The process of tokenization is where data is taken and assigned a value known as a token. Security is dependent upon the algorithm and process used.
Often tokenization is the producing of non-sensitive data (the token) to represent sensitive data. This is a process that is not usually reversible, at least without more data. Hence, the encryption offers a level of security for the sensitive data.
With cryptocurrency, markets develop which assign tradeable value to the tokens or coins. Since it all exists in the virtual world, there are no physical representatives of what is created although tokens can be generated to represent physical objects.
The tokens or coins tied to a blockchains will have all transactions recorded on a distributed ledger.
Many feel this is an essential component of Web 3.0.
Some estimates have tokenization exceeding $24 trillion by 2027.
Advantages to Tokenization
It is believed we are going to see the tokenization of everything. This means that assets, physical and digital, will all be tokenized and exist on blockchains. There are a number of benefits to this.
They are:
- greater liquidity
- higher accessibility
- more transparency
- immutability
- no intermediaries
- cheaper and faster transactions
Two of the primary markets people see being tokenize are real estate and art.
Assets that get tokenized are can then be traded on exchanges, meaning non-liquidity is replaced with liquidity.
One of the keys is fractional ownership.
Another is that tens of trillions of dollars in non-liquid assets can be unlocked by being used as collateral. When a token represents the asset, or a portion of it, this can by put up against a loan.
In short, everything that has value will be tokenized.
Accessibility
This is one of the key factors in tokenization. In many countries, the process to acquire real estate is horrific. People are shut out because the system is too complicated and cost too much for the average person.
Tokenization eliminates this by enabling people to buy fractional pieces of real estate on the open market. Since it is all digital, there is no paperwork required. Once simply buys a token much in the same way one purchases a share of stock.
DeFi Versus Regulation
There is great debate as to how this will all unfold.
Cryptocurrency proponents who believe in the tenets put forth by original Cypherpunks (which many believe Satoshi Nakamoto was part of) feel that decentralized finance (DeFi) will end up as the vehicle for tokenization.
Others feel that this is playing right into the hands of the established system, i.e. Wall Street and the regulatory agencies. At present, many governments are wresting with regulation regarding digital assets.
At the core of this debate is the fact that tokenization of assets is viewed in most countries as a security. Hence, it has to be registered and sold by approved financial institutions. Here is where TradFi is believed to be taking over.
The Securities and Exchange Commission already sued many companies for selling unregistered securities. Many ended up paying fines to their actions.
Part of the issues it tokenization assets by using security tokens. This is obviously falling right into the scope of regulatory agencies such as this.
A large portion of how this does eventually get settled is by going back to the core tenet of Bitcoin. The vision of Satoshi was to be a monetary system that was decentralized, hence outside the reach of the banks. He (she or they) felt these institutions were the cause of the Great Financial Crisis.
The solution might reside in the idea of decentralization. If the industry can build out systems that have no corporation or single entity behind them, then we could see DeFi truly take hold. This will have to apply to both blockchains (along with the sidechains) and layer 2 applications.
If the infrastructure is established properly, then things such as decentralized exchanges and liquidity pools could excel.