What is tokenization?

We’re progressing toward the next era of the internet in fits and starts. Web3 is said to offer the potential of a new, decentralized internet, controlled by participants via blockchains rather than profit-motivated corporations. But progress hasn’t been linear: one major setback has been the meltdown of the cryptocurrency market in 2022, triggered by multiple cryptocurrency failures and high-profile cases of fraud. Regulators are paying increased attention to Web3 players, and public curiosity is peaking.

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But Web3 is about much more than crypto. Blockchain, smart contracts, and digital assets—the latter created via a process called tokenization—stand to change the way we exchange ideas, information, and money. For organizations and early adopters, there is significant value on the table.

Let’s get specific: tokenization is the process of issuing a digital representation of an asset on a (typically private) blockchain. These assets can include physical assets like real estate or art, financial assets like equities or bonds, nontangible assets like intellectual property, or even identity and data. Tokenization can create several types of tokens. Stablecoins, a type of cryptocurrency pegged to real-world money designed to be fungible, or replicable, are one example. Another type of token is an NFT—a nonfungible token, or a token that can’t be replicated—which is a digital proof of ownership people can buy and sell.

Tokenization is potentially a big deal. Industry experts have forecast up to $5 trillion in tokenized digital-securities trade volume by 2030.

There’s been hype around digital-asset tokenization for years, since its introduction back in 2017. But despite the big predictions, it hasn’t yet caught on in a meaningful way. We are seeing slow movement: US-based fintech infrastructure firm Broadridge now facilitates more than $1 trillion monthly on its distributed ledger platform.

In this article, we’ll drill down into how tokenization works and what it might mean for the future.

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What technologies support Web3?

Before we dig deeper into tokenization, let’s get some basics defined. As we’ve seen, Web3 is a new type of internet, built primarily on three types of technology:

• Blockchain. A blockchain is a digitally distributed, decentralized ledger that exists across a computer network and facilitates the recording of transactions. As new data are added to a network, a new block is created and appended permanently to the chain. All nodes on the blockchain are then updated to reflect the change. This means the system is not subject to a single point of control or failure.
• Smart contracts. Smart contracts are software programs that are automatically executed when specified conditions are met, like terms agreed on by a buyer and seller. Smart contracts are established in code on a blockchain that can’t be altered.
• Digital assets and tokens. These are items of value that only exist digitally. They can include cryptocurrencies, stablecoins, central bank digital currencies and NFTs. They can also include tokenized versions of assets, including real things like art or concert tickets.

As we’ll see, these technologies come together to support a variety of breakthroughs related to tokenization.

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