Today’s digital economy is based on tokenization, which is used by billions of people every day. Tokenization is the process of replacing valuables (such as money, stocks, credit card numbers and medical records) with tokens that reflect those values, making them easier and more secure to trade with. It may seem a distant idea, but tokenization is having a profound impact on our lives and can revolutionize many industries.
Payment transactions totaling nearly $110 trillion are processed globally each year with tokenization by payment providers such as Visa, which reports roughly $2 trillion in payments each year. Two major problems dramatically increase the cost of payments for customers around the world: incredibly high fees for micropayments ($5 to $10) and the high costs associated with converting the currencies for international payments.
Tokenization significantly reduces all these costs and prevents any losses, so many blockchain-related companies have started providing services in these areas.
Hedge funds, venture capitals and asset managers
The top 400 asset management firms collectively manage about $74 trillion. Hedge funds manage more than $3 trillion, while venture capital funds manage about $500 billion. But this money is often frozen for long periods of time, sometimes for up to seven years. Investors have to pay high fees if they want to withdraw their funds before this period ends.
Tokenization of stocks in a hedge fund or a venture capital fund provides investors with a faster and cheaper way to redeem their money from the hedge fund. They have the opportunity to benefit from the token value whenever they feel it is reasonable to do so. In addition, tokenization services allow investors to increase the liquidity of their assets. They can sell them or buy more small stocks from numerous hedge funds or venture capital funds.
Antiques and collectibles
Tokenization provides a compelling solution for owning antiques and collectibles, paving the way for mass ownership of valuable collectibles. For example, the right of ownership of a Michelangelo’s work can be divided among tens of thousands of people who can own shares in the painting and receive dividends from exhibition fees, while being able to sell their shares at any time on a secondary exchange. Contemporary artists also can use a tokenization service to raise funds for new works.
Investors seeking to balance their portfolios often buy fixed income bonds sold by governments and corporations to finance operating activities. Many small investors do not have access to the lucrative institutional debt market and often have to settle for lower-yielding mutual funds. Banks, underwriters and other intermediaries increase the cost of buying highly secured debt.
Bond tokenization allows small investors to participate in the purchase of issued debt, which increases the general investor pool and helps issuers meet their funding targets. A large enough investor pool will create pressure to lower interest rates and allow issuers to secure financing at cheaper rates.
Health care and data
Blockchain technology can solve several healthcare industry challenges: stringent laws on patient privacy protection, difficulties in sharing patient data between different healthcare institutions, complicated funding cycles for drug and biotechnology researches, and confusing payment processes arising from insurance lawsuits.
Blockchain ledgers help detect insurance fraud by reducing the cost of exchanging data between insurance companies, enabling insurers to save up to $40 billion. Smart contracts significantly can speed up claims processing and reduce the cost of these processes, which can help insurers save up to $200 billion.
Real estate investments
The real estate market is massive and expensive. Asset tokenization will allow everyone to acquire a stake in this segment.
With asset tokenization, buyers can purchase fractions of real estate through its pre-tokenization.
Asset tokenization allows assets to be divided into smaller fractions, giving potential investors the opportunity to purchase a fraction of a single stock.
Tokenization of the terms and conditions traditionally inherent in contracts allows information to be tracked and stored and shared online.
Apps and games
Gamers can tangibly experience their progress toward a goal with tokenization, while receiving rewards for their achievements in the form of real assets.
Service tokens represent a potential future right to a product or service provided by the token issuer. It should be noted that this is not an investment, but rather a coupon for a product under development. An example of such a token is Filecoin. The project raised $257 million on the sale of its tokens, which will later provide its owners with access to a cloud storage platform.
Investment tokens represent the right to some external asset or cash and are therefore used as an investment. This type of token is regulated by federal laws, and if federal laws aren’t followed, the entire project can be shut down. However, if all regulations are complied with, investment tokens have the potential to be used in a variety of applications.
+ Token holders receive dividends from the company. Every time it reports a profit, investors receive additional coins.
+ Some investors even can influence the development of the company through features offered by blockchain technology.
The term tokenization has been around for quite some time. In its broadest sense, a token is a kind of unit meant to represent a certain value within a particular ecosystem. So, for example, a poker chip has no value outside of the casino that issued it. Inside the establishment, however, it has a certain value. Tokenization works on a similar principle.
In the asset management sector, tokenization is a way to revolutionize the world. Before the concept emerged, asset management required third parties and legal contracts, and it was time-consuming. And all such processes lacked security and transparency.
Today’s decentralized digital token boom began in 2009 when bitcoin emerged. It was the first virtual asset that represented a certain value, retained that value when sent over the Internet, and did not need an intermediary or a specialized third party for the transaction verification.
Tokenization has been adopted in various industries as a way to make payments that do not require the transfer of any sensitive information or personal data. This is achieved by sending data as a sequence of characters, which lose value outside of a strictly defined context. Thus, it gives such tokens the characteristics of security and safety.
Arrival of a new digital asset, Ethereum, in 2015 opened new horizons for tokens, expanding their range of applications. Developers had the ability to create their own tokens. This meant that blockchain could henceforth be used not only for cryptocurrencies. With smart contracts, people could develop their own projects and decentralized apps (Dapps).