The art of tokenization

What if you could collect baseball cards on blockchain and sell them for Ether? Would you like to store a value on blockchain and trade it after a while for a cryptocurrency? Let’s talk about this technology behind blockchain, called tokens.

Since the launch of Bitcoin in 2009, the cryptocurrency space had a tremendous amount of growth in every aspect. The technology behind this currency was created as a digital peer-to-peer payment system that enables users to store, send, and receive money without the need of financial intermediaries.

Later on, a new blockchain was born, called Ethereum, which allows creating new tokens. With this new technology we got involved in a huge ICO (Initial Coin Offering) boom. More tokens were issued with no longer purely digital currencies but evolved into a range of different tokens with different functionalities. Before talking about these types of tokens, let’s define what is a token.

Tokens have different properties, but there are two main categories which are fungibility and non-fungibility. In economics fungibility refers to the interchangeability of each unit of a commodity with other units of the same commodity. An example would be to exchange one kilogram of gold or ten units of a FIAT currency, like EUR.

If I lend ten EUR to a friend, it would not matter if he returns me the exact same 10 EUR bill, or various bills and coins for an amount of 10 EUR. A fungible cryptographic token is not unique and perfectly interchangeable with other tokens of its kind.

Fungible tokens

Fungibility is the essential feature of any currency, as a means of exchange, a unit of account, and store of value. That property exists for Bitcoin, NEO, Ether or any ERC20 token. If you send one Bitcoin and get another back, the value is the same, regardless of its provenance.

Also, refers to a currency’s ability to maintain a standard value and uniform acceptance. Without fungibility, the currency is unstable and likely to collapse.

As per now, the fungible tokens can be summarized in three different parts:

• Payment
• Utility
• Security

Payment

Payment tokens or currency tokens are digital assets that act as online currencies. These tokens can be used to buy and sell goods and services and can be held as a store of value. Are based on distributed ledger technologies to facilitate easy and fast peer-to-peer transactions.

The difference with FIAT money is that cryptocurrencies are decentralized and function independently of any central bank. It is not required the use of a financial intermediary and uses cryptography and a peer-to-peer network to ensure transaction security.

Example: Bitcoin.

Utility

Utility tokens or app coins are mostly distributed through an ICO when the project is launching. Tokens are required to access to blockchain-based platforms providing particular services developed by the project they invested in. For example, allowing to participate in the ecosystem through decision-making processes like decentralized vote.

Example: 0x Protocol.

Security

The security tokens, also called equity tokens, act as stock after the initial coin offering has ended.

This category of tokens represents assets such as participation in real physical underlying, companies, or entitlement to dividends or interest payments.

Security tokens have become subjects to some of the most significant global regulators, from SEC in the USA and FINMA in Switzerland, thus being utterly identical to stocks. The regulations from the U.S. Security law fall under the Howey test.

Regarding their economic function, the tokens are analogous to equities, bonds or derivatives.

Example: NEX.

Non-fungible tokens

Tokens as a payment medium or a utility are only two uses of the underlying blockchain technology. Another standard, the ERC-721 tokens, are digital assets that contain unique data which makes different from each other. These tokens can certify and secure uniqueness and identity.

These non-fungible tokens are blockchain assets that are designed not to be equal, which essentially works as a database entry for any item. To understand these type of tokens, let’s take a look at the first non-fungible token ever created, the CyrptoKitties.

There are lots of them with a limited supply of 50,000. Each one is unique, has its name, eye color, facial expression, and special features.

You gain ownership of a non-fungible token that corresponds with that kitty. Some are more valuable than others, and you can buy and sell your kitty for a varying amount of fungible tokens like Ether, depending on the rarity of the non-fungible token. The most expensive one was sold for $170,000, crazy right?

Another example could be art collecting. Painting and sculptures could be verified and authenticated by experts before creating a non-fungible token of that piece of art. When the owner wants to sell the piece of art, they can list the token on an auction as proof that the asset is real, and they’re the right owner.

The non-fungible tokens are not just collectibles tokens on the blockchain, they have more power behind as blockchain-based assets.

Let’s thing one moment about identity and how to verify personhood. A non-fungible token can be created as your driver’s license or your passport. This creates non tradable digital tokens able to interact and verify with the proper authorities.

What’s next?

A token could be defined in so many ways, but it’s important to know the difference between them in case you want to invest in an ICO, STO or just buying a collectible token.

The utility tokens already had their boom. Now it’s time for the security one, defined as the intersection between traditional financial products and digital crypto assets. The new standard for them, the ERC-1400, could bring a lot of potential to these tokens and future STO.

Now that there are so many fungible tokens out there, more than 2000 as per coinmarketcap, let’s think about this new technology bringing non-fungible tokens into the space. Turning back to the art example, this kind of certification digitizes the process of provenance and prevents fraud in the art world, because the ownership of the art assets exists on the blockchain.