obstacles and intermediaries, while allowing fractional asset ownership — opening the market for small investors. Nearly every item, from artwork to gold and real estate, may today be tokenized.
Tokenization disrupts how people invest in assets and corporations view the token economy as a method of building new markets and boosting sales. A compound annual growth rate of 19.5% would increase the global tokenization industry to $4.8 billion by 2025 from $1.9 billion in 2020, by 2025.
In virtual gaming tokenisation is now an integral part of the industry. NBA Top Shot was a well-known national basketball association, a crypto collecting company enabling Fans to exchange numerical versions of specific video highlights which have been officially licensed and tokenized. A Dunk NFT from LeBron James sold for than US$200.000 recently.
In the precious metals space, Tokenization is becoming more and more important. Royal Mint Gold (RMG) is a gold tokenisation project supported by the UK Royal Mint.
There is also currency tokenization, with stable coins accessible now that offer the advantages of cryptocurrencies the stability that a fiat currency supports.
How tokenization Works
Tokenization is utilizing tokens to replace cloud-sensitive data in the payments industry. In the area of the blockchain tokens represent physical and digital assets and a value unit in a specific system, such as ownership or voting rights.
Tokenization in the blockchain business has been on the increase, especially in 2021. But the tokenization notion has been around for some time. From the 1970s, tokenization became popular among finance enterprises as a data security method.
These companies have utilized a mix of letters and numbers to substitute important consumer information. To secure the private data of its clients, such credit card details, personal data, financial statements and more, financial firms utilized tokenization.
Types of Tokens
There are two sorts of crypto tokens: utility tokens and security tokens.
UTILITY TOKENS
User tokens and app coins are other terms for utility tokens. They are the tokens distributed during a project’s crowd sale. Utility tokens are a type of currency that may be redeemed in the future. These coins’ value is not derived from any external asset. They are created by businesses for a specific purpose. They cannot be traded on an exchange. Brave’s Basic Attention Token is an example of a utility token (BAT).
SECURITY TOKENS
Security tokens are digital assets that reflect legal ownership of a physical object and may be purchased and resold. Typically, they are given to investors via a security token sale (STO). Security tokens might represent a share in a firm or, in the case of governance tokens, the right to vote on important corporate decisions.
Tokens can also be classified differently depending on whether or not they are fungible.
FUNGIBLE TOKENS
The capacity to exchange one item for another of the same sort and equal value is referred to as fungibility. Fiat money is a fungible asset.
Fungible tokens are simply tokens that can be readily exchanged for one another. They have intrinsic worth, and you may simply trade one token for another in the open market without causing a value dispute.
NON-FUNGIBLE TOKENS
Non-fungible tokens (NFTs) are intended to have a specific value. Each NFT, like a picture, is cryptographically unique, has a unique value, is not divisible, and is not transferable with other NFTs.
A used vehicle is an example of a non-fungible object in the real world.
CryptoKitties — collectible digital kittens that are cryptographically unique and whose validity, origin, and ownership are recorded on a blockchain — were the first to draw public attention to non-fungible tokens. Because each CryptoKitty has a distinct appearance and value, it would be difficult to divide or sell it for other CryptoKitties. One CryptoKitty sold for more than USD $150,000.
NFTs are also rapidly being employed in the fields of art, sports, music, and fashion. For example,Twitter CEO Jack Dorsey auctioned off his first tweet, which sold for 1,630.58 ETH (Ethereum) which is equivalent to USD$ 3,177,902.59 at the time of writing this.
4 Benefits of Tokenization
Aside from the money-making possibilities of NFT for artists and other content providers, here are some other advantages of tokenizing assets:
1) Immutability
In contrast to a typical database, anything recorded on a blockchain is irreversible. A blockchain record is immutable, which means it cannot be updated, altered, or falsified.
Immutability is important for tokenization since it allows you to monitor the asset’s history or provenance. You can track the token’s origin, issue date, ownership changes, and purchase and sale prices through time. This function significantly reduces the likelihood of investment fraud or system theft.
2. Transactions completed more quickly
Smart contracts included in the blockchain finish the tokenization process. This means that certain parts of asset purchasing and selling that would have taken days or weeks in the traditional sector may now be completed more quickly and at a lower cost.
3. Reduced barriers to entry for investors
Even if NFTs are not divisible, tokenization of other assets allows for the division of ownership rights into smaller bits, with each bit represented by a token. This characteristic generates market liquidity, transforming the asset into a profitable investment choice.
4. Reduced middlemen
Lets take this example:
To sell your company’s equity on the stock exchange, underwriters and other middlemen, such as securities custodians, brokers, registrars, and others, are required. Each middleman adds to the complexity and cost of the transaction.
Tokenization eliminates the need for intermediaries, allowing owners to obtain cash more quickly and cheaply. The tokens are issued quickly, and the assets are cheap. Furthermore, because tokens are backed by actual assets, they are a considerably less hazardous venture than initial coin offerings (ICOs).
ALL in ALL
For the time being, the most important hurdle to the adoption of blockchain-based tokenization is regulatory ambiguity. However, if the whole crypto sector expands, particularly with NFTs, governments and business may be pressed to resolve the concerns sooner rather than later.
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