What Is Tokenization in Blockchain?
Tokenization is converting real-world assets or rights into digital tokens on a blockchain. These tokens represent ownership or a stake in the asset and can be easily traded or transferred within the blockchain ecosystem.
This process is very important because it guarantees enhanced security, ensuring that ownership and transactions cannot be tampered with through blockchain technology. Tokenization also improves efficiency since it reduces costs and eliminates intermediaries, streamlining the transfer of assets.
This process improves liquidity because tokenization enables fractional ownership, making traditionally illiquid assets like real estate or art accessible to a broader audience and easier to trade.
Key Takeaways
Types of Tokenization in Crypto
Tokenization can take multiple forms, each one with a different main function. Here’s an overview of the main types of tokenization in crypto:
Asset tokenization: It involves representing physical or intangible assets, like real estate, art, or stocks, as tokens on a blockchain. Platforms like Propy allow fractional ownership of real estate properties. Organizations can also tokenize expensive artwork, enabling shared investment.
Utility Tokenization: It allows holders to access specific features or services within a platform, especially in the Web3 ecosystem. One example is Filecoin (FIL), which uses tokens for decentralized storage solutions.
Note: Data tokenization, often used in cybersecurity, protects sensitive information by replacing it with tokens. While critical for privacy and security, we won’t cover this form of tokenization here as it falls outside the scope of crypto applications.
How Does Tokenization Work?
The tokenization process of an asset guarantees that its digital representation is secure, transparent, and easily transferable. Here’s a breakdown of how it’s done:
- Creation of Tokens: Real-world or digital assets are assessed for value and then represented as tokens on a blockchain. Each token typically signifies a specific ownership share or utility tied to the asset.
- Storage on a Blockchain: The generated tokens are recorded on a blockchain, creating a secure, immutable ledger that tracks ownership and transactions. This ensures transparency and accessibility.
- Security via Cryptography: The blockchain uses cryptography or encryption to secure the tokenized data. This protects against unauthorized access and ensures that transactions and ownership details remain private and tamper-proof.
Benefits of Tokenization
Tokenization can bring several benefits to assets, such as improving liquidity, security, and efficiency. Here are the key benefits of this process:
Risks and Challenges of Tokenization
On the other hand, tokenization also has several risks, as any other element of the crypto industry. Here are some points you should consider when going through the process:
Real-World Examples of Tokenization
Now that the concept of tokenization is clear, we will explore real-world examples to get a sense of how tangible this process is in investors’ daily lives.
Real Estate Tokenization
Real estate tokenization involves transforming physical property assets into digital tokens on a blockchain, allowing for fractional ownership and easier transferability. Usually, the tokens that result from that process are called real-world asset (RWA) tokens. They represent a share in the tokenized property, allowing you to buy, sell, or trade its portions of real estate with less bureaucracy than traditional transactions.
The main advantages of tokenization of real estate are lowering entry barriers, enhancing liquidity, and providing greater transparency through blockchain’s immutable ledger. You can also diversify your investment portfolio by holding fractions of multiple properties across various locations and types, decreasing risks associated with single-property investments.
Some platforms that already work with this kind of trade are RealT, Lofty AI, Propy, and Brickblock. They provide a safe environment for those looking to invest in these tokens.
Art and Collectibles Tokenization
To create digital representations of different kinds of artwork on a blockchain, those assets must also go through tokenization. The main function of this kind of token is to fractionalize the assets so multiple investors can hold a share in high-value items like paintings, sculptures, or rare collectibles. This process improves accessibility and democratizes ownership of valuable assets traditionally limited to wealthy individuals or institutions.
By introducing real-world asset tokenization into the art industry, platforms such as Masterworks, Ethernity, Rarible, and Mintable can ensure the authenticity and provenance of high-value art and collectibles through their blockchain’s immutable ledger. With that security and transparency, it’s easier and safer to trade on those marketplaces.
Non-Fungible Tokens (NFTs) are digital assets that represent ownership of a specific item, such as the artworks mentioned above. Unlike cryptocurrencies, like Bitcoin or Ethereum, NFTs cannot be exchanged because each token has its own unique metadata and attributes. NFTs became highly popular in 2020 and 2021 with artists, creators and traders generating big profits through sales on specialized marketplaces.
The NFT craze was marked by huge sales that captured the public’s eye. Beeple, a digital artist, sold one of his artworks Ëverydays: “The First 5000 Days” for $69.3 million at an auction in March 2021, one of the highest prices ever. Similarly, the first-ever tweet by its founder Jack Dorsey was tokenized and sold as an NFT for $2.9 Million. These events highlighted the potential of NFTs to generate profit for creators and investors, while also changing the art industry. By allowing sales between artists and buyers and eliminating mediators, NFTs provide new opportunities for monetization, however, the market’s volatility also underscores the importance to understand the risks associated with investing in those assets.
Tokenization of Intellectual Property
Unlike the previous kind of tokenization, this one regarding intellectual property acts primarily on intangible assets, such as patents, trademarks, copyrights, and creative works. The tokens generated in this process can represent ownership, licensing rights, or revenue-sharing agreements, enabling IP holders to monetize their creations efficiently.
The tokenization of intellectual property aims to help creators access funding by fractionalizing their IP assets. It also allows for more dynamic licensing models, enables wider access to creative works, and reduces legal and administrative barriers. Another advantage is facilitating collaboration among stakeholders by enabling secure and automated agreements through smart contracts.
Some of the leading platforms that work on this process are:
- BPC Labs: Provides tokenization services for intellectual property, including trademarks and patents, to help creators monetize their assets.
- Billon: Specializes in tokenizing and trading patent rights, offering tools for IP owners to unlock liquidity from their portfolios.
- SingularDTV: A blockchain platform allowing filmmakers and content creators to tokenize their projects for funding and distribution.
Tokenized Securities and Financial Instruments
When you tokenize traditional financial instruments, such as stocks, bonds, mutual funds, and derivatives, as tokens on a blockchain, you create a digital representation of those assets. These tokens offer investors the same rights as their traditional counterparts, such as dividends or interest payments, while enabling faster, more efficient transactions. Tokenized securities combine blockchain technology’s benefits with traditional financial markets’ regulatory compliance.
Like the other kinds we explored, tokenized securities and financial instruments allow fractional ownership, enabling smaller investors to participate in markets that were previously out of reach. Moreover, blockchain-powered platforms ensure secure and automated contract execution, enhancing efficiency and trust in financial transactions. Some platforms that act on this market are tZERO, Polymath, Securitize, and INX.
Digital Assets Tokenization
Digital assets tokenization involves converting native digital items into blockchain-based tokens, such as cryptocurrencies, in-game assets, or virtual real estate. This token is especially important in industries like gaming, virtual reality, and decentralized finance (DeFi). Like other tokens, these represent ownership or rights over the digital asset, enabling easy trading, transfer, and monetization in digital ecosystems.
The main advantages are the opportunity to monetize their virtual holdings safely while also enabling interoperability between platforms and the use of smart contracts to further automate transactions and ensure adherence to agreed-upon terms, reducing friction in digital economies.
Some of the main platforms that provide this kind of tokenization are:
- Enjin: Allows gamers to tokenize in-game assets that can be traded or used across multiple games and platforms.
- Decentraland: Tokenizes virtual real estate and items within its metaverse, enabling users to own and trade digital land and collectibles.
- Sandbox: Offers tokenized assets in a virtual world, including land parcels and user-created content.
- Axie Infinity: Utilizes tokenization to allow players to own and trade in-game characters and assets.
Tokenization in Supply Chain Management
To record goods, raw materials, or processes within a supply chain on a blockchain, these assets can also go through tokenization. This process transforms them into tokens, allowing real-time tracking, transparency, and verification of product movement from origin to destination, increasing efficiency and accountability.
With this blockchain-powered system, companies ensure that each step of the supply chain is secure and tamper-proof, reducing the risk of fraud or human mistakes. It also provides enhanced visibility, allowing participants to track product history, certifications, and compliance data. Tokenized supply chains improve team collaboration by offering everyone involved a shared, immutable ledger.
Some platforms offering this service include VeChain, IBM Food Trust, OriginTrail, Everledger, and Provenance.
Utility Tokenization
Utility tokens can be created through tokenization to access specific services, features, or products within a blockchain-based ecosystem. Unlike cryptocurrencies, this token can only be used for specific use cases, such as paying for services, accessing premium features, or participating in governance within a platform. These tokens drive engagement and incentivize users within the ecosystem, making them a great tool for fostering active and sustainable communities.
Some examples used currently are:
- Basic Attention Token (BAT): This token powers the Brave browser by rewarding users for viewing ads and offering advertisers access to a decentralized ad platform.
- Chainlink (LINK): Enables users to pay for services like accessing off-chain data and smart contract execution.
- Filecoin (FIL): Functions as a payment method for decentralized storage services within the Filecoin network.
- Uniswap (UNI): Provides governance and fee discounts for users within the Uniswap decentralized exchange ecosystem.
- Ethereum Name Service (ENS): Often recognized as one of the best utility tokens for managing decentralized domain names in blockchain environments.
Cost of Tokenization
Along with its benefits, tokenization also comes with costs. These costs fall into three primary categories: initial setup, ongoing maintenance, and transaction fees that businesses and individuals must consider.
The initial setup costs can be pretty high. Developing and maintaining blockchain infrastructure requires skilled developers and advanced technology. This process includes creating a secure blockchain-based system, designing smart contracts, and implementing the necessary backend to ensure functionality and scalability. This might represent a fair amount of the total costs of the required equipment and team for this project.
Tokenized systems require regular updates to remain secure and efficient, so ongoing maintenance costs must also be considered. This can include auditing smart contracts to identify vulnerabilities, staying compliant with everchanging regulatory requirements, and upgrading the system to accommodate new features or handle higher transaction volumes.
Lastly, transaction fees also contribute to the tokenization process’s costs. Every token transfer or interaction on a blockchain incurs fees, often referred to as gas fees. For example, Ethereum gas fees can fluctuate based on network congestion, making transactions more expensive during peak periods. These fees can add up, especially for high-volume systems or platforms with frequent token exchanges.
To better manage these costs, you can utilize tools like our Ethereum Gas Fees Calculator. This tool helps estimate transaction costs based on current network conditions, enabling you to plan your token exchanges more effectively and avoid overpaying during high-congestion periods. By using this calculator, you can optimize your transactions and make more informed decisions in the tokenization and NFT ecosystems.
Future of Tokenization
We believe tokenization is key to completely changing how we view ownership, investment, and financial systems. One of the most important developments is the expansion of asset classes that can be tokenized. While real estate, art, and financial instruments have been early adopters, the scope of tokenization is growing, including assets like intellectual property, carbon credits, and even human capital.
This expansion will make traditionally illiquid or inaccessible assets available to a broader audience, democratizing wealth creation and fostering greater participation in global markets.
Another important area developing around tokenization is integration with traditional finance. Connecting blockchain technology with conventional financial systems can reshape the financial market.
Tokenized securities, for instance, could streamline issuance and trading, reducing settlement times and costs while increasing transparency. Another advantage of this integration is the creation of hybrid products that combine the stability of traditional assets with the flexibility and programmability of blockchain-based systems.
However, all these innovations will depend highly on regulatory evolution and the development of global frameworks to support their adoption. Currently, the lack of uniform regulations across jurisdictions creates uncertainty for businesses and investors. Clearer and more uniform regulations will ensure compliance while developing this new technology.
International collaboration will be essential to establish standards for asset classification, investor protection, and dispute resolution. These frameworks will provide the legal and operational stability needed for tokenization to expand globally.
Final Thoughts on Tokenization in Crypto
Tokenization completely changes how we view and trade assets by leveraging blockchain. It enables fractional ownership and global accessibility for traditionally illiquid or high-value assets, transforming real estate, art, finance, and gaming industries. By making assets more liquid and programmable, tokenization creates new opportunities for investors and innovation across sectors.
As tokenization evolves, its integration with traditional finance will connect conventional markets with blockchain-powered solutions, driving efficiency and creating hybrid financial products. To better understand this everchanging space, start by exploring ERC token standards, which define the rules for creating and managing tokens on Ethereum, a cornerstone of the tokenized economy.
FAQ
What is the main reason for tokenization?
How does tokenization differ from traditional asset securitization?
What industries are currently leading in adopting tokenization?
What role do oracles play in the tokenization process?
Why Trust Cryptonews
Best Crypto ICOs
-
Solaxy (SOLX)
-
BTC Bull Token (BTCBULL)
-
Mind of Pepe (MIND)
-
Best Wallet Token (BEST)
-
SUBBD (SUBBD)
in numbers
About Cryptonews
Our goal is to offer a comprehensive and objective perspective on the cryptocurrency market, enabling our readers to make informed decisions in this ever-changing landscape.
Our editorial team of more than 70 crypto professionals works to maintain the highest standards of journalism and ethics. We follow strict editorial guidelines to ensure the integrity and credibility of our content.
Whether you’re looking for breaking news, expert opinions, or market insights, Cryptonews has been your go-to destination for everything cryptocurrency since 2017.
Ihssan El Medkouri 
