Before diving directly into the core concept of Tokenization and its process of emergence there are prerequisites for a good understanding of some topics related to it like
- Blockchain
- Smart contract
- Consensus Mechanism
- Block creation and transaction
Tokenization is used extensively in the computer world due to its nature of existence over digital network infrastructure.
It is transitioning asset ownership into a digitally bit format using blockchain technology. It could also be defined as encapsulation of value in a tradeable entity of account known as tokens.
Currently, it is used in the blockchain world due to its advantages like its legitimacy and security.
This revolutionary idea (tokenization) is the result of blockchain technology by solving the problem of double-spending. once the assets are tokenized every type of asset of value can be treated & managed as a digital asset whose unit of account is a dedicated virtual token. such token will be minted(produced) by an individual, group, or organization which defines the set of rules to govern them like:-
- The token features
- The Monetary Policy
- User’s incentive system
And the token definition move along two stands
- The function performed by tokens
- What they represent (Idea of Representation)
Token Classification
To get an overall understanding of diverse /multiform tokens a comprehensive taxonomy approach is needed, so if in general term token are described as a quantifiable representation of decentralized and disintermediate trust in the operational definition of existing (and future) tokens must include all the diverse shades of trust that they convey.
Types of tokens are:
- Security Tokens
- Utility Tokens
- Platform Tokens
- Fungible Tokens
- Non-fungible Tokens
Process of Tokenization
For the process of being into existence, tokenization is heavily dependent on the smart contract.
so, In technical terms tokenization process is a well-defined format of a piece of code, consisting of certain rules and regulations that help to transfer values from one user (sender)to another (receiver).
smart contract implementation preferred UTXO and Account-based models. These smart contracts process no of the transaction, here UTXO focused on existing on maintaining output for every transaction they perform
Account-based model is used by hyper ledger fabric and Ethereum. As soon as the order is placed, the node (validator) will debit the amount and credit it to the receiver’s account (wallet) from the sender.
UTXO = Unspent Transaction output
All of that UTXOs are in a system and are stored by the participant nodes in a database. The transaction uses the amount specified by one or more UTXOs and transmits it to one or more newly created output UTXOs, according to the request initiated by the sender. The structure of UTXO is very simple.
- Unique Identifier of the transaction that created the UTXO
- Index of this UTXO in the transaction’s output list
- Value
- Optional: conditions under which output can be spent.
Basic Operation in blockchain for block creation (It is also the main process of the tokenization)
As we come across the basic concept of tokens i.e nothing but a virtual no defined in a piece of code called Smart contract which is the main pillar behind the Token creation.
operations include validation transactions, gathering the transactions for a block, broadcasting the ballot transactions in the block, and consensus on the next block creation, and chaining the blocks to form an immutable record.
