It is the process of developing tokens as a means of data replacing highly sensitive data for algorithm-generated numbers and letter known as tokens.
The idea of tokenization did not begin with blockchain, unlike crypto. People have used different forms of tokens to exchange money in the past. The first tech company that used tokens was TrustCommerce. They used it to protect their client’s sensitive information. Using tokens on the blockchain increase its usefulness. The blockchain keeps track of the number of distributed tokens using a distributed ledger.
When a transaction becomes complete on a blockchain, instead of a new representation of the token, the ledger accesses the token and updates its record to reflect the spend. You can find more information on Bitcoin Code.
Benefits of Tokenization
Asides from solving the double-spend issue, issuing a token on a distributed blockchain offers several benefits to the token. Some of the benefits tokenized blockchain assets enjoy include;
Transparency: the benchmark bitcoin stands for is transparency. Users can view the source of the blockchain because it runs on open-source code. This gives users a new level of confidence and reduces the cases of asset theft and fraud.
Immutability: with the use of token on the blockchain there will be no case of identity theft as information stored cannot be deleted, changed, or corrected by anyone. With this immutability, free tokenized assets cannot be laundered neither can they be used for bribery or stuff like that.
Great Security: With the use of cryptography tokens issued on a blockchain benefit from a greater level of security. Cryptography is a way of storing confidential information on the internet. While anybody can download the database only those with the special decryption key can access the information
Automation: Unlike the traditional financial sector, the processes on the blockchain can be automatic through the use of smart contracts. These automatic algorithms handle all the processes that involve the exchange of tokens, stocks and real estate.
What are utility tokens?
Utility tokens are referred to as user app coins. They are those tokens that fail to qualify security based on the Howey test So they provide users with a product or service. These tokens act as an access point to a network. Without the token, you may no access the services of that platform.
What are Security tokens?
Security tokens are used to represent assets of different classes that can be traded or held on the blockchain. These tokens are created through asset origination and asset tokenization.
Utility Vs Security Tokens
The purpose of creating tokens is to tell the difference between a utility token and a security token. These two tokens perform different functions such as utility tokens are created to fund ICOs and create an internal economy while the security tokens are used as a form of investments.
The value of a security token is tied directly to the value of its issuing company. The more value the company acquires, the more valuable the token becomes. While Utility token does not offer a direct relationship between the value of the token and the value of the company.
There is no direct relationship between security tokens and utility tokens. Their differences are listed here for you to compare so you know which token you’re getting.