How tokenization works on Hedera Hashgraph platform?

What is tokenization?

Tokenization is the process of transforming ownership rights and tangible assets into digital assets known as tokens. The process is recorded on the distributed ledger and can bring revolution across how multiple trillion-dollar markets operate. Tokenization is readily explored across various organizations and decentralized protocols for stablecoins, securities, digital art and more.

The success and the continued rise of tokenization rely on public networks supporting the compliance, performance and cost required for mainstream adoption. Hedera Hashgraph eliminates such limitations by implementing Hedera Token Service to offer two deployment methods. Let’s dive deeper and understand Hedera’s tokenization models in detail.

How does tokenization work on the Hedera Hashgraph platform?

Tokenization on Hedera Consensus Service enables permissioned networks to allow builders to define specific network participants, use cases, data privacy and deployment models. The networks are designed using permissioned node operators with a local copy of a database updated with custom code based on synced messages from Hedera Consensus Service.

During tokenization, the message sent to HCS includes instructions for transmitting tokens between a ledger of accounts. The permissioned network of nodes maintains the state while Hedera Mainnet manages to order along with Hedera Consensus Service.

The Token Message Standard is a verified specification and audited implementation for creating a token using HCS. The main components of a token on HCS that are used for implementing Token Message Standard include:

• Application logic that defines the token contract to arrange the roles and behaviors of the token.
• Permissioned nodes that run the logic expose tokens to users and stores the ledger of accounts. HCS Transaction Ordering makes sure to keep the nodes in sync safely and securely.

The application logic referred to as the token contract receives an ordered message from Hedera Consensus Service, which is streamed through a mirror node for other parties to access. The Token Contract allows nodes to listen to the particular TopicID against which all messages relevant for tokens are submitted.

The Token Contract then validates the received message, ensuring that it is compliant with the roles and behavior specified in the token definition. It also validates the transaction details to ensure that the account does not transfer more than it holds.

Post-validation, the Token Contract changes the state of the permissioned network based on transaction details. It is simply updating the new balance of accounts based on token transfer or updating the key that controls the minting and burning of the token. It can also introduce more complex logic based on the requirements of use cases, including atomic swaps, reference to external oracles or automated event triggering.

The mutation state then triggers a notification informing the user about the completed transaction, caching of transaction details and storage in the database on the permissioned network.

Conclusion

Hedera Hashgraph offers various models to support different tokenization use cases. These models benefit the decentralized Hedera network with high throughput and low latency. Moreover, its Token Service provides a trusted, transparent solution with token living directly on Hedera public ledger.