November 9, 2022
Kris Punia


Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.

Tokenization on blockchain refers to the conversion of tangible and intangible assets into programmable blockchain tokens (digital representations of real-world assets, value, or utilities, running on smart contracts). Blockchain tokens are different from traditional data security tokens, which are layers of encryption applied to data through the substitution of sensitive data elements (information) with non-sensitive characters (tokens) which have no exploitable meaning or value. Blockchain tokens allow real-world assets (including indivisible articles of value) to be digitally represented and consequently traded on decentralised exchanges. Aside from representing value, tokens may be programmed to execute an array of functions (discussed in detail further in this article) and can be held or traded like any cryptocurrency. Smart contracts, the token-enabling technology, can automatically execute preset contract terms such as transactions between parties and periodic yields on investment. They can even be utilised to manage business processes by automating workflows - triggering actions (stage by stage, in series) when respective conditions are met. 

Tokens are an efficient and secure means for storing, transferring and verifying information. In technical terms, tokens are cryptoassets running on top of a blockchain’s native cryptocurrency. Cryptocurrencies are the native assets of specific blockchain protocols, whereas tokens are products of platforms built on top of those blockchains. Tokens lie on and are managed by the underlying blockchain. While transactional tokens can represent cryptocurrencies but are not to be confused with the same.

Any object, service or intellectual property perceived to have value may be tokenized and subsequently traded. Users can now lend or borrow sundry assets at long/short interest, benefit from automated assessment and execution of trade contracts, invest and trade value on decentralised peer-to-peer exchanges and more (aside from safely storing and transacting in value), all thanks to tokenization. Tokens also democratise markets by providing participants equal access to various assets and financial instruments. In DeFi, automated issuance and management of securities could trim costs from throughout the transaction-lifetimes of securities, benefiting issuers and investors alike. Fractional ownership of indivisible assets is now a reality by virtue of tokenization.

Tokenization injects liquidity into conventionally illiquid markets by facilitating the fractionalisation of immovable and intangible assets. It eases fundraising/crowdfunding activities and makes transactions cheaper and faster by circumventing various intermediaries. Transaction-history can be tracked via an immutable ledger and the provenance of commodities is established instantly, thus, preventing fraud.  The use of smart contracts stamps out counterparty risks by ensuring fulfilment of transaction-related obligations. 

Before tokens are issued, asset holders are given certificates of ownership (exchangeable for corresponding deposits) and their assets are stored in repositories. Owners then receive tradable tokens representing deposited assets. Intangible assets are effortlessly converted to tokens as they do not require transportation or physical storage. 

Fungible and Non-Fungible Assets

Fungible assets are homogenous articles, units of which are interchangeable and indistinguishable from one another. Examples of fungible assets include money and common shares.

Non-fungible assets are unique and hence, irreplaceable. Typically, they cannot be exchanged for similar articles or fragmented into smaller pieces. Examples include artwork, property rights, copyrights and patents. 

Tokens may be programmed and deployed to perform an enormous range of functions, as per the needs of the issuer. 

Transactional Tokens

Transactional tokens are analogous with cryptocurrencies. They serve as modes of payment and units of account on digital platforms. Some payment tokens like DAI and GUSD are backed by underlying assets but more often than not, that is not the case. The value of blockchain tokens instead is derived directly from the underlying blockchain network.


In effect, tokens are randomly-generated numbers assigned to vulnerable data in order to conceal sensitive information. They can be issued by both decentralised as well as legacy platforms to reduce transaction/gas fees, increase financial liquidity, et al. 

Most cryptocurrencies and blockchain tokens are payment tokens. Security and utility tokens are essentially transactional tokens as well, though utility tokens need not necessarily be. Examples of currency tokens: stable coins, Ethereum, Bitcoin, et al. 

Security Tokens

Security tokens are contracts representing ownership of real-world assets (in whole or in part). In essence, these tokens may be treated as financial securities (tradable financial assets) or equities of underlying assets, the holders of which are shareholders of represented value. Investors are entitled to dividends accruing from owned assets. Security tokens that represent debt instruments like short-term loans or bonds with pre-defined interest rates. The collection of dividends is executed automatically by smart contracts. Security tokens are broader than tokenized securities; they can represent any class of tangible assets like commodities, real estate, articles of value, et al. Security tokens broaden market accessibility or liquidity of the security being tokenized. They can be programmed to adhere to strict regulatory and compliance parameters in order to protect investors and sellers. 

Security tokens are issued through security token offerings (initial coin offerings or ICOs backed by real-world value). They are useful to investors who require instant divisibility of assets to raise funds. They also provide for rapid transaction settlement and transparency in management. 

Security tokens can be programmed with an endless array of unique characteristics and ownership rights. As such, these tokens constitute an entirely new type of digital asset.

Examples of security tokens: Jet token, Bcap, et al.

Utility Tokens

Utility tokens are generated by various blockchain-based applications to grant holders access rights to their products and services. While the holders may redeem these tokens to gain access to respective dapp offerings, they do not gain ownership rights to the products. For instance, they can access the product or service, possibly even at a discount, or have the right to pitch or vote for particular cases or topics by way of these specialised coupons.  

Utility tokens are issued during crowdsales when an enterprise carries out an ICO. Their initial value is determined by the issuer and may subsequently fluctuate due to the interplay of market forces. Should a company achieve success, its utility tokens will appreciate in value and may be spent within their native blockchain ecosystem. 

These tokens may be deployed to facilitate reward programmes and consequently improve user experience. Utility tokens are unregulated in certain jurisdictions; they ought not be considered reliable investment products. Intrinsically, these tokens have no underlying assets or value. Examples of utility tokens: Cronos, Filecoin, Aave, et al.  

Governance Tokens

A subset of utility tokens, governance tokens are a means for allocating voting rights to users, giving them the right to participate in the decision-making processes of enterprises. By apportioning decision-making powers to the user community, these tokens enable decentralised administration and development of various blockchain-based projects. Governance tokens are allotted to stakeholders and often awarded to notable users for their contributions. Decentralised models of project-governance are more democratic and transparent. 

Issuers input unique instructions into their respective governance tokens. Allotted voting rights may vary; some tokens may restrict voting rights to particular issues only while others may grant full access. Examples of governance tokens: Maker, Compound, et al.  


NFTs are digital certificates of ownership to non-fungible assets. Further, they enable unique, irreplaceable, one-of-a-kind assets to be offered as public offerings on decentralised exchanges by fractionalising assets of non-fungible nature. However, they are not interchangeable themselves. NFTs can be fragmented into infinite fungible sub-tokens which may be  subsequently traded, allowing for fractional ownership of indivisible assets. They are mainly used to represent works of art, collectibles, digital content like photos, videos, media posts, et al. NFTs can monetise any unique and original real-world items of limited edition. It helps artists, collectors, owners of real-estate, trade participants and many other entities to generate revenue from their assets. Aside from ascertaining ownership and making non-fungible assets tradeable, NFTs lower the requirements to invest in various assets. 

They can be bought and sold in crypto marketplaces like OpenSea, Rarible, Foundation, and Decentraland.

Regulatory Compliance 

Blockchain-based projects making use of crypto tokens may encounter obstacles vis-à-vis regulatory guidelines in certain jurisdictions because regulators have not quite been able to keep up with the unprecedented volume of use cases of this nascent technology. For instance, while security tokens are often categorised as financial securities, they may be subject to dissimilar regulations due to their decentralised nature. However, governments all over the world are currently evaluating policies to govern and supervise blockchain-based fintech, so while administrative impediments may occur, they are mostly resolvable. It is only a matter of time before legislative clarity is achieved in most regions of the world, which will not only enable mass adoption of DLT but also bring blockchain technology into the mainstream. Governments are still in the process of defining laws to adjudicate web 3.0 - related disputes such as cases involving an overlap between decentralised and traditional ecosystems.  


Tokenization of various kinds is profoundly revamping how we interact with articles of value. Decentralised apps (dapps) use tokens built on native blockchain cryptocurrencies to develop and operate. Tokens enable digital representation and fission of assets on a distributed ledger, thereby making assets tradable and accessible to all. DLT in finance makes markets more equitable while delivering the unparalleled transparency and security of blockchain technology. Multilateral initiatives are underway to build borderless value transfer mechanisms. As people and governments around the world become increasingly conscious of DLT’s tremendous utility, blockchain technology will disrupt every industry in one way or another.