Crypto tokenization is the process of placing real-world assets onto a blockchain.
Once on a blockchain, we develop crypto tokens. Each token represents an ownership share of the real-world world asset.
What real-world assets can be placed on a blockchain and tokenized? Artwork, real-estate, currencies, stocks, and many other assets have been tokenized.
Crypto tokenization is key for blockchain technology to transform modern finance.
The world of crypto tokens and asset tokenization can be very confusing. Here is everything you need to know about crypto tokenization.
Crypto Tokens Explained
Before we talk about crypto tokens you might wonder what tokenization is in general. We will try to keep it simple and use some examples to explain everything for beginners. So, investing in wine can be an excellent way to add diversification to a portfolio. Right?
But few people have the ability to build a wine collection.
A leading wine dealer might create a crypto token by setting aside one million USD worth of fine wine in his cellar. This wine is placed on a blockchain.
The wine dealer could issue 10,000 crypto tokens that each represent 1% of this wine reserve.
The value of the crypto tokens would fluctuate with the value of the wine itself and would allow investors of all sizes opportunities to invest.
This is an example of an asset-backed crypto token. The crypto token in this case is backed by physical wine assets.
Technical Details about Crypto Tokens
In technical terms, what would these wine crypto tokens look like?
The wine-backed crypto token would implement a smart contract on a blockchain. That smart contract, secured by a cryptographic algorithm, would define all features of the token.
For example, the smart contract would outline which bottles back the token, the percent share of the total stock the token owns, and any other terms of the investment.
In the case of an asset-backed crypto asset, the smart contract might define a period when the wine dealer will sell the underlying wine. After the wine dealer sells the collection, during a defined period, the owner of the crypto token would have a 1% claim on revenues from the sale.
How do we generate a smart contract? Generally speaking, we create smart contracts on a blockchain platform that supports them. Ethereum is a popular choice but not the only option.
Difference Between Crypto Tokens and Crypto Coins
“Crypto token” and “crypto coin” are not identical.
Most simply, a crypto coin is a token that is specifically made to act as a means of payment. Bitcoin is the most prominent example of a crypto coin.
Bitcoin does not represent ownership of a real asset. It is a cryptocurrency similar to the U.S. dollar. This might change at the time when governments or better say central banks will issue their own central bank digital currencies (CBDCs).
This line is not always clear, however. For example, stablecoins are crypto coins intended to peg their value to that of currencies such as the U.S dollar or gold. In order to ensure the values are linked, stablecoins might offer some form of exchange for the underlying currency.
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