What is Tokenization? Behind the hype

Tokenization is the prevailing buzzword in the web3 world these days. Prominent financial institutions are making their moves to tokenize their extensive asset holdings into digital tokens. They are also forging partnerships with other financial giants. For instance, JP Morgan is leveraging blockchain technology for the seamless transfer of money market funds. Euroclear has unveiled its RWA Tokenization Service, and notable players like Citi Bank and TD Securities have engaged in token issuance. It’s evident that the financial sector has finally recognized a vital use case for Distributed Ledger Technology (DLT), specifically blockchain, after much anticipation. So for all those eager to grasp, What exactly this tokenization is? And how does blockchain come into the picture? , Here’s my attempt to reveal the truth behind all the buzz around this.

What is Tokenization anyway ???

It’s nothing but a digital record of something which in our case is an asset

Tokenization, in essence, is not a novel concept. It’s nothing but a digital record of something which in our case is an asset. In our daily lives, we encounter digital records of assets frequently, whether it’s digital gold, the digital registry of your property, or digital representations of bonds and stocks. The challenge arises when we consider the maintenance of these digital records, especially given their high value. Multiple entities, including government bodies, banks, and brokers, are typically involved in this process. In most cases, each entity maintains its own digital record of these assets. Making a change in one record can necessitate the reconciliation of records across all involved entities. Which in our traditional systems is a very sluggish and expensive process.

So even if we keep the security benefits of blockchain aside, Managing and reconciling such data swiftly becomes a crucial accomplishment

Now, let’s talk about blockchains. These complex systems have this unique ability to facilitate changes in multiple ledgers or digital records. Each record is essentially a replica of the others, but blockchain technology simplifies, streamlines, and enhances transparency in the process. This significantly reduces the overall cost of maintaining multiple ledgers, which is a big win !!! for traditional financial institutions dealing with tonnes of data in these digital records. So even if we keep the security benefits of blockchain aside, Managing and reconciling such data swiftly becomes a crucial accomplishment.

Does tokenization exposes me to crypto market risks???

The notion that tokenizing your assets exposes you to the risks of the cryptocurrency market is a common misconception, particularly among those who aren’t well-versed in the technical aspects. To put it simply, a digital token is merely a piece of code that records the ownership and balance of assets. This is exactly what we do in centralized databases in current financial institutions. The key distinction is that these records are maintained on a blockchain, which we’ve given a more fancy name.

So in essence, No!!! Tokenizing your assets doesn’t subject you to the risks associated with cryptocurrencies.