What is a token and what is tokenization?

Few people have never heard of Bitcoin, especially after the fluctuations of the last few years. Bitcoin is the first token that was created, it is a cryptocurrency. Today, it is common to associate the term token with crypto-currency, but tokens can have many different uses than exchanging monetary value. Tokenization of real life assets is a good example.

In this article, we will see:

  1. What a token is

  2. The different types of token

  3. The tokenization of real life assets

  4. The example of real estate tokenization

1. What is a token?

A token represents a unit of value that exists on a blockchain. We can compare the token/blockchain relationship to:

  • Our currencies that exist within the banking system. The currency is issued in the banking system. The banking system records the movements of the currency, its value and certifies its authenticity.

  • The property of an apartment is present on the property registry. It is the registry that certifies who is the owner of an apartment and records the transactions. Without this registry, it would be difficult to verify who is the owner.

The blockchain is the equivalent of the property registry for apartments and the banking system for money. It is a database of which one of the major functions is the registration of token exchanges.

The first token created was bitcoin, which is now the most well-known. The main function of bitcoin is the exchange of value, the payment. In fact, this is the reason why tokens are often associated with cryptocurrencies. Today, there are different types of tokens with different functions to monetary exchange.

2. The different types of tokens

There are two main families which are the security tokens as well as the utility tokens.

The security token is generally linked to a real life asset such as a real estate or a share of a company.

It can also be the representation of a financial instrument such as a tokenized loan. It is therefore less volatile, as it is less subject to speculation.

The legal and fiscal environment is still in development, although it is already present. The tangible and regulated aspects of it make it a relatively low risk asset.

The second large family is that of utility tokens. The specificity of these is that they are not backed by real life assets. There are the following categories of utility tokens:

  • Governance Tokens: They represent a decision-making right in an ecosystem. For example, if each citizen's vote was represented by a governance token, we could elect political representatives with it.

  • Transactional (cryptocurrency): The function is the same as the euro or the dollar, it is used to pay.

  • Access to a service: A restricted access can be given to the holders of a token, it is the same principle as a membership card of a sports club. It can also give access to additional services as a reward, on the same principle as loyalty points.

Utility tokens are still not regulated. Many of them, mainly crypto-currencies, have been subject to large speculative effects which classify them as very risky assets.

3. Tokenization of real life assets

Tokenization is the process of dividing a real-life asset into fractions that are represented by tokens. As explained in part 1 of the article, the token is hosted on a blockchain that certifies its existence, its owner and records its exchanges.

There are thus 2 major aspects to consider for the tokenization:

The technical aspect: To issue on the blockchain the number of tokens wanted while programming the rules that it must follow. The legal aspect: To attach the legal documents which will justify that the holder of the tokens are indeed the holders of a fraction of the asset. It is this aspect which today is the most complex.

Tokenization allows to have several owners for a single asset. This reduces the economic barrier to the purchase of assets that are not accessible. By reducing the price, we open the access to a wider population, the demand increases, it is therefore easier to sell too

4. The example of the tokenization of real estate

Real estate is the most concrete example of tokenization of real life assets. It is one of the most attractive assets because of its stability. There will always be a strong demand for housing, but the supply is not infinite.

The main barrier to investing in real estate is the high capital contribution. The purchase is therefore very binding and limits the number of potential buyers. Few buyers also means low liquidity. Tokenization addresses these problems and reverses the mechanism:

The property is divided into several hundred tokens. This makes it accessible to many more buyers. If there are more buyers, it is easier to resell.

On the mobile application Equito App, you can for example invest in a property from 100 € and receive rents like a classic investment, but without the capital contribution.

In summary:

The token is a unit of value present on a registry called the blockchain. There are 2 main families of tokens:

  1. Security tokens which generally represent a fraction of a real life asset

  2. Utility tokens whose value is only present in a closed environment (voting rights for a project, exchange currency, loyalty points)

Tokenization consists in dividing a real life asset into tokens on a blockchain. This makes them more accessible. This is for example the case of real estate.