Asset tokenization is a service involving the digitization of real assets that has been catching the attention of investors and institutions. In this article, we explain how this technology works and the opportunities and challenges it brings.
The financial market has been a stage for significant transformations with the exponential advancement of technology. Just to give an example: a few years ago, who would have thought that one day we would have access to all our banking information in the palm of our hand? Or that there would be banks operating 100% digitally? And what about Pix, which has replaced physical currency in many transactions?
However, the Digital Transformation of the sector didn’t stop there, and currently, there are currencies created specifically for virtual trading, such as Bitcoin and Ether. From these currencies and the technologies involved in their use, various services and possibilities have emerged and developed, catching the attention of investors and consumers from diverse backgrounds.
Among the financial services available in the digital world, we find tokenization. But what exactly is a token? Is it the same as cryptocurrencies? What are the advantages of this investment model? Is it secure? Find the answers in this article!
What is a token?
The word “token” originates from English and, in a loose translation, means “symbol.” In the realm of investments, the term “token” is used to refer to the digital representation of assets within the blockchain. Among these, it is interesting to mention:
- Real estate;
- Works of art;
To illustrate, imagine that you buy a ticket to watch a movie in the cinema; in this case, it symbolizes the value previously paid for admission.
Similarly, a token is the symbol of a real-world asset within the digital environment, enabling transactions involving the use of these assets.
Token x cryptocurrencies: what’s the difference?
The main difference is that a token is the representation of an asset created on an existing blockchain, while a cryptocurrency is the native asset of the platform itself.
It’s worth noting that Blockchain is a technology that functions as a ledger, allowing the recording of all user transactions within the business network in a secure and decentralized manner.
In this regard, it’s interesting to highlight that there is only one digital currency for each blockchain, for example, Ethereum’s Ether (ETH).
On the other hand, it is possible to create multiple different tokens on the same blockchain. Moreover, they can be developed by any user, simply by following the protocols established by the network.
In other words, in the case of cryptocurrencies, their creation happens alongside the development of a specific blockchain for that asset. Tokens, on the other hand, are generated by others on third-party platforms.
How is tokenization done?
Tokenization is achieved through the creation of smart contracts, which are applications developed to automatically execute the clauses established in the document. Thus, the process enables transactions to be conducted without the need for intermediaries.
However, before this, it is necessary to complete the following steps:
- Asset definition: selecting the element that will be represented by the token;
- Legal contract: documentation with specifications about the rights of the asset owner;
- Blockchain: determining the blockchain platform on which the token will be traded.
After these steps, the smart contract is built to ensure transactions in accordance with the contractual terms through the definition of protocols. Once this is done, the token becomes available on the blockchain for trading.
However, how do you choose the ideal token category for your asset? To help you with that, familiarize yourself with the main types and see how they are used in practice.
What are the main types of tokens?
There is a wide variety of tokens, each with a specific purpose. Therefore, let’s delve into the details of the top 5 models:
- Payment tokens: These are used as a payment method during transactions and are very similar to cryptocurrencies. However, the difference is that they operate through third-party platforms.
- Utility tokens: They offer specific benefits to those who acquire the asset, such as discounts on a particular company’s products and/or access to exclusive services.
- Equity tokens: They function similarly to buying shares in a company. Those who own these assets have the right to receive a portion of the organization’s profits.
- Security tokens: Also known as security tokens, they represent real assets, meaning assets that have monetary value in the financial market. In this category, investors can acquire a percentage of the value of these assets.
- Non-fungible tokens (NFTs): These are used to depict unique and irreplaceable items, such as artworks, whether in the physical or digital world. When obtaining an NFT, the buyer gains ownership rights over the asset represented by the token.
What are the advantages of tokenization?
Why invest using tokens? This is a valid question because, before making any type of investment, it’s important to delve into the investment method and understand its advantages and disadvantages.
In the case of tokenization, it’s possible to highlight some significant benefits compared to traditional market methods. Here are three examples.
1- Increased security
First and foremost, it’s worth noting that tokenization provides significant security for transactions, both in terms of cyberattacks and the potential breach of the agreement by any of the parties involved.
In this regard, it’s important to remember that all transactions take place within a blockchain. The technology received its name because of the way data storage functions.
Have you ever observed the structure of a chain? Typically, there are several interconnected links. In the blockchain, it’s as if each of the records were divided into small links that connect.
In other words, the information is transported and stored separately but interdependently, increasing the level of protection. So, it would be necessary for a cybercriminal to overcome the defense barrier of every block in the chain to access any data.
Another factor that enhances the security of transactions through tokens is smart contracts. Because they operate automatically, they ensure that the clauses of a contract will be fulfilled exactly as established, preventing external interference.
2- Transaction agility
Another benefit of tokenization is that the completion of transactions is often much faster when compared to traditional financial market transactions.
This happens because there is no need to use an intermediary to execute the operation, such as banks and other financial institutions. Within the blockchain, tokens can be traded directly between users, without anyone overseeing the transaction.
As a result, the process becomes less bureaucratic, increasing agility, and also contributing to cost reduction since there is no need to pay intermediary fees.
3- Affordable investments
With tokenization, individuals with diverse profiles can participate in the same investment, which can be highly advantageous for the token owner. How does this work in practice?
Investors have the option to fractionalize an asset during digitization, allowing other people to buy small fractions of the asset and profit according to its appreciation.
Just to illustrate, imagine the token as a work of art divided into small fractions. This broadens the potential audience for acquiring the asset, enabling the owner to find buyers more easily and raise funds more quickly.
Investors in the artwork will have a proportional percentage of their investment in the total asset, tracking the financial appreciation of the art in the market.
However, before deciding to invest through tokens, it’s also crucial to be aware of the disadvantages. This way, you’ll be better equipped to make an informed decision.
What are the risks of tokenization?
Despite the advantages offered by tokenization, it’s important to note that the process also comes with some risks. These include:
- Volatility: Digital assets can experience significant price fluctuations in very short periods of time. In other words, the investment value can rise rapidly, but it can also drop sharply, causing significant losses.
- Liquidity: In some cases, it may be difficult to sell the token at the desired moment. Alternatively, you might find buyers, but they may offer prices far below expectations.
- Regulation: Another factor worth noting is that, in Brazil, there are still no specific laws governing transactions involving tokens, affecting legal security.
The term “tokenization” refers to the representation of an asset within the digital environment to be traded through the blockchain, a platform that functions as a ledger for each transaction.
Among the advantages that this type of trading can provide are:
- Accessibility in investments;
- Faster transactions;
- Higher level of security.
Therefore, it is a good option for companies seeking a modern and less bureaucratic investment alternative than the traditional financial market.
In this regard, it is possible to use tokens to trade various types of assets, for example: Money;
- Digital games;
- Real estate;
- Among others.