The technology is very simple. Blockchain introduces trust, automation and accountability into this system and an algorithm defines all the token’s characteristics such as the value, how and how many tokens are created, what denominations they allow, how the tokens are issued and under what name and address they can be used.
To understand the contribution of tokenization, it is necessary to have a global vision that associates the physical world and the digital world in which objects can be copied and duplicated without extra effort. The boundaries between real images and fictional images are blurring.
The above infographic presented by prof. dr. Tim Weingärtner puts into perspective the benefits of this global vision that connects the physical world and the digital world:
- The “Internet of Things” (IoT) offers the possibility to recognize and track physical objects. The IoT represents the senses of the digital world.
- Robots, drones and other manipulators enable intervention in the physical world. They represent the actuators of the digital world.
- “Artificial intelligence” (AI) in the form of machine learning, computer vision, speech recognition, speech processing or optimization helps to understand objects and processes in the physical world. Autonomous decisions can be made. AI thus represents the brain of the digital world.
- The storage of large amounts of data thanks to “Big Data” and with it the possibility to store all information for a long time is ultimately the memory of the digital world.
- Tokenization facilitates exchanges by making it more fluid.
The benefits of tokenization
Tokens will play a fundamental role in everything related to the exchange of value and the representation of rights in the physical world. For example, deeds, titles, and certificates are all traditional versions of a token. A deed to a house represents ownership of that house. The token refers to the digital native asset that represents the actual asset itself.
The benefits of tokenization are:
- Assets such as real estate have a high barrier to entry due to the large initial capital required. Fractionating these assets democratizes access for retail and retail investors.
- Asset tokenization allows the sale of an asset for the opportunity to buy
- Automation through smart contracts
- Smart contracts can automate steps such as compliance, document verification, trading, and escrow.
- Using smart contracts, dividends and other cash flows can be paid programmatically when they are due.
- Costs can be significantly reduced by eliminating some middlemen and increasing process efficiency.
- Faster settlement times
- Smart contracts triggered by predefined parameters can execute transactions instantly.
- Tokenization extends the scope of collateral beyond traditional assets by breaking down into new asset classes, which will significantly increase the options available to market participants.
- Fraud Mitigation
- Using immutable blockchain databases reduces risk.
Tokenization mainly concerns assets that are not yet traded electronically, for example works of art, exotic collectibles and assets that require more transparency in payment and data flows to improve their liquidity and their “tradability”.
Example of NFTs
NFTs differ from cryptocurrency in that they represent a single or non-fungible asset. For example, ownership of NFTs, such as works of art, can be established and verified because NFTs are not replaceable. While copies of the work may exist, the original can always be identified and its ownership verified by registration in the blockchain.
Smart contracts allow artists to receive a royalty on their work every time the work is sold. Since the blockchain associated with an NFT work must be updated with every transfer of ownership, the contract is activated every time the hand of the work changes.
Selling the property NFT simply involves adding the record of the sale to the property’s blockchain, which secures all relevant legal documents. Not only do NFTs help authenticate identities in a way that is essential in environments such as online healthcare and online education, but NFTs can also be used in more casual settings to enhance avatars used to represent people on online platforms.
The Tel-Aviv Stock Exchange example
The Tel Aviv Stock Exchange (TASE) uses blockchain technology, smart contracts and tokenization to reduce the inherent costs, improve the security of the process and also reduce the various risks associated with these types of securities.
The aim was to make the stock exchange a central economic player in the Israeli capital market. Result: the profit margin of the Tel Aviv Stock Exchange has more than doubled from 9% to 25% in 5 years. Sales have also increased significantly, with an annual increase of 7.5% over the same period.
Example of the contribution of tokens to real estate
Tokenization has the potential to provide a financing alternative by assigning buildings their own tokens, which represent fractions of all or part of the asset’s ownership or debt. It is also likely that we will see an increase in real estate investment trusts issuing tokens instead of stocks.
Indeed, each token is similar to a digitized share that contains all the ownership rights associated with a share. Where the classic real estate transaction as part of a rental investment takes between three and six months, regardless of whether there is a loan or not, the transaction is carried out via tokens in one click.
A smart contract has the potential to transfer property instantly and securely, without intermediaries (e.g. escrow agents, brokers) in a transaction.
Loyalty program tokenization example
A customer collects ten, twenty or more loyalty cards from different companies or brands. Often they are not used. Therefore, technological solutions based on the Wallet principle – multiple loyalty cards in a special aggregator application – are becoming more common by adding the possibility to pay with a smartphone. Many brands mainly manage their loyalty programs based on their own mobile application, so customers don’t have to carry around stacks of plastic cards.
Implementing tokenization will transform loyalty programs.
- Cost reduction
- Blockchain-based smart contracts can enable secure, traceable and transparent transactions, reducing costs associated with errors and fraud
- Using smart contract solutions, a blockchain-based loyalty program can significantly reduce management costs
- For loyalty program providers, tokenizing loyalty points makes them unique, trackable, and tamper-resistant.
- For customers, it provides a single digital wallet platform to manage multiple membership programs.
- Metacard offers the Giftverse, an NFT gift experience management system to help brands, creators and event organizers connect with new audiences, increase sales, increase brand awareness and build engaged communities.
- Tokenization provides a clear understanding of loyalty points and easy redemption of those points
- The blockchain allows many independent participants to participate in a single market to exchange the value of the prizes offered to customers.
- Cryptographic tokens can define complex and consistent sequences and combinations of interactions between participants to achieve a single result.
- The possibilities for formulating mechanisms and rules are limitless. and easily adaptable and, above all, not subject to manipulation and abuse.
- Customer loyalty
- Providers can connect customers with more service providers to provide them with an improved customer experience.
- Clients benefit from more trading options with near real-time capabilities.
- Program management
- Suppliers get transparent reporting and tracking while gaining insight into customer behavior.
- Transparent program management reduces point loss due to expiration or fraud for customers.