Tokenization in Blockchain 🚀🌐

#blockchain #web3 #cryptocurrency #news

Hi, there 👋 welcome to another blog on blockchain concept with tokenization 🚀. This concept of Tokenization is very essential to understand for budling any project beet DAPP, DAO OR Defi.

Lets try to understand Tokenization

Advantages of tokenization

Tokenization provides several benefits. The following are some of the most important of these benefits:

• Faster transaction processing: As transactions and all relevant parties are present on the
blockchain and readily available, there is no need to wait for a response from a counterparty
or to wait for clearing and settlement operations. All these operations can be performed efficiently and quickly on a blockchain.
• Flexibility: Due to the worldwide adoption of systems that use tokens, such as payment systems,
tokenization becomes simple due to easier cross-border use.
• Low cost: In comparison with traditional financial products, tokenization requires a lower cost
to implement and incurs a lower cost to the end user due to digitization. More recently, the
introduction of digital payments has revolutionized the financial industry. In the same spirit,
tokenization using blockchain can be considered another step toward achieving further efficiency and cost reduction. In fact, tokenization gives rise to a better, more efficient, and more
democratic financial system. For example, just being able to share customer data recorded
on one blockchain across all financial institutions reduces costs. Similarly, the possibility of
converting illiquid assets into liquid assets is another way of increasing efficiency and profits.
• Decentralization: Tokens are presented on a public blockchain, leveraging the decentralization
offered by blockchain technology. However, in some cases, a level of somewhat acceptable
centralization is introduced due to the control and scrutiny required by investors and exchanges
and other involved and interested parties.
Security: As tokens are cryptographically protected and produced using a blockchain, they
are secure. However, note that proper implementation must use good practice and meet established security industry standards, otherwise security flaws may result in exploitation by
hackers, leading to financial loss.
• Transparency: Because they are on a blockchain, tokens are more transparent than traditional
financial systems, meaning that any activity can be readily audited on a blockchain and is
visible to everyone.
• Trust: As a result of the security and transparency guarantees, more trust is naturally placed
in tokenization by investors.
• Fractional ownership: Imagine a scenario in which you own a painting by Vincent van Gogh.
It is almost impossible in traditional scenarios to have multiple owners of the painting without
immense legal, financial, and operational challenges. However, on a blockchain using tokens,
any asset (such as our van Gogh painting) can be fractionalized in such a way that it can be
owned in part by many investors. The same situation is true for a property: if I wanted to have
shared ownership with someone, it requires complicated legal procedures. However, with
tokenization, fractional ownership of any asset, be it art, real estate, or any other off-chain
real-world asset, is quick, easy, efficient, secure, and a lot less complicated than traditional
methods.
Low entry barrier: Traditional financial systems require traditional verification mechanisms,
which can take a long time for a customer. While they are necessary and serve the purpose
in traditional financial systems, these processes take a long time due to the necessary verification processes and the involvement of different entities. However, on a blockchain, this
entry barrier is lowered because there is no need to go through the long verification checks.
This is because not only is tokenization based on cryptographic guarantees provided by the
blockchain, but for many decentralized applications (DApps) in this ecosystem, it is basically
just a matter of downloading a DApp on your mobile device, depositing some funds if required,
and becoming part of the ecosystem.
• Innovative applications: Tokenization has resulted in many innovative applications, including
novel lending systems on blockchain, insurance, and other numerous financial applications,
including decentralized exchanges. Securities can now be tokenized and presented on blockchain, which results in client trust and satisfaction because of the better security and faster
processing times.
• More liquidity: This is due to the easy availability and accessibility of the tokens for the general
public. By using tokens, even illiquid assets such as paintings can be tokenized and traded on
an exchange with fractional ownership

Disadvantages of tokenization

In this section, we present some of the disadvantages of tokenization. At the top of the list we have
regulatory requirements:
• Regulatory issues: Regulation is a crucial subject of much debate. It is imperative that the tokens
are regulated so that investors can have the same level of confidence that they have when they
invest using traditional financial institutions. The big issue with tokenization and generally
any public blockchain technology is that they are mostly decentralized and in cases where
no single organization is in control, it becomes quite difficult to hold someone responsible if
something goes wrong. In a traditional system, we can go to the regulatory authorities or the
relevant ombudsman services, but who is held responsible on a blockchain?
Some of this situation has changed with recent security tokenization standards and legislation,
which consider tokens as securities. This means that security tokens will then be treated as
securities, and the same legal, financial, and regulatory implications will be placed on these
tokens that are applicable in the currently established financial industry. Refer to https://
www.sec.gov/answers/about-lawsshtml.html, where different laws that govern the securities industry are presented. This helps to increase customer confidence levels and trust in the
system; however, there are still many challenges that need to be addressed.
A new type of financial crime might be evolving with this tokenization ecosystem where, instead of using well-known and researched traditional financial fraud methods, criminals may
choose to launch a technically sophisticated attack. For an average user, this type of attack is
difficult to spot and understand as they are entirely on a blockchain and digitized. New forms
of front running and market skewing on decentralized finance platforms is increasingly becoming a concern.
• Legality of tokens: This is a concern in some jurisdictions where tokens and cryptocurrency
are illegal to own and trade.
• Technology barrier: Traditional financial systems have been the norm with brick-and-mortar
banks. We are used to that system, but things have changed and are expected to change rapidly with tokenization. Tokenization-based financial ecosystems are easier to use for a lot of
people, but for some, technological illiteracy can become an issue and could become a barrier.
Sometimes the interfaces and software applications required to use tokenization platforms
such as trading platforms are difficult to use for the average user.
• Security issues: The underlying blockchain technology is considered solid from a security
point of view, and it is boasted sometimes that due to the use of cryptography, it is impossible
to launch attacks and commit fraud on a blockchain. However, this is not entirely true, even
with the firm security foundation that blockchains provide. The way tokenization platforms
and DApps are implemented on the blockchain result in security issues that can be exploited
by hackers, potentially leading to financial loss. In other words, even if the underlying blockchain is relatively secure, the tokenization DApp implemented on top may have vulnerabilities
that could be exploited. These weaknesses could have been introduced by poor development
practices or inherent limitations in the still-evolving smart contract languages.