Tokenization is one aspect of a rapidly evolving movement toward more fluid and decentralized forms of value exchange.
Bitcoin pioneered this movement, and it has continued with blockchain technologies that support newer digital currencies.
Tokenization is the process of assigning a token as a unit of value for a specific asset. In the blockchain spaces, this means assigning a digital token to represent an asset so it can be used as a medium for value exchange in a network.
It may seem like a new concept; however, tokenization has been around for much longer than we think. In a sense, the U.S. dollar is a traditional asset token: It is considered legal tender for all public and private debts, it is backed in the full faith and trust of the government and, like other fiat currencies, it represents a unit of value people agree upon. If you were to tokenize the dollar on a blockchain, it would be worth about a dollar.
As recently as 1950, there were thousands of functioning forms of tokenized currency in the United States alone. For instance, banks could issue parallel banknotes. Industrial and agricultural trading companies could write a “scrip” to streamline transactions with suppliers and buyers. Now, we are familiar with using utility tokens to pay for things like car washes, laundromats, and arcades. In this sense, tokenization doesn’t seem so new.
Much of the hype around tokens is largely due to a phenomenon called initial coin offerings, which allow companies to raise millions of dollars in crowdsourced funding without the need for a traditional VC investor. Where some people view these tokens in terms of price and market valuation, serious blockchain project founders, as well as analysts, are more concerned with advancing tokens as a form of value exchange to build decentralized networks.
The major change of tokenization in the traditional manner is that now decentralized networks can create a substantial increase in the the ease of value exchange across many different platforms. This allows trades to be fairer, transactions faster and costs lowers. In supply chain terms, tokens provide a unit of value exchange that can cut costs at every stage of the process. Tokenization helps decentralized organizations build customer-oriented solutions to increase value for all participants by aligning economic incentives, rather than focusing on growing shareholder value or exit strategies.
As our world becomes more digitally connected, cash will have a role, but will no longer reign supreme. If tokenization can help us recapture liquidity not only for currencies, but by digitizing the value of all assets, time and work in a more flexible, fair exchange, that’s exciting. And given the amount of work still ahead, tokenization is certainly still in its early stages.