The term tokenization describes the fragmentation or division of a unit. A single part is called a token. Each token has a clearly defined value and is assigned rights and obligations.
A token is managed via a smart contract. These are intelligent contracts that are based on software and that automatically adapt to the fulfilment or change of contractual services. For example, if the value or the function of the token changes, the smart contract changes.
This method is based on blockchain technology. The blockchain enables ownership, rights, assets and material assets to be digitally mapped. The blockchain is a decentralized crypto exchanges database. It works on the principle that updates are made chronologically and cannot be changed afterwards. The name “blockchain” is derived from the fact that the information stored in the database is summarized in blocks and connected like a chain.
The information within the blockchain is stored in a history (similar to a chat history) and linked to the previous record. Each data block knows nothing about its successor, only about its predecessor. A digital fingerprint, also known as a hash, is made to uniquely identify a block. Blockchain technology can represent all imaginable values, rights and obligations to tangible and intangible goods through tokens. This simplifies their tradability and interchangeability.
Why is the blockchain particularly suitable for tokenization? Subsequent changes are excluded. To do this, a hash has to change, which, however, leads to the information chain-breaking apart. So all hashes would have to be recalculated. Blockchain is safe from manipulation and forgery this makes the blockchain a very secure system: an important prerequisite for the digitization of property rights and assets.
Another important point: The blockchain is managed via a decentralized network that anyone can join. Every member has a full copy of the blockchain on their computer and the computer checks that it is still intact.
A new block will not be added until it has been verified by every computer on the network. This decentralization ensures that everyone controls everyone. This is another reason why manipulation and counterfeiting are almost impossible.
Tokenization and the Impact on the Financial World
Many industries are now recognizing the advantages of blockchain technology. Secure systems are essential, especially in the financial sector. And this is exactly where blockchain and tokenization are assigned a disruptive force. With the help of tokens, theoretically, all types of assets and the associated rights can be digitally mapped and made tradable. The blockchain ensures the necessary security.
There are two different areas of application of tokens:
Through the blockchain, some tokens serve investment and financing purposes but are not securities.
Using blockchain, securities can be digitized and represented as tokens. The execution and settlement of securities transactions are faster and cheaper than before.