The concept of tokenization has emerged centuries ago with the first currency system.
Tokenization is a means to reduce risk in handling high value financial instruments by replacing them
with the equivalents.
For example, the tokens used in a casino.
Tokens can represent a wide range of goods which are transferable and fungible, like shares or tickets.
The major problem with tokens is that tokens representing the assets should be authoritative source
of the corresponding assets.
The tokens which we are using are fungible goods for easier distribution and tokenization.
Patron help us to solve the problem.
There are few forces which led to the creation of tokenization pattern.
The first one is risk handling.
The fungible financial instruments with high value is very risky and the loss tokens cannot be replaced.
The second force, which led to the creation of tokenization pattern is the authority tokens should
be maintained with the authoritative source of the assets.
The solution provided by the tokenization pattern is related to creating a platform to realize tokenization.
There are different ways to implement tokenization using blockchain native tokens on blockchain example
Bitcoin or Ethereum can be used to formulate a system where the tokens represent monetary value or other
physical assets.
The token is generally used to track title over the physical assets.
Transactions on blockchain record.
The verifiable title transfer from one user to another.
However, using the native token on blockchain for tokenization is limited because it can only implement
the title transfer of the physical assets with limited condition checking.
A more flexible way is to define a data structure in a smart contract to represent the physical assets.
Tokenization is a process starting from the asset which is logged under a custody and gets represented
in the cryptographic world through a token.
The ownership of the digital token matches the ownership of the corresponding assets.
The reverse process can also take place by which the user redeems the tokens to recover the value which
is sitting within the bank.
A token on blockchain is the authoritative source of the physical assets.
By using smart contracts, some conditions can be implemented and associated with the ownership of transfer.
One of the major example of tokenization pattern is Libra blockchain, where Facebook has created the
tokens which are linked to the actual currencies, which will be sitting in the physical banks throughout
the world.
The benefits for the tokenization pattern is that it reduces the risk in handling high value financial
instruments by replacing them with the equivalent for tokens.
The second one is that it provides a authority as the tokens are maintained, with the physical world
corresponding to the blockchain assets which have been distributed with the system.
But there are also drawbacks related to this pattern.
One of the major drawback is related to integrity.
Integrity of the tokens is guaranteed by the blockchain infrastructure, but the authenticity of the
corresponding physical or the digital asset is not guaranteed automatically.
Another drawback related to tokenization pattern is about standardization.
Standardization is required for all the new proposed tokens, which they will be following on top of
the blockchain platform.
For example, in Ethereum we have the ERC 20 or ERC 777 standards and about 25% of all the financial
smart contracts on Ethereum follow the tokenization patterns and standards.
Another drawback related to tokenization pattern is about the legal process for ownership.
A token on a blockchain is not necessarily the authoritative source of information about the ownership
of the physical asset.
The owner of an asset may be entitled to sell the asset without being required to create a transaction
on the blockchain.
Also, the legal processes such as court orders and bankruptcy proceedings, can change the ownership
of physical assets without any associated transaction being recorded on the blockchain.
One of the known implementation for the tokenization pattern is colored coin.
This is a protocol for tokenizing digital assets on Bitcoin blockchain.
Another known implementation is with Dgcs, which are the tokens used to track the ownership of gold
as a physical property.
In this diagram, you can see the tokenization pattern in action.
You can see that we have blockchain on the left hand side and we have different external services working
on the right hand side.
This blockchain is introduced as a token mechanism where you can create token with the native assets
or with the smart contracts.
The token design module is integrated with the wallet module, identity module and admin module, thus
maintaining the ownership and authority of the tokens.
Apart from this, we have also included a simple token open side chain which can be used by the member
companies or by the analytics or big data teams to capture and process the data.
The third pattern part of the data management is off chain data storage.
Now let's go into the details about off chain data storage pattern.