Tokenization of the economy as a global trend in 2022
This article will discuss what tokenization is, examples and prospects for its use in various areas of information technology, in the global economy and in Ukraine.
Tokens as a substitute for values
In a general sense, tokenization is the replacement of real values with conditional ones. Tokens were used in the British Empire from the 17th to the 19th century due to the lack of state currency. These were coin-shaped tokens that either replaced small coins or were intended to buy something specific, such as lunch in a canteen, were made as medals or awards, and sometimes for fraud purposes.
If you think about it, money itself is just generic tokens with no intrinsic value. However, they are a necessary means of exchanging values, goods and services.
Security Tokenization
From the point of view of information security, tokenization is a way to protect personal data using tokens – combinations of characters that are of no value to attackers.
Many regularly use tokenization without being aware of it, mainly when paying for goods and services on the Internet with a payment card and using Apple Pay or Google Pay. It is easy to think that encryption is used here – that is, that the card number, expiration date and CVV are encrypted and transferred from the seller to the bank along with the amount. However, it is the tokenization of the card that is used, and instead of the data itself, a token is sent – a set of characters corresponding to the payment data.
Encryption involves the transmission of confidential data transformed using a code (i.e. the rules for this transformation, for example: A=1, B=2) that the sender and recipient have. And with tokenization, confidential data is not sent, but remains in the application on the cardholder’s device and on the bank’s servers. The token can either be reused or generated anew each time. One way or another, the bank knows which card corresponds to which code and can confirm the transaction.
Tokenization does not negate the benefits of encryption, it is necessary when storing sensitive data, however, tokenization avoids the direct transfer of personal data where possible, and using both approaches makes the transaction process even more reliable.
Blockchain as a platform for Internet services
The advent of the blockchain not only made it possible to combine the previous properties of the token, but also to assign a number of new properties to it, allowing it to expand the possibilities of its use in various aspects of value exchange and information accounting.
Thus, now a token can be an asset (including digital), digital or fiat currency, a share, ownership, copyright, client bonuses or a discount. You can use tokens to record votes or user ratings, for medical records, and in general for any registries and databases.
The token as a way to confirm crypto payments (working in the same way as card tokenization) has been used since the advent of Bitcoin in 2009. However, already in 2015, on the basis of Ethereum, it becomes possible to create more complex applications suitable for any transactions and transactions (smart contracts), the rules of which can be clearly and unambiguously described mathematically. With the help of such algorithms, it is possible to automate processes that take into account the interests of the seller, buyer, intermediary, contractor, investor, author, and other parties.
Blockchain Benefits
The main principle of the blockchain is decentralization, which helps to avoid the disadvantages of centralized management of a particular process or asset. Excessive centralization of governance, from governments and corporations to large Internet services, leads to bureaucracy, cumbersome systems, manipulation, uneven distribution of benefits and unequal decision-making. Decentralization is able to optimize the system of any process and level the chain of intermediaries or fix their income at an economically justified level.
One of the key principles of the development of Internet services is the struggle for the place of an intermediary. Most of the successful businesses simply occupied the markets that existed before. Amazon has replaced shopping, YouTube and Netflix have replaced TV and video rentals, and Uber has taken a large share of the taxi market.
But here a new problem arises: the larger and more successful the service, the more it turns from an intermediary into a market owner. He can dictate his terms and take as much as he wants for his services, and often both clients and contractors, in a word, everyone else, turn out to be dissatisfied.
And it is at this moment that the blockchain comes – the principle of a decentralized platform on which any service can be made simple, cheap, honest and transparent, the main thing is desire and a suitable legislative framework.
Economy tokenization
Considering all of the above, we will consider examples of already existing asset tokenization projects and other possible applications.
During the cryptocurrency boom of 2017, almost every crypto startup had its own ICO (initial coin offering – initial coin offering). The projects promised investors huge profits, and in most cases, in fact, they were just tokens for internal use, not supported by anything other than the price of bitcoin and the hopes of entrepreneurs for success with its endless growth.
Therefore, after the fall of bitcoin by 65% in just a month in January-February 2018, more than half of the ICO went bankrupt, as their tokens were more like tokens than real assets.
Since then, the concept of a security token, that is, tokens as securities, has been increasingly used in relation to serious investment projects. Such an initial offer is called STO (security token offering), that is, tokens that either contain signs of securities, or are their digital counterpart, or are tokenized assets – that is, the rights or part of the rights to other assets, for example, precious metals, real estate, paintings and other property.
The advantage of tokens is obvious, since any object of ownership or investment can be divided into a huge number of tokens. This opens up new opportunities for the investment market, especially for small investors. This allows them to participate in this process without joining investment funds, as well as trading assets on the secondary market according to a simplified scheme, which is also convenient for large investors. There are already examples of real estate projects such as the $30 million Manhattan house and the upscale St. Aspen Resort in the American ski resort of the same name. The tokenization and sale of a third of the rights to Andy Warhol’s painting “14 Little Electric Chairs” was also successfully carried out for $1.7 million.
Tokenization can significantly simplify the procedure for registering an investor and lower the financial threshold for participation, it becomes possible to create a securities market without a stock exchange. It also simplifies the process of registration, registration of ownership and other aspects of the transaction.
On top of that, information has now become a value in itself, with the help of which tech giants like Google and Facebook generate billions of dollars in targeted advertising revenue using information about the users of their free services. But users also give this information for free, along with the rights to use it.
Therefore, there is an idea of a decentralized social network based on Ethereum, in which users will have full control over their data and will be able to benefit from them themselves.
There are projects to tokenize health-related information such as personal health records and medication supplies.
According to the Security Token Club, at the end of 2018, $500 million worth of assets were tokenized, and this amount will grow every year. Some countries like the UK, Germany, Italy, France and Japan have already brought their legislation in line with the needs of digital assets. Malta is known as one of the most attractive crypto and blockchain jurisdictions. Offshores like the Caymans and Bermuda offer the same favorable conditions for crypto funds as they do for traditional ones.
