Tokenization on blockchain: The standards explained
You might not be aware of it, but tokens are already inside your pocket; a dollar bill, a credit card, or even the key to your home is in some sense considered a token of your house.
A token is just a symbolic item of value that represents something greater.
The 2 types of tokens: Utility and Security
As a retail token/crypto-user you probably don’t need to know. But if you are considering doing any type of blockchain/crypto project or development, you better know the difference. In terms of regulation, there are two types of tokens. The utility token and the security token, let’s get started!
Utility tokens are the tokens you can make use of
You might have tried holding a ticket for the cinemas, or a seasonal pass for a sports club. That is the tokenization of a cultural asset. This is often referred to as a utility token, for its utility to get you something, e.g. get you into the football stadium or the cinema.
Security tokens are heavily regulated tokens
For real estate property, you have a deed. This proves your ownership in a regulatory area. If your country is invaded by a hostile country, it is probably worth nothing. But as long as democracy gets reelected: You’re the proud owner of a real estate property with your name on the deed.
A deed is used for various reasons, first of all, so no one can come and take your home, and second, for collateral since most people need a loan to buy a house. A deed is a token representing a real estate property. This is popularly referred to as a security token.
In a financial matter, security can be used to raise capital in public and private markets. A token is a proof of ownership usually of something abstract or something too big to fit into your pocket. So you can imagine a security token being a token representing something of value underlying regulation like a financial asset.
The different attributes of the two types of tokens
What really separates a utility token from a security token is regulation. While your token to the cinema is lightly regulated against black markets and copy schemes, the security token is heavily regulated against financial fraud, etc. Therefore you would most likely need either a lawyer, a real estate agent, a certified investment advisor, or in some cases all of them to buy a house.
They all need a cut and by looking at their cars and suits, it’s probably a substantial cut of your money, for a very little of their time.
Thanks to modern blockchain technology this is coming to an end!
Hence the regulation, the ERC-1400 security token standards
In order to provide a security token, there are a lot of legal requirements for the provider, some of them are: Controller Access (Token Recovery Process), Compliance Issue / Redemption, On-Chain Transfer Validation, Permission Management W/ Multiple Agents, Stakeholder Identity Management, STOs, Identity-Driven Permissions Access, Custody and much more.
Therefore the ERC-1400 standard is made to tokenize Real-World Assets (RWA).
Take real estate for an example: In order for an investor to buy and trade the real estate token, investors will need to whitelist the wallet and identify themselves to be compliant with regulation.
For a real estate property, this could be issued by the real estate developer who is registering their real estate property on the blockchain.
Smooth operations: ERC-20 utility tokens are like gas for your car
ERC-20 tokens are the most commonly used tokens on the Ethereum network. They are designed to be used for paying for functions and are known as utility tokens. They can also be used to pay for goods and services.
These tokens are:
- Fungible — The code of each token is the same as any other although transaction histories can be used to identify and segregate tokens.
- Transferable — They can be sent from one address to another.
- Fixed supply — A fixed number of tokens must be created so that developers cannot issue more tokens and raise the supply.
The money on your bank account is tokens that represents your time and productive work minus what you’ve spent.
Securities and utilities can be managed on a blockchain
The idea of a blockchain is old, what is new is the computer being able to process the blocks in a secure and transparent way.
In the country where RealEstate.Exchange was born, Denmark, the ideas and problems solved by the blockchain date back to the 11'th century when the old landscaping laws demanded that transferring of the property had to be approved by the central government.
So every time a property was traded a new block was created in the central administration’s archives. This type of bureaucracy is known for its highly time-consuming, cost-expensive, and illiquid assets. But it was better than not having any proof of ownership.
Today we have decentralized, digital blockchain ledgers such as Ethereum or Ravencoin. Every time a token is traded on the machine a new block is created on a transparent virtual computer chain. This is available for everyone to access, and see on Etherscan, and makes you able to check the former transactions (and prices) of the assets represented by the token, it also doesn’t require a lot of money, and you now have an asset, that you can post on any online or offline marketplace. All it requires from you is to decide whether you want to HODL or sell your tokenized asset!
Fungible or non-fungible token?
NFTs are everywhere, and you probably touched space with some of the PFP (Picture For Proof) projects like the CryptoPunks or Bored Ape Yacht Club.
So what’s fungible and what’s not fungible?
Imagine that you’ve printed 1000 posters with the exact same print.
Now if I bought 500 of your posters we both have exactly the same amount of the exact same poster.
If I replaced 200 of my posters with 200 of your posters, while you looked away, you wouldn’t be able to tell if I did the replacement or not. Thereby the posters are fungible.
The key to understanding whether something is fungible or not is the replaceability parameter.
Now let’s print another 1000 posters, but this time we give numerate them in the corner with “#1, #2, #3, …, #1000”.
Now it is pretty obvious that you would be able to see if I replaced 200 of your posters from [#1#2, …, #200] with my posters [#600, #601, …, #800].
Simply by looking at the numerations in the corner we are able to tell that the 200 posters are not the same.
This adds up into following statements:
Fungible token: Token#1 = Token#2, = Token#…, = Token#1000
Non-fungible token (NFT): Token#1 ≠ Token#2, ≠ Token#…, ≠ Token#1000
Did you enjoy the tokenization ride?
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