What is Tokenization?
Introduction to tokenization
Tokenization is simply the creation of something that represents something else. It can represent ownership of something, the right to do something, or the right to a good or service. In this day and age when we speak of tokenization, we typically mean a digital representation of something else.
Tokenization in its most basic form is not an entirely new idea, and (contrary to popular belief) blockchain does not need to be involved in order for tokenization to occur. We already have lots of paper, non-digital, “tokens” today. For example, a title on a home or vehicle represents ownership of that asset. A check you write to someone is a “token” representing the right to cash in your bank account.
We have digital tokens today as well. For example, a digital ticket to a show at the theatre is a token that represents your right to a particular seat over a particular period of time at a particular show. An airline ticket can be another very similar example of a digital “token”.
What the Sweetbridge protocols and our Synchronized Accounting platform make possible is the trusted tokenization of anything.
What are the benefits of tokenization?
Digital tokenization of assets provides the following benefits:
- Ease of transfer vs physical transfer of assets
- Lower cost and increased speed due to reduced intermediaries
- Automatic enforcement of behavior, regulations, rules and agreements on transfer
- Fractional transfers of ownership
- Audit trails that provide transparency and keep all relevant information in a single place
- Identity for something that is very difficult to counterfeit and can prove something is genuine
- Separating the rights on an asset from the ownership of the asset
Tokenization makes it possible to easily transfer 100% of the ownership of something or a fraction of the ownership, without intermediaries. It also makes it possible to divide an asset or right between multiple owners with little effort or cost. Obviously you would not want to have multiple owners for a theater ticket but you might want to do this with gold for example.
Moving a step beyond that though, tokenization of rights can create entirely new markets. Think for a moment about how the ability to have property titles (a token of property ownership) created the real estate market, or how the ability to have a right to future profit (a stock “token”) created the stock market. Whenever a right is tokenized, whether through a paper system or a digital one, there is potential for a new market to be created and new value to be unlocked.
Now, imagine what could happen if we could tokenize anything, even assets and rights which aren’t currently tokenized today. All of the protocols in our original white paper where examples of rights. For example, Sweetcoin is just one example, it’s the right to lower cost.
What is needed to make tokenization trustworthy?
The possibility of tokenizing anything sounds appealing, but it isn’t as simple as some may lead you to think. If tokenization is to be wide spread and useful for real trade and commerce (for more than just a few use cases), it must build upon and improve the current processes in place today. It must enable everything that the current systems enable while adding more benefits and value to what the current systems offer.
Tokenization offers immense opportunity but it must be trustworthy, value-add, and standardized if it is to be widely applicable.
The Sweetbridge protocols create a trusted environment by building standardization into financial transactions in a way that does not exist today. Standardization has proved enormously beneficial and profitable throughout history. Think for a moment about what the standardization process of the assembly line did for the industrial revolution, or more what containerization did for the shipping industry, and you will understand very quickly the possibilities. The physical standardization of shipping containers in 1956 resulted in a 36 times reduction in the cost of handling at ports and a significant upturn in global GDP.
In contrast, the financial industry has very little standardization in place today, and nothing that would rival the level of compliance or standardization that the Sweetbridge Synchronized Accounting Platform could provide. In addition to regulatory checks and balances the Sweetbridge platform makes it possible for transactions (even across an entire economy) to be audited in real time.
In addition to that, the Sweetbridge platform makes it possible to do what cannot be done in paper-based or even digital systems today; it can enforce behavior on digital tokens. This means that legal requirements and workflows can be programed right into transactions. The workflow for each transaction will be different depending on the assets or rights being tokenized and transferred — it can be a simple workflow or a more complex workflow, but in order for tokenization to be trustworthy the workflow must be built into the system to ensure that what is meant to happen is what actually occurs.
Furthermore, in order to be trustworthy, a tokenization system must ensure that all transactions are performed ‘atomically’. This, for example, ensures that multiple parties do not end up owning an unshareable asset at the same time.
When we talk about atomic transactions we mean that “each transaction is an indivisible and irreducible series of persisted state changes such that all occur or nothing occurs.” This can sound a little confusing, but essentially it means, in order for the transaction to be atomic, a bunch of things must happen at once so that there are no duplicates or inconsistencies in the transaction. This is what our Synchronized Accounting platform makes possible. By ensuring that the legal state, accounting state, and payment state of all transactions are all connected and cannot be out of sync with each other, we ensure that no two parties can own the same thing at the same time and there are no inconsistencies within the system.
All of this must occur within a system that doesn’t just tokenize assets alone, or rights alone, these things must be tokenized together, within the same system. If you tokenize only assets then you cannot ensure that the rights associated with that asset will be transferred along with the asset when ownership is transferred. Think for a moment what would happen if you bought an apartment only to find out that it had tenants who had a long term contract for 10 years which you didn’t know about. In order to tokenize that apartment you must also have a way to tokenize any rights associated with that apartment. The same is true of any number of other assets.
At Sweetbridge we aren’t just interested in tokenization as a fad, we want to enable the kind of tokenization that will actually work with all use cases in the real world. That is why our protocols are designed to function on a foundation of Synchronized Accounting. That is why we are designing a system that will allow the tokenization of both assets and rights together in a standardized and trustworthy environment that offer real-time auditing and continuous assurance across all transactions and all parties.
This post is just an overview of tokenization, but you can read more about the depth tokenization requires in order to handle real world problems of tokenization and what is needed in order for it to be trustworthy in our recently published research paper, Trusted Tokenization.
In our next blog post we’ll look more closely at the tokenization of assets and the tokenization of rights related to these assets. Stay tuned!
