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Everything about tokens and tokenization

There is a growing interest in tokens and tokenization, but what is it really about? 

Before talking about tokenization, it is important to understand what a token is. 

A token is a digital representation of an asset on a blockchain. 

It is managed by a smart contract that specifies a series of rights to it. 

Each token can represent the ownership of real or digital assets, access rights to these assets, voting rights, the possibility to carry out actions or have roles. 

A token, to qualify as such, must have certain fundamental characteristics.

First of all, it must be non-duplicable, censorship-resistant and immutable; moreover, it must be manageable in complete autonomy and issued in such a way as to avoid its double-spending. 

Token classification 

The first big distinction to be made is between fungible and non-fungible tokens (NFT). 

Fungible tokens are created using the ERC20 standard. Fungible means that all tokens are identical, i.e. there are no differences between them. 

They can be catalogued according to their function: 

  1. Utility tokens;
  2. Payment tokens;
  3. Commodity tokens.

Utility tokens represent tokens that can be spent within a digital ecosystem. 

They can be used to buy a good or a service, take advantage of a discount or perform a certain action. 

Another example of fungible tokens are payment tokens, which serve solely as a means of payment. This category includes stablecoins such as Tether, USD Coin or Paxos Standard. 

Another type of fungible tokens are commodity tokens, which are backed by commodities such as precious metals, gold and silver. Examples of gold-related tokens are PAX Gold, Tether Gold and Digix Gold Token. 

The latter was the first example of this type of token. It is backed by physical gold found in a vault in Singapore. DGX holders pay periodic fees to help pay the management of the gold collateral. 

A well-known example of a utility token is BAT (Basic Attention Token). 

BAT is the token that is distributed through the open-source Brave browser. One of the goals of Brave is to reward users. A small percentage of the earnings from advertising is allocated to users who can decide whether to withdraw it or automatically donate it to content creators. 

BAT introduces a new way of advertising: rather than paying for the advertising platform (e.g. Google or Facebook), the end-user who sees the advertisement is paid directly. All this takes place on the Ethereum Blockchain. 

According to Brendan Eich, creator of the JavaScript programming language and CEO of Brave Software since 2015, this system guarantees better transparency in the distribution of money and information, dividing profits between content creators, the Brave platform and partners. 

The emergence of the ERC721 standard gives rise to non-fungible tokens (NFT). 

The great innovation that this standard brings is the possibility to insert metadata inside each token, i.e. information that makes it unique and different from the others. 

One of the most famous examples of NFTs is CryptoKitties, a blockchain game on Ethereum that allows users to buy, collect, breed and sell virtual cats. Each CryptoKitty is represented by an NFT, making each cat unique. The person who holds the NFT is the only one who can decide whether to sell the cat or breed it. 

What is tokenization 

To tokenize means to divide an asset into multiple digital shares and distribute them to different owners

This system allows dividing the ownership or access rights to an asset through tokens that each represent an identified portion of a particular asset or right. 

By connecting any object to non-fungible tokens, that object becomes manageable and tradable outside the normal platforms where it is used. 

The tokenization process is applicable in several areas. 

For example, STOs (Security Token Offerings) represent a great innovation in the financial sector. A Security Token represents a share of a company, therefore, the company in question can decide how to distribute profits to the various token holders, in a completely unilateral way. The token holders would basically be in a position to be shareholders in a particular company. 

Other examples of tokenization are digital art and real estate. Tokenizing works of art and property would bring great advantages in both areas: the certainty of the artwork’s origin for digital art, greater flexibility and capital inflow for real estate. 

Even in the world of sports, many teams are taking action to integrate blockchain technology into this entertainment sector. The recent partnerships of teams such as Barcelona, Juventus and AS Roma with the Socios and Chiliz platforms, are a demonstration of how this sector is growing considerably. 

Socios is a blockchain platform that aims to introduce a Fan Token, a digital token that can be exchanged on the mobile platform by fans around the world and used to interact with the Club through polls and voting; an innovative way to allow fans to make their voice heard, establishing an even stronger bond with their team. 

In the coming years, tokenization will certainly bring enormous positive changes in many areas. This will only be the beginning of a great revolution that will result in massive adoption of blockchain and cryptocurrencies. 

David Coltro