What is tokenization?


As part of an ongoing series about decentralized ledger technology (DLT) & blockchains, I am writing a few articles that introduce technical concepts that are needed to explore and understand more advanced questions.

The recent all-time highs in the crypto financial markets, along with increased demand for digital art in the form of NFTs, has heightened the interest of the public in crypto & blockchain technology.

In this first article, I spend some time explaining what tokenization is. In order to understand tokenization, you first need to understand what is a blockchain & what is a token, so I discuss these concepts in more detail. Have a look at our glossary for the specific meaning of words.

What is a blockchain?

People use the word “blockchain” or “blockchain technology” or “blockchain network” interchangeably and mean different things. This can be confusing. Sometimes people will talk about Bitcoin. Other times, people will talk about the Ethereum network and mention smart contracts & tokens. Most of the time, when people use the word blockchain, they mean a decentralized ledger.

A decentralized ledger is a special kind of database distributed across several computers & physical locations. This decentralized ledger stores data and logs transactions. The transactions are permanently stored & recorded, as well as publicly viewable, and they are grouped together into “blocks”. The blocks are cryptographically verified by the network participants (called miners in Bitcoin and Ethereum). Those blocks are then “chained” together, hence the word “blockchain”.

Since the blockchain is usually run by multiple participants (nodes), it’s often referred to as a blockchain network.

What is a token?

Just as with the word blockchain, people use the word “token” and refer to various & contradicting things. Tokens are used for everything. They are used to exchange value & to trade. They can grant voting rights to the token holders and be used for governance. They can be used as loyalty points to give rewards to customers. Or they can represent real-world assets such as shares of a company, art, or real-estate. In the context of tokenization, a token is a digital representation of an asset or utility that is issued and stored on a blockchain.

Even though tokens existed before blockchains, Ethereum truly democratized crypto tokens when they introduced a common token standard called ERC20, first proposed in late 2015. Initial Coin Offerings (ICOs) enabled new crypto & blockchain projects to raise money by offering tokens redeemable & usable in the Ethereum ecosystem. Projects were able to raise $90M+ in 2016, $6.2B+ in 2017, and $7B+ in 2018, before the interest somewhat dropped off after the market collapse of 2018.

What is tokenization?

Tokenization is the process by which you issue a tradable asset on a decentralized ledger (e.g. a blockchain). It’s a complicated way of saying that you create a digital representation of an asset (i.e. a token) and store it on a blockchain.

In Autumn 2020, the Swiss parliament passed the new DLT Act (Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology). The Federal Council enacted this act in February 2021, which opened up the possibility for Swiss corporations (Société Anonyme, SA) to issue shares in the form of digital cryptographic tokens represented on a blockchain.

Audacia is a pioneer in this regard, having tokenized all of its registered shares into digital tokens (the Tokenization), and thus becoming one of the first Swiss companies to digitize its Shares using Ethereum’s distributed ledger technology (the Blockchain).

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