A token is a unit of value issued by a private company. According to William Mougayar, author of ‘The business blockchain’, a token is “a unit of value that an organization creates to self-govern its business model, and empower its users to interact with its products, while facilitating the distribution and sharing of rewards and benefits to all of its stakeholders.”
Although tokens have a lot in common with bitcoins (they have a value attached to them which is accepted by a community and are blockchain-based), tokens have a wide range of applications and serve a much broader purpose. Moreover, nearly all tokens are based on Ethereum’s blockchain protocol, which is more complete than bitcoin’s one.
What Are the Types of Tokens?
There are three major categories of crypto tokens:
Equity tokens — or, in other words, company’s shares;
Utility tokens — tokens, that represent value within a native platform (reputation, scores for certain actions, game currency).
Asset-backed tokens — a digital obligations for real goods or services (a ton of aviation kerosene, working hours, etc.).
What Backs Tokens?
The direct support have only the asset-backed tokens as they are a digital copies of existing assets. For example, one token can be equal to one square meter of living space or two movie tickets. The tokens’ conversion is ensured by a company which stores goods or provides services.
What is Asset Tokenization?
Tokenization is the process of replacing sensitive data with unique identification symbols, tokens, that retain all the essential information about the data without compromising its security. Tokenization aims to minimize the data needed to run a business. In other words, the tokenization is issue of digital version of existing values for quick and safe operating with them.
For example, a shop owner creates an electronic accounting system in which he issues digital obligations for items sold in the shop — tokens. Having a fairly good reputation, the owner can pre-sell the items by selling tokens on online trading platforms. In this case, any owner of the tokens can come to the shop and exchange the tokens for any product within the shop.
What is the difference between a token and a crypto currency?
Unlike a crypto currency, issuing of tokens can be centralized (under the management of one organization), and decentralized (under the management of a predetermined algorithm). Processing and acceptance of transactions can also be performed centrally (when all servers are controlled by one organization). Formation of a token price is influenced not only by demand and supply factors, but by many additional aspects (binding to an external asset, conditional emission and rewarding rules ). In addition, unlike a crypto currency, a token does not have its own blockchain.
How to buy tokens?
Tokens can be bought through online trading services (exchanges and trading platforms), or in personal transactions (when a buyer and a seller agree personally). The very process of token trading is identical to the process of cryptocurrencies trading. In addition, issuers of tokens often provide the possibility to buy tokens through traditional electronic means of payment.
Where to store tokens?
The storage and transaction of tokens is similar to cryptocurrency ones. Special wallets realize the storage and processing of keys, as well as forming and signing of transactions. Typically, these applications are integrated in the tokenization platform.
What are the benefits of tokenization?
A high trading speed;
Increase the security of storage and data transfer due to the blockchain technology;
Absence of third parties transactions;
Advanced features of the platform (multi-level authentication, invoicing, regular payments, replenishment cards);
Ease of use. Many platform capabilities can be integrated into a mobile app.
What are the advantages of blockchain in tokenization process?
Creation of a reliable database (ensuring verification of data reliability for each next state of the system);
Decentralization of the point of failure (all transactions are processed by independent servers);
Organization of a reliable audit (correctness verification of all changes on the platform).
What are the risks and problems of tokenization?
Personal keys of users can be lost or stolen by hackers, that can not be predicted and insured.
Ensuring the confidentiality in public blockchains is a difficult task, since for the process of transaction verification their data must be opened.
The complex task of scaling in a decentralized accounting system because of a strict bandwidth restriction of a decentralized database.