What does “Tokenization” really mean?

The blockchain world has been long been predicting that eventually, “everything will be tokenized”.

But what does that statement actually mean? Let’s break it down in a way that’s simple and clear.

At first glance, the concept of tokenization sounds like poker chips at a casino.

I give the teller at the casino bank a $100 bill, and she gives me $100 worth of chips.

In that situation, the chips are an IOU, or a claim on the value associated with the money.

Using another example, I could take $100 worth of gold, and represent the value associated with the gold in a token on the blockchain.

Tokenized assets are very useful.

I can’t send you a physical chunk of gold in an instant if you are on the other side of the world, but I can send you that value through the blockchain very quickly and inexpensively.

But what does it really mean to “own” a chunk of gold?

This is the key question if you want to understand what tokenization really is.

When you own something, what you really have is a set of property rights associated with that thing.

Let’s use gold as an example.

If I “own” a chunk of gold, that means I have the right to:

1 – Store it in my safe

2 – Sell it to someone else

3 – Melt it down to make jewelry

4 – Divide it into smaller chunks

5 – Use it as collateral to borrow money

There may be more “rights” associated with owning this chunk of gold, but you get the idea.

When you own something, what that means is you have a set of property rights that are tied to that asset.

The blockchain is an accounting ledger that is distributed across a network of nodes (computers).

It is set up this way to ensure that many copies of the ledger exist. No central entity can change the entries in the ledger.

In blockchain, this is referred to as being “immutable”.

An accounting ledger is a specific type of database where transaction information is stored.

Imagine a checkbook where the payments in and out of your bank account are recorded as deposits or withdraws.

The ownership rights associated with your money are being transferred between you and the various people with whom you exchange money.

So, let’s get back to the tokenization of assets that is coming soon.

While it does mean that physical assets will be “represented on the blockchain”, what it REALLY means, is the various ownership rights will be recorded, and exchanged, via a digital accounting ledger.

The nuances of those rights will differ by the type of asset, as owning a house entitles you to different property rights than owning a share of a company, which is different than owning money that is used to pay bills.

This idea will revolutionize how we all exchange items of value, and understanding how this works at a fundamental level will help you navigate these changes in your business, and in your life.

Download our eBook “The Blockchain Revolution” to learn more about the changes coming to the world of business.