What is Tokenization in Blockchain?

Tokenization is converting physical and digital assets into blockchain based digital tokens. Before going deep into tokenization let us understand why we need tokenization and what are the benefits of tokenization.

When we convert the physical item into a digital one, we call it digitization. Like when we convert an asset either a physical or digital one into a blockchain-based decentralized one we can call it as tokenization. Also, the representation will be in tokens and that can be transferred to another person through blockchain.

After bitcoin was introduced it changed the way we use and store money. Previously, we stored the money in banks and we need to go through a procedure to transfer the money to another person. However, after bitcoin, we can own our money securely in our wallets and transfer to anyone we want in the world at any time.

So, whatever the assets that we tokenize on the blockchain will get some of the cryptocurrency characteristics by default and we can add more features to make it more specific for our use case/industry. Tokenizing the assets on top of the blockchain will create secure, transparent, and auditable tokens with full ownership.

In the blockchain, we have different types of tokens Such as ERC20, NFT(ERC720), ERC 1155, and SFT. each of these tokens has its way of tokenizing assets and we will look at these things in detail in the next blog.

Use cases

The blockchain-based supply chain is one of the common blockchain use cases in the world. Let us see how tokenization can be applied to this and how it will make the blockchain process easier.

In the supply chain, if we take it as we are tracing some oranges from farm to shelf. At the beginning of the chain, that is the farm level, we can tokenize the oranges in the blockchain. So, for example, if we have 1000 kg of oranges then we can create 1000 orange tokens where each Kilogram = 1 token. From that point onwards if the farmer wants to transfer the oranges to a factory using third-party transportation then he will simply transfer the 1000 tokens to the driver through blockchain and which will show the new owner of the tokens.

At one point, the driver will transfer the ownership to a factory and after the processing and cleaning, the factory will end up with 990 orange tokens as we can consider the rest 10 are damaged ones. Then factory can split the tokens into different super markets and one supper market may get 350 orange tokens which will go to their shelf.

At each point, the owner can add different data to the tokens and when they transfer the tokens to the new owner all the data also will be transferred. However, the new owner can only view the past data and not be able to modify any old data. At the end when the consumer scans the product QR code, the full history of the orange through blockchain will be displayed.

By using tokenization in blockchain we can easily achieve this use case with minimal effort and maximum control and security over the tokens and data.

Another example is real estate. Real estate is one of the industries that adopted tokenization earlier and using it for betterment. It is always difficult to find buyers to sell a large property and on the other side, there are a lot of people having a small amount of money that they want to invest in real estate to gain profits.

For instance, if a person having real estate worth $1M then he can simply create 1M tokens in blockchain through smart contracts in Ethereum or another blockchain. Then he can mention as each token is worth $1. So, people can invest any amount from $1 to buy the tokens and the number of tokens they own will determine the percentage they own in the building. If the owner wants, he can still own the majority of the tokens and let the rest be purchased by people. Even if he rents out the property or whatever gain the property makes will be equally shared with the token holders based on the number of tokens they own (It is legal now in many countries to tokenize the real estate and the smart contracts are valid legal evidence at courts as well). At that moment it converts to tokens, physical assets are changed into a digital representation with liquidity.

Tokenization is not only limited to supply chain or real estate you can tokenize any physical or digital item in the world from a piece of data to a spaceship. There are already existing use cases where they have tokenized medical records, collectibles such as sports cards, tickets, certificates, loyalty points, gift cards, carbon credits, and many more. in the next blog, lets understand the types of tokens and more details about the use cases.


What is Tokenization in Blockchain? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.