Tokenization: What Are Tokens and What Role do they play?

Feb 12, 2020 at 09:12 // News
Coin Idol
What are tokens?

What is a token? A token is a blockchain-based digital asset that can be exchanged between two parties without the need for an intermediary. A token (coin) can be seen as a set of digital information that is able to give a right of ownership to a subject on the same set of information that is recorded on a blockchain and that can be transferred via a protocol.

The token may eventually also incorporate other additional rights that in the case are governed by a smart contracts system. One of the first examples of coins is bitcoin, but in a short time many others appeared, some starting from the experience of bitcoin itself others using new models and new code such as the Ethereum blockchain. Tokens created thanks to Ethereum have different attributes that allow the management of smart contracts in order to establish in an increasingly binding and secure way the agreement between the parties.

What are the different types of Tokens?

There are different types of tokens that are determined by both the type of technology approach and the type of use. In particular, it is important to focus on three different types of tokens determined by the type of rights handled by the tokens themselves

  • Class 1 token – this token looks like a real coin, has no counterpart and can be transferred via blockchain transactions. The token is also a guarantee of the "non-changeability" of the transactions themselves. It is a type of coin that does not confer rights against a counterparty, but has the function of registering a right of ownership of the coin itself or the existence of a certain subject/object. With this type of token, the owner has no additional rights than those related to the coin ownership. Cryptocurrency tokens such as Bitcoin, Bitcoin Cash, Litecoin, etc. are in the Class 1 Token category;

  • Class 2 token – these are tokens that are able to give owners rights that can be exercised against the person who generated the tokens or possibly against third parties. These are coins that allow you to exercise rights to your counterparts. In different words it could be said that Class 2 tokens could be defined as a kind of credit, i.e. "documents" which give the holder "right to the benefit indicated in it towards the presentation of the title". As in everyday life, bonds or loans, holdings, representative securities of goods and legitimization documents can be. But to better understand what this is, let's mention the examples of

    1. Smart contract tokens related to the management of future payments – with the award of a right to receive future payments, based on certain contractual conditions that the token is called to manage in an "automatic" way;

    2. Token as asset – in this case, the token represents a kind of right to ownership of a particular asset (both material and intangible) and for example could also represent shares of the issuing legal entity or third-party entities.

    3. Tokens used for "standardized" payments – where a person has the right to receive a payment for a specific, well-defined amount;

    4. Token for the management of service performance – in this circumstance the token holder has the right to receive a certain service or in the case of an asset from the issuer or a third party who has signed a trade agreement. These are, for example, coins that govern access to IT infrastructure, service delivery and may also have the characteristics of a native cryptocurrency.

  • Class Token 3 – These are tokens that can perform a mixed function. They are tokens that represent co-ownership rights or that represent a property but also confer different rights, such as voting rights, or economic rights for legal representatives or associates of a company, etc. In this type of token, the holder does not have a right to be exercised directly to the issuer of the security or to a third party.

What is Tokenization and what Are Labeled Tokens

In addition to Tokenization, a mode defined as Tokenization has also developed based on so-called Labeled Tokenization. The issuance and management of 'Tokens labeled' or even Labelled Token (LB) is a procedure that associates coins with a series of metadata for which the exchange is conducted on a secondary market, via Smart Contracts on blockchain Ethereum Mainnet.

Tokenization is an evolution of both the ICO and the Initial Token Offering (ITO) and is used in many international projects.

What are the Benefits of Tokens?

Compared to "traditional" coins, a Token has five great advantages

  1. it is individually and uniquely labeled and has associated metadata;

  2. it is not fractional;

  3. 'exists' in digital form on the blockchain;

  4. it can also be followed individually in its path/history of 'property chain';

  5. can be handled in different ways on a single label depending on the meaning/value of the

Where Tokenization is Used

Tokenization can be used as a financing tool at different stages of business development, from Seed to C/Tech growth series and can also be used as an alternative or in addition to other tools such as VC, Stock Market, Business Angel, Funds, Banks.

In particular, Tokenization can be addressed to four specific areas, where the management of smart contracts is not inconsistent with what is required by the current jurisdiction:

  1. Innovative blockchain-based business projects

  2. Innovative business projects NOT blockchain-based

  3. Business projects NOT innovative

  4. Material goods (real estate, works of art, etc.) or intangibles and services (e.g. Software, families of collectible digital elements) of any kind.

It must be said, that exactly as with the 'traditional' Coin in the various countries, analyses and studies are currently under way to define the regulation to be applied on a case-by-case basis, a similar phase of review is also needed for Tokens, to understand the benefits of the presence of the Label, i.e. the label, and how to use metadata in accordance with the privacy rules, investor or consumer protection, anti-money laundering, identity.

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