What is Tokenization?

What is Tokenization?

Tokenization is a concept that can take several forms, but essentially it means to create a tradeable item which holds value anchored in an asset which is not itself readily tradeable.

If something of value is not easily traded, it is natural that a token is created which represents part or all of such value, which can then be held until redemption or circulated as currency. Historically, some things, such as hours of labor, could not easily be accounted for without a physical token.

One benefit is that tokens make things easier to account for. Tokenization has many real-world examples but has become used almost exclusively in reference to digital tokens. In today’s world, of course, it matters less and less whether physical assets exist anywhere at all: people only care about the numbers. Cryptocurrencies are taking that notion to a new level by creating value in currencies which are made up of little more than numbers and other symbols on a blockchain of computers. Tokens are being created out of thin air to serve as micro-currencies for specific distributed applications on the blockchain of the Ethereum platform and other protocols which allow for distributed applications and smart contracts. Many of the services which are using distributed applications and are creating tokens for their services can do so by simply inviting people to buy some of the coins and thereby give them a tradeable value based on what people use them for. Or, they can attempt to allow the tokens to derive their value from the utility they provide, and the fact that nothing else would translate the value as efficiently.

If a unique service was to make all the hours worked by people in a city, according to a blockchain in the municipal computer system, into tokens which were traded based on their relationship to energy consumption or some other variable of interest, the labor hours in the city would be “tokenized” on a platform whose purpose was so closely tied to the token that the two would not be as strong without each other. This is just a loose, imaginary example of what tokenization might mean in one context. Increasingly, tokenization is used in reference to the internet-of-things and the economy of microtransactions that seems to be on the horizon, if blockchains can indeed keep their transaction fees so small that the economy will be reshaped by the ability of consumers to pay tiny amounts through smart contracts and so forth for various things in their day-to-day lives.

Another, different kind of tokenization being kicked around lately would be individuals selling-off small slices of interest in assets they own, such as their home, which would be said to be “tokenized.” Small businesses in the real world might be able to tokenize their business and their assets soon. Many people living in geographic proximity to one another could tokenize and jointly own cars, bikes, buses, etc. In coding lingo, tokenization is the act of splitting a message into the parts that comprise it. How interesting that the code for creating tokens could be itself made up of tokens. The future holds many surprises for us, to be sure.