What is Tokenization? Explore The Benefits & Impacts Of Tokenization

Do you know how tokenization can help startups? What are the benefit of tokenization? How it will impact various industries? How tokenization is different from blockchain? Read this article to explore!

Shreshtha Verma
11 Apr 2023
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Tokenization Future Impact

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In the fast-paced world of business, with constant advancements and changes taking place, companies are always on the lookout for new and practical solutions to stay ahead of the curve. Tokenization is one such innovation that has gained significant traction in recent times. What was once considered a mere buzzword is now a global phenomenon with the potential to revolutionize the economy.

The tokenization market has been experiencing tremendous growth, and its impact is not limited to a specific region or industry. A recent report predicts that the market will expand from $2.3 billion in 2021 to $5.6 billion by 2025, indicating its potential to reshape the global economy. While automation may eliminate some intermediaries, the emergence of new service providers will facilitate and manage this transition. With such rapid growth and impact, businesses must take notice of tokenization and consider incorporating it into their strategies to stay competitive.

What Is Tokenization?

Tokenization is a process that involves transforming physical assets, such as art or real estate, into digital equivalents, known as tokens, using blockchain technology. These tokens represent ownership of the asset and can be traded on a blockchain platform or ledger. In addition to replacing sensitive data like credit card information, the goal of tokenization is to safeguard valuable information against theft and cyberattacks.

The advent of digitization has significantly boosted business efficiency and opened up new market opportunities, but it has taken time to reach this point. Today, tokenization holds enormous potential and continues to evolve with the aid of blockchain technology. Tokenization involves the conversion of physical assets and rights into digital tokens on a blockchain, and by 2030, it is predicted to disrupt the transaction methods of established asset classes. This technology will make established asset classes more accessible to a broader range of investors while also creating new asset classes. It will also drive growth in various areas and displace existing intermediaries. However, this shift demands investments in technology and skills, as well as legal and regulatory changes, requiring businesses to overcome various challenges during the transition.

Tokenization Vs Blockchain  

Blockchain is a decentralized data system that provides universal access while also protecting data against theft. It is an online ledger that records transactions or blocks, which are replicated across multiple computing stations to ensure data security. The blocks in the blockchain represent permanent file pages, making it impossible to manipulate data without the authorization of all participants.

Tokenization, on the other hand, is a powerful tool used to safeguard payment card information. When combined with blockchain technology, it becomes even more effective. Tokenization enables faster, safer, and more efficient transactions in the payment sector. Tokens can represent any trading asset, including currency, stock, or commodity. Blockchain technology facilitates the transfer of tokens between parties without the need for intermediaries such as banks, reducing transaction fees.

The emergence of decentralized technology provides businesses with transparent records of token transactions, which can only be accessed with specific permissions. Blockchain technology enables seamless and secure transactions by recording all data on an immutable and transparent ledger, thereby eliminating the risk of errors or fraud.

What Is The Reach of Tokenization Across Industries?

Tokenization has the potential to benefit businesses across multiple industries. In the real estate sector, where projects are often large and expensive, tokenization allows multiple investors to own a part of the property, making it accessible to a broader audience. Tokenization also helps firms automate income distribution, resolve property disputes like inheritance, and provide liquidity for operations.

In asset management, tokenization enables assets to be divided into smaller pieces, providing investors with the opportunity to acquire a fraction of a single share. This allows for greater affordability, flexibility, and efficient portfolio management.

Tokenization also helps in the efficient management of contracts and agreements. Digital tokens are used to define contractual obligations, facilitating more efficient agreement management for contract execution. It also aids in verifying real-time obligations and existing agreements.

What Are The Benefits Of Tokenization?

Tokenization has the potential to transform multiple industries! Wondering how? Read below the various benefits of tokenization!

  • Improved Security and Fraud Prevention: Tokenization replaces sensitive data such as credit card information with a token that has no intrinsic value, thus making it useless to cybercriminals in case of a data breach. It also reduces the risk of fraud by preventing the use of stolen information in fraudulent transactions.
  • Increased Efficiency and Speed: Tokenization enables faster and more efficient transactions by eliminating the need for intermediaries, such as banks, to validate transactions. This reduces transaction fees and settlement times, making it more cost-effective and efficient for businesses.
  • Enhanced Liquidity: Tokenization enables the fractionalization of assets, making it possible for investors to own a fraction of high-value assets that would otherwise be too expensive to purchase. This opens up opportunities for new investment markets, providing greater liquidity and access to a larger audience.
  • Greater Accessibility: Tokenization makes it easier for novice investors to participate in large-scale projects, including real estate investments. It also makes it easier for businesses to streamline income distribution and deal with property-related disputes like inheritance.
  • Transparency: Tokenization creates an immutable and transparent record of transactions on a decentralized ledger. This enables businesses to easily track and audit their transactions, ensuring greater transparency and accountability.

How Tokenization Can Help Startups?

Tokenization can provide numerous benefits to startups. One of the significant advantages is the ability to raise funds through Initial Coin Offerings (ICO) without the need for traditional financing methods, like venture capitalists or banks. By issuing tokens, startups can attract investors from across the globe, making it easier to secure funding. Additionally, tokens offer greater flexibility than traditional investments, allowing startups to design and customize their fundraising campaigns to target specific markets or audiences.

Another advantage of tokenization is its potential for creating liquidity in assets that traditionally have limited liquidity, like intellectual property or real estate. Through tokenization, startups can create a market for these assets and offer investors the opportunity to purchase fractional ownership. This approach can help startups unlock the value of their assets while providing investors with a new asset class to invest in.

Tokenization can also help startups reduce transaction costs and increase efficiency in their operations. By using tokens, startups can automate many of their processes, eliminating the need for intermediaries and reducing transaction fees. This approach can help startups streamline their operations and allocate more resources towards innovation and growth.

Overall, tokenization can provide startups with a range of benefits, including access to global investors, greater flexibility in fundraising, increased liquidity in traditionally illiquid assets, and reduced transaction costs. As blockchain technology and tokenization continue to evolve, it is expected that startups will increasingly adopt this approach to fund their growth and achieve their business objectives.