The Future Of Tokenization: Exploring Its Impact On Business And Technology
In a rapidly changing business environment, many innovations emerge, with some being immediately useful while others quickly disappear. As for tokenization, today, it is no longer a buzzword but a phenomenon that needs more comprehension.
Though TrustCommerce spearheaded tokenization in 2001, most of the general public is not well-versed in the issue. Back then, tokenization was introduced in the digital realm to substitute sensitive data (e.g., credit card information) with a digital counterpart called a token to safeguard credit card details from data thefts and cyberattacks.
The global tokenization market has been showcasing astounding growth, which could have a considerable impact on the global economy. According to Markets & Markets, the tokenization market is expected to broaden from $2.3 billion in 2021 to $5.6 billion by 2025, with an average annual growth rate of 19%.
Today, tokenization holds immense potential, continually advancing alongside blockchain technology. It goes far beyond cybersecurity and implies the conversion of tangible assets (e.g., real estate, precious metals, art, etc.) into a digital equivalent (token) through a blockchain, ensuring improved tradability and liquidity.
Benefits Of Tokenization
By leveraging blockchain technology, tokenization can secure both traded and non-traded assets. Furthermore, the advantages of tokenization include improved liquidity, quicker settlement times, reduced costs and strengthened risk management. Below, we highlight the benefits of tokenizing physical assets that market participants benefit from:
- Security: When a token is created, blockchain technology generates a unique address, ensuring strong data protection through access control, automatic rights transfer and remote decentralized file storage. Tokenization implies that only authorized users can access the system through unique tokens. Administrators, in their turn, can revoke or update them if necessary, allowing complete control over data access. Automated rights transfered through tokens entail assigning specific rights, such as read or write access, ensuring data is processed based on the earlier established rights.
•Efficiency: Tokenization diminishes transaction time by allowing 24x7 trading and triggering smart contracts based on predefined parameters. Consequently, settlement times are shortened from their current duration of, at best, T+2 to near-real-time transactions. This results in counterparty risk mitigation during transactions and lower trade break odds. As all the essential data is stored in a smart contract, tokenizing assets makes it possible to conduct transactions without hated red tape. In this way, transactions are accelerated while simultaneously being uncensored.
• Flexibility: Assets cannot be divided into smaller pieces in the real world. For example, selling a fraction of a company share or 1/20 of an apartment is not feasible. However, this constraint is eliminated when assets are tokenized because tokens represent parts of ownership that can be traded, making them available for a broader array of investors. In 2021, the Swiss crypto bank based in Zurich accomplished a groundbreaking feat by recording the legal ownership rights of Picasso’s 1964 masterpiece “Fillette au béret” on the blockchain. At a price of 1,000 Swiss francs ($1,040), over 50 investors bought 4,000 tokens of the artwork.
• Convenience: Some time ago, physical presence was often required to complete transactions. With smart contracts, assets can be sold or purchased anywhere at any time. Additionally, public blockchains are inherently accessible to individuals worldwide without any external barriers to entry. However, compliance with AML (anti-money laundering) and KYC (know your client) regulations and programs is required in the institutional market, limiting the widespread adoption of public blockchains. Even so, several public blockchains now incorporate KYC and AML measures, which have increased trust and expanded tokenized digital asset usage.
Tokenization And Blockchain
Blockchain is a decentralized data system that belongs to everyone and no one simultaneously. It comprises an online record of transactions that is perpetually replicated across multiple computing stations in a secure ledger system, eliminating the slightest risk of data theft. The blocks in the blockchain represent permanent file pages, making any manipulations impossible without the consent of the other participants or making a retroactive change.
Tokenization, a powerful tool for safeguarding payment card information, becomes even more potent when coupled with blockchain. Through tokenization, the payment industry has become faster, safer and more efficient, with tokens representing the value of trading assets, such as a fiat currency, stock or commodity. Thanks to blockchain, tokens can be transferred directly between parties without banks as intermediaries, reducing transaction fees and accelerating settlement times.
Ultimately, this decentralized technology provides a transparent and tamper-proof record of token transactions, accessible by anyone with a set of permissions. Overall, blockchain technology means that all transactions are recorded on an immutable and transparent ledger, eliminating the risk of errors, fraud or the need for manual oversight.
Tokenization has immense potential and can be applied in various fields.
• Real estate: Real estate is an enormous and expensive market, making it challenging for novice investors to participate in significant projects. With tokenization, multiple investors can own a part of a property, making real estate contributions more accessible to a wider audience. In addition, tokenization streamlines the automatic income distribution between stakeholders, deals with property-related rights, such as inheritance, and facilitates liquidity for real estate operations.
• Asset management: When assets are tokenized, they can be divided into smaller pieces, providing potential investors with the chance to acquire even a fraction of a single share. By splitting securities, commodities or other financial assets into smaller denominations, investors benefit from greater affordability and flexibility in managing their portfolios.
• Contracts: Contracts and agreements can be managed more efficiently through tokenization. In such a system, digital tokens represent contractual obligations or terms, ensuring more efficient agreement management by automating the contract execution, verifying real-time obligations and extending existing agreements.
Powered by blockchain technology, tokenization has evolved significantly since 2001, creating new opportunities across various tech domains. Nowadays, the perspectives of tokenization are vast and far-reaching since the technology increases transparency, immutability, and security. With continued development and integration with other emerging innovations, such as AI and IoT, its applications are endless.