Tokenization in blockchain – the new way of sharing profits?
Tokenization is an incredibly effective way to secure data, designed to protect sensitive information from prying eyes. For financial transactions, tokenization frees sellers from having to store credit card information in their payment systems.
What exactly is tokenization?
In short: As a process, tokenization is all about turning goods into digital assets.
Let’s say you own a furnished apartment with a market value of USD 700,000. The apartment is brand new, newly renovated, a professional designer is responsible for the decor – everything you can dream of. And suddenly something happened, a complete drama, so you need money ASAP and you decide to sell the apartment. Of course, you can sell your property in a classic way, placing an ad, completing paperwork, maybe a few months will pass before you catch the right offer and agree on the details. However, if you don’t need that much cash injection right away, is there any other way?
Yes, tokenization. Let’s imagine that we theoretically change our apartment into 700,000 tokens called DOM. Next, let’s assume that having such a token gives someone a real percentage of shares in our apartment – let’s say that one DOM is worth 1% of our apartment – the value is not important, it can be more or less, it only matters whether each token gives a real share in some existing product (in this case, our apartment).
Technically, you would have to develop an algorithm that would be implemented as a smart contract in a blockchain network. This algorithm would specify all the features of your token: value, quantity, denominations, name etc.
Okay, so we have our DOM tokens – so how do you make everyone buy and sell them on different exchange platforms? For this we need a platform that supports smart contracts, with Ethereum being the clear favorite. And that is all, except for developing the contract and some technical details, our DOM token is now in circulation! It’s now an ERC-20 tokens in the Ethereum blockchain network, and since it entered the market, its value may decrease and increase depending on demand.
So you understand how blockchain allows you to tokenize things? We took an apartment and created its digital representation that exists on the web – our apartment has become a tokenized product.
Is tokenization something new and how is it different from securitization?
In short: Tokenization allows for better participation in digital campaigns, and its biggest advantage is being in a blockchain network.
Securitization is the process of combining different types of contractual obligations – such as mortgages, car loans or credit cards – and the sale of related cash flows to external investors as securities, which can be defined as bonds, pass-through securities or secured debt obligations (SDO).
In other words (and very simplified) – tokenization is similar to securitization in that in both cases we need a product that will be processed into securities – they will simply be in the form of tokens.
However, what “token” actually means to us – as with all new solutions – is hard to find a very precise law terminology and some details differ from description to description.
At the most basic level, the token represents certain resources or values. If this sounds a bit too abstract, let’s focus on three types of the most common tokens:
- Currency Tokens
These are the most obvious. Think of classic cryptocurrencies like Bitcoin.
Currency tokens are built on own independent blockchains. They are not resource-based – instead, their value is directly related to the mechanism that distributes them. According to their name, currency tokens are traded, issued and received.
- Personal token
These are the freshest tokens on the market, they are currently experiencing a real boom amongst stars and influencers. Personal tokens provide a share in the income, activities and/or time of the person who issues the token. Thanks to this, putting yourself behind the token’s value, one person can accumulate funds for their project, implementation of an interesting solution, or find time in their normally busy schedule to conduct classes. A great example here will be the recently announced Akoin token (we wrote more about it here), which bases its value on the singer Akon, trying to introduce the currency to the African market and introduce blockchain to the market there. source: akoin.io
Personal tokens can be short-term investments, the purpose of which is to raise funds for the project so that after its completion you can earn enough to buy back your token at the going price and perhaps create further investment opportunities.
- Utility tokens
These tokens are a bit harder to explain.
Utility tokens provide future access to a given product or service, and the money you pay for them allows startups to accumulate enough capital to actually develop the product. A good example is the CoinCasso Exchange (CCX) token – a platform for cryptocurrency exchange. Tokens allow you to purchase additional services on the stock exchange, additional membership options, as well as to profit from its infrastructure.source: TechStartups – Democratic exchange CoinCasso Succeeds in ICO Token Sale Despite Bearish Mood
Utility tokens should not be investments by design; however, people often treat them this way and buy these tokens in the hope that their value will increase along with the demand for the company’s product or service.
- Security Tokens
In turn, security tokens are a simple investment. Defining this kind of token is surprisingly simple, especially if you refer to the Howey Test, which has been used by the US Security and Exchange Commission (SEC) since 1946, and, oddly enough, still applies to cryptocurrencies. When you see the token, ask the following questions: Is it sold as an investment? Are profits expected? Will these profits depend entirely on the efforts of the promoter who places the contract or another third party? If you answered ‘yes’ to all three, you are dealing with a security token.
Do you remember our DOM token? Howey’s test will also work on it. As our apartment is sold as an investment, investors will rely on you – the owner of the apartment – to make the apartment profitable and attractive to potential tenants. In short, security tokens represent a variety of values that may be subject to further exchange. They don’t need long and complicated whitepapers with a lot of technical materials – security tokens are simply shares placed on a pre-existing blockchain network.
Why blockchain? What is so special about it and how is a share of 0.5% in someone’s apartment a good thing?
In short: Blockchain makes tokenization transparent.
By releasing our DOM token into the Ethereum blockchain network, every transaction using the DOM has been saved to that network because it is an ERC-20 token. As this is an immutable and publicly available document, no one can question its existence or fake the ownership of our tokens. Your rights and legal liability are directly linked to the token.
In addition, blockchain makes tokenization very cheap. Instead of paying some intermediate companies for paperwork, you simply program a smart contract to do it for you. And yes, really the administrative costs of buying and selling our DOM token will be close to zero. What’s more, as with all crypto trading, our token will be available 24/7, anywhere in the world, without any problems.
And as for this share of just 0.5% in our apartment, it is not as bad as it may seem – in fact, it’s the biggest advantage of tokenization compared to normal securities. Imagine that you want to catch willing investors or you yourself are one and would like to invest in someone – isn’t it hard to buy shares in e.g. Facebook, for over $200 per share and which cannot be bought partially, always paying the full price for each subsequent share?
Tokenization has exactly this advantage – shares in the form of tokens can be divided into smaller parts. Hence the possibility of buying e.g. half a DOM token and – if Facebook as a company would be tokenized – it would be just as easy to buy a half token for $100 when the profits from its ownership are comparable to securities.
You don’t have money for a car? Tokenize your apartment, sell as many DOM tokens as you like, and then buy them back at their commercial price as soon as you have the money.
It sounds too good to be true – what are the cons?
In short: Tokenization is so new that its full rights and regulations are difficult to formulate, although at its root it is fully legal.
Ask yourself – imagine that a fire broke out and your apartment burned down. What then will happen to the investors and the value of their DOM tokens they have purchased? Should they not be protected by investor rights? Of course, but who would implement them?
So while tokenization legally does not yet have the same facilities as classic forms of investment, there is nothing to fear – some startups are aware that the token bond should be inseparable from the default value of the entity. Therefore, they announce that they have their own forms of validation of the tokens they offer, compatible and dependent on the region in which the token is to be issued. Of course, this does not work everywhere, but where it does – token holders are properly protected against any accidents and other random events. Just like with securities, but still with all the benefits of tokenization.
This does not exhaust the subject of tokenization, but it definitely explains it enough to introduce everyone interested in this world – so good luck with your DOM token, and if you ever wanted to make it real – go ahead and contact us and we will take care of everything!