Tokenization in a Nutshell

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Tokenization in a Nutshell

What is tokenization and a token?

  1. Tokenization is the process of transformation of infrastructure to manage asset ownership rights.
  2. A token is a digitized ownership right for an asset.

Tokenization in context

There are four levels on which we can view tokenization: user, business, IT infrastructure, technical details.

  1. From a legal perspective, tokenization doesn’t change the reality (whether it is paper registry or a database).
  2. From a responsibility perspective, tokenization implies that the registry of ownership is no longer controlled by a single party.
  3. The terms “a tokenized title to an asset” and “a tokenized asset” are interchangeable.
  4. Token is a generic technical term which doesn’t mean any particular asset class. (You can think of cryptocurrency as a token, but not every token is a cryptocurrency.)

Key principle of tokenization

Tokenization implies that accounts are managed using cryptographic keys, which results in direct account management instead of execution of orders by system operators.

Necessary conditions

  1. Tokenization implies that a blockchain/ledger is the primary source of information.
  2. Tokenization requires digital identity.

Main functions of a tokenization platform

  1. Maintaining immutability of all records of balances, accounts, and transactions
  2. Implementing provenance
  3. Implementing fractional ownership
  4. Implementing programmable logic with assets (smart contracts)
  5. Implementing seamless secondary markets
  6. Implementing trustless real-time audits
  7. Implementing transparent governance
  8. Implementing resistance of infrastructure to attacks and hardware errors
  9. Implementing non-repudiation

Main processes in a tokenization system

  1. Governance
  2. Creation of tokenized assets
  3. Transaction processing
  4. Audit

Tokenization allows for the creation of a closely integrated ecosystem with custodians, exchanges, wallet providers, and merchants.

Benefits

  1. For the case of physical assets, the primary benefit of tokenization is that operations with tokens are cheaper than with physical assets.
  2. For the case of intangible assets the main benefit of tokenization is that operations with cryptographic tokens are more secure than the traditional database records.
  3. For business the main benefit is increased liquidity as a result of reduced trading frictions.
  4. From the IT operations perspective, the main benefit is the reduction of TCO (Total Cost of Ownership) of ecosystems and greater interoperability.
  5. Tokenization helps to get real-time statistics about the usage of the system.
  6. Tokenization solves security problems for secondary markets of digital goods.
  7. Tokenization is about democratization of access to accounting infrastructure.
  8. Tokenization is about creation of efficient registries of ownership.
  9. Tokenization is an evolutionary step in the transition of accounting from paper to an entirely digital form.

Regulation

  1. Regulation of tokenized assets is the same as for the ownership rights of an asset itself.

Security

  1. In the case of tokenized physical assets, the custodian plays a very important role since an IT platform cannot prevent theft by itself.
  2. Tokenization makes accounting systems secure, transparent, expandable, and scalable.
  3. Tokenization focuses on integrity, accessibility, non-repudiation, and resilience.
  4. Tokenization implies that an internal ledger is blockchain-based.

Result of tokenization

  1. Full automation of all business processes from accounting to dividend distribution.
  2. Creation of new-generation accounting systems.
  3. Uniform APIs for all accounting systems.
  4. An ability for users to audit transactions and state of accounts themselves.
  5. New monetization scheme for ecosystems — open economy.

Evolution

  1. Tokenization will start with divisible, fungible, and transferable assets.
  2. Tokenization is the necessary precondition to Financial Internet.

…more in the upcoming book “Theory of Tokenization”

Originally Posted Here

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By | 2018-12-28T12:19:46+00:00 December 28th, 2018|Technologies|