Tokens, NFT’s, ERC20, ERC721, what do these all mean? Today we are going to be taking a dive into the world of smart contracts and we will discuss what tokenization is, examples of tokenization use cases, why businesses should issue tokens, the difference between fungible and nonfungible tokens, strategies for tokenization and lastly technical token standards.
What is tokenization?
A token is a digital artifact that represents a metered resource. They are often implemented via smart contracts: a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. Tokenization involves many layers of security to ensure that a token successfully represents its unit of value.
These layers of security include:
• Leveraging real world legal contracts that are valid across multiple jurisdictions and governments
• Crypto economic security which sets a high waterline for a financial cost that must be breached before anyone can think about conducting an attack
• Cryptographic security which confers digital ownership in the form of private keys and even physical securities
Tokenization in Real Estate
A commonly discussed theme of tokenization is the reduction of transaction costs. Token use cases become apparent when reflecting on the current real estate market. Today, there is no national real estate exchange of meaningful size or activity. The markets primarily involve brokers matching buyers and sellers per transaction. The value of properties within the market are subject to non-market forces such as the social value of home ownership and the idiosyncratic appeal of each house, which is why home seekers generally want to inspect a property before purchasing. Some economists claim that these factors add to the transaction costs when trying to buy or sell a house which makes it very difficult to achieve the critical mass needed for an efficient exchange.
Tokenization is a method that could potentially unlock a new system of exchanging real estate assets that was previously not possible due to high transaction costs. Through tokenization it is possible to tie tokens to individual properties by building on existing fractional ownership legal agreements. IT automation and contract templates can reduce transaction costs to the point where fractional ownership is affordable for residential properties, instead of only large commercial buildings/expensive assets. Since tokenization in essence is just software, tokens can be split into as many subdivisions as appropriate, and because the tokens would sit on the blockchain, we can confidently prevent any instance from owning two of the same shares or fabricating a deed. We know the technology is available now to create this, it just depends on market interest, business models, regulatory environment and asset governance.
Why should you issue a token, or digitize assets into tokens?
There are a variety of business benefits in issuing tokens and digitizing assets, some of which include:
• Near Real Time Settlement: International asset transfers may be cleared, settled and disbursed globally in seconds to minutes, with transparency and certainty
• Cryptographic security: Digital signing and cryptography ensures immutability and privacy; zero knowledge and secure computation allow for private validation without human auditors
• Verifiable digital ownership and history: Through blockchain we can ensure tokens cannot be double spent while enabling full traceability as assets evolve and change hands
Fungible or non-fungible?
What is fungibility?
Fungibility is the property of a good or commodity that have units that are interchangeable and indistinguishable. Think of a US dollar, no one cares what dollar they have or where it has come from, as long as they have the dollar. The more non fungible an asset is, the more quality and scarcity comes into place.
Bitcoin is a fungible cryptocurrency; it does not matter what address your bitcoin comes from (unless of course it is a blacklisted address). Z Cash is also a cryptocurrency based on anonymity where it is purely anonymous and one of the most fungible cryptocurrencies.
On the other spectrum, there are crypto kitties which are digital collectable cats that are unique and can evolve and have children. Believe it or not, various digital cats sell for hundreds of thousands of dollars now.