Just a year ago, tokenization was a novelty. Today it has already triggered certain, for now, minor changes that are believed to very soon make a shift in the economic paradigm. What’s it all about? It turns out that modern world economics has a bit of problems that are mostly related to the accounting and managing of assets. Tokenization indeed is capable of coping with them.
The ecosystem of tokenization and the role of blockchain
Tokenization is the process of changing the way accounting and managing of assets are provided, at which point every asset unit is represented by its digital analogue — token.
One of the key components of the tokenization platform is its accounting system. This is where the blockchain technology is applied because it provides for a flexible and secure mechanism of managing data. Most people associate blockchain with Bitcoin, which makes sense, but is hardly correct in terms of business. Bitcoin’s blockchain is permissionless for everyone (you don’t need permission to access it).
In business, the permissionless parameter is not primary, yet blockchain may be applied because it provides for certain advantages. Robustness, stability and transparency of the accounting system. The owner may hold a number of servers, either of which contains the whole copy of the blockchain (full history of changes in the database, represented in the form of a chain of blocks) and synchronizes with each other. Such peculiarities allow you to build your own web of data, where even the breakdown of one or a couple of hosts won’t crash the whole system.
This is the case of a permissioned blockchain — users must be granted a permission to gain access to the accounting. In such a case, users would need to trust the owner of the system.
However, the owner may grant his business partners access to copies of the blockchain, meaning that now they’re able to become nodes i.e. personal hosts of the system. At this point, the parameter of trust towards the owner is not that essential, because his partners are now independent parties of a common system (each permissioned user is able to verify the integrity of the last). This is how blockchain provides for the transparency of ongoing processes. On top of that, the owner can furnish regulators (auditors or governmental structures) with a so-called auditor-node that would do examinations in real-time, automatically.
The advantages of tokenization
As you can see we explore the topic by a reversal logic. From practice to principle:
- We initially explored how the underlying mechanism of a Blockchain tokenization platform works, when applied.
- Now, we’ll examine the advantages that tokenization may introduce to the business sector.
More flexible trading mechanism ➝ significant rise of liquidity
A Token is a digital right of ownership. It can be: gold, grain, sand, shares, or even another token. It is a kind of receipt, but digital and with much higher liquidity. Just think of it: how many steps do you need to perform in order to buy a physical receipt? Even if we cast down the fact that in 2018, you’re still obliged to go somewhere and physically obtain a piece of paper just to start owning the asset, the whole process is still exceptionally unconventional, because it is mostly hinged on loads of paperwork.
While dealing with a tokenization platform, the right of owning the asset is being traded in real-time. At that, end-customers can buy or sell tokens using their smartphone, without leaving the deck chair.
Which of the assets do you think would be more in demand: those backed by receipts, or — by tokens?
We deal with a system where, hosts are distributed, independent and synchronized with each other — you have no single point of failure. Its uptime is significantly higher than of the centralized one because breakdown is no longer an issue. Consequently, the price of maintaining such a system is significantly lower.
Tokenization may help build plain commercial relationships, which would lay the groundwork for a fair competition on the global market.
The tokenization platform may have strict rules under which participants cooperate with each other. You may guarantee that they cannot violate the system because each has a copy of the database, which is reliably synchronized. The only way someone may try to act against the rules is to collude with, at least, more than half of all participants of the system. That’s how we return to the reliability issue, the more independent parties running their own nodes — the better.
New opportunities for fundraising
Tokenization is a very flexible tool for crowdfunding, which has already opened new opportunities for finances. Now, small investors can enter the market and, with common efforts, make up a quite massive budget for the projects.
Imagine there’s a progressive project from both: commercial and, for example, an ecological point of view. The team has organized a crowdfunding campaign, where they trade their stock for $0.5. They’ve shared a precise plan of the project realization and many people came to believe in them.
If we take one average megapolis, where, for instance, half of the citizens have bought one token for $0.5 — we’ll get a sum of about $1.5 million. Of course, it wouldn’t be the half of all citizens, though it wouldn’t be one megapolis either 🙂
Before tokenization, the mechanism of crowdfunding was barely competitive with conventional methods of raising funds. Today having a properly built tokenization platform, crowdfunding becomes much more transparent for the investors and provides for much easier accessibility, making it a viable competitor to the traditional approach to fundraising. People now have a choice.
Hardships related to tokenization
The other side of the medal lies in the fact that along with truly breakthrough and progressive projects, the concept of an ICO is now characterized by a great outbreak of scams. The reason for this is that the token economy is outside the legal environment and is currently beyond regulation.
Apart from a proper approach to regulation, the following list of conditions should be introduced in order to have such systems fully operational:
- Digital identity that would make it possible to assign users’ actions in the digital environment to their actual identities.
- A tried and tested approach to regulation of asset recognition (basically, how the digitization of physical assets is provided)
- Effective methods of decentralized decision-making
- Uniform rules for solving the conflict situations
- A tried-out scheme of storing and managing users’ keys
What can tokenization introduce in the future?
In the nearest future, tokenization platforms may take the position of traditional accounting systems to which everyone refers today. Meaning that they can actually become the primary source of actual data for proprietary rights of individuals with their digital identity, e-passports, driver’s licenses, etc. Obviously, it will only happen WHEN tokenization becomes legally binding.
The Age of fine products
Transparency of business, simplicity and the reliability of accounting, is the groundwork that will improve relations between producer and consumer. Not only reduce the distance between them, but also improve the balance of their interests.
It’s true for many things. For example, artificial demand generation when producers, on purpose, reduce the operational life of their product. The faster it’s out of action— the earlier consumers buy a new one. It’s not an obligatory rule but you must admit— there’s a grain of truth about this.
And then, there’s this situation with cheaper primary products, which can be attractive for buyers in the context of price, whereas the quality suffers. In other words, quantity instead of quality.
If handled properly, tokenization may bring the age of fine products. As a case in point, producers won’t be paid for the whole product shipment, but — only over the course of the consumers’ usage. This will be the revolution in the supply chain, where manufacturers can count up to the ‘latest’ unit of product they’ve sold (thus, reduce the outlays), while consumers will be confident as to the quality of what they buy.
Among all the properties that tokenization platforms may offer, the most basic are:
- transparency of the ongoing processes;
- reliability of storing and synchronizing data among independent participants;
- inability to alter data (immutability);
- an easy-to-perform audit.
On a global basis, such approach will contribute to the development of a fair competition and obviate the bureaucratic machinery. Such new methods of managing assets will open new opportunities for regular people, who will be able to avoid paperwork or any other acts of red tape. While the simplified process of raising funds will pave the way for smaller businesses and investors.