15 tokenization terms you need to know

Sometimes it’s difficult to understand a concept like tokenization because the discussion around it is so filled with vernacular that you can’t even infer the meaning from context. Tokenization is a big concept encompassing a lot of interesting developments and innovations. From utility tokens to security tokens to tokenized securities, it can get a little confusing.

Here are 15 tokenization terms that will help you understand the concepts and follow the conversation.

15 tokenization terms

#1 Smart contract

A smart contract is a piece of code that automatically executes, contingent on certain criteria being met by the parties involved. They are most commonly used on the Ethereum blockchain and allow trustless, peer-to-peer transactions. Smart contracts have many use cases throughout blockchain technology, but one example is an atomic swap of one cryptocurrency for another between two individuals that is self-executing when both sides of the swap are placed in the contract.

#2 IPFS

InterPlanetary File System (IPFS) is a protocol for storing files on a distributed network that allows peer-to-peer sharing and transfer. Instead of hosting files on a central server and accessing them through an HTTP client, as most data on the internet is currently accessed, IPFS uses distributed hash tables and content identifiers to decentralize the file on multiple nodes. This makes files censorship-resistant and unable to be controlled or changed by a single entity. IPFS is a key part of Web3 protocols and is designed to help build infrastructure for the decentralized web.

#3 Fractional ownership

The value of an asset can be divided by tokenizing it—this is called fractional ownership. For example, if a $5 million dollar property is tokenized into 50,000 tokens, each one would represent .01% ownership. You could invest for as little as $100 and gain fractional ownership of .01%.

#4 ERC-20 token

Tokens that are created to be compatible with and operable on the Ethereum network use the ERC-20 token standard. It is one of the most common types of fungible token and can be created and transacted with smart contracts on Ethereum. Examples of ERC-20 tokens are USDT, BNB, WBTC, and DAI.

#5 Cryptography

The purpose of cryptography is to make sure information is only seen by those it’s intended for and cannot be intercepted by those who should not see it. It is the study of security protocols that protect private communications using codes and ciphers. Public-key cryptography uses a public and private key to protect information and is widely used in tokenization and throughout the cryptocurrency ecosystem. 

#6 Asset tokenization

Creating a digital representation of an asset that is kept on a blockchain is called asset tokenization. Smart contracts are created to document the ownership and value of an asset in a transparent and immutable way. An example of asset tokenization could be a car whose title is tokenized and stored in a digital wallet. That token can then be kept, sold, or traded digitally and transactions will be viewable on the blockchain.

#7 Tokenized securities 

Similar to asset tokenization, tokenized securities are traditional securities (a type of financial asset that is tradable) that have a digital representation on a blockchain. Debt, equity, and derivatives are all securities. When they’re tokenized, they become tradable on-chain. Tokenized securities are subject to the regulations that the underlying security is subject to, and some crypto projects have been fined or shut down for not fully adhering to regulations.

#8 Security tokens

The difference between tokenized securities and security tokens can be confusing. One of the key reasons to differentiate between the two, however, is regulation. A security token is a new kind of security using new technology to create dividends (e.g. Nexo). A tokenized security is a traditional security that is placed on a blockchain by tokenizing it. There are already regulations in place for traditional securities that still apply, even if the asset is tokenized. In contrast, the new and undefined nature of dividend-generating security tokens has yet to see clearly defined regulations.

#9 Tangible assets

Assets that exist in physical form and have calculable monetary value are tangible assets. This could be anything from money, to real estate, to cars, to equipment.

#10 Intangible assets

Assets that don’t have a physical form are intangible assets. Their value is usually harder to determine. Examples of intangible assets are patents, trademarks, copyrights, and other kinds of intellectual property.

#11 Utility tokens

A utility token is used to give holders access to a product or service, but they don’t have a monetary value. These tokens are usually issued during an initial coin offering to fund the development of a project. They can later be redeemed for some kind of utility or value but they’re not usable outside the platform they are native to. An example of this concept in the physical world is a movie ticket. You can buy a movie “utility token” and gain access to see a movie, but it has no other uses.

#12 Governance tokens

Governance tokens give members voting rights on a protocol or platform. Especially for decentralized projects, members with governance tokens can vote on changes and updates, financial decisions, and staffing decisions. Sometimes there’s a threshold of tokens required to gain voting rights, but governance rules differ among projects. There are other uses for governance tokens as well. For example, they can sometimes be staked or used for yield farming.

#13 Decentralized autonomous organization (DAO)

A DAO is an organization with a software-based governance structure that is decentralized instead of top-down. For example, many DOAs don’t have a CEO or a board of directors. Decisions for the organization are made with the votes of members—usually people invested in the organization holding governance tokens—and executed with smart contracts.  

#14 Fungible tokens

Fungible tokens have a one-to-one value and are interchangeable. Bitcoin, for example, is fungible because you can trade one Bitcoin for another and there is uniformity between the two. Dollars are also fungible because I can give you my $5 bill and you can give me yours and there’s no difference between them. Bitcoin can sometimes be considered semi-fungible because, while they’re interchangeable in value, each Bitcoin has a unique history documented on-chain, unlike cash, which is untraceable.

#15 Non-fungible tokens

NFTs, unlike fungible tokens, are individually unique. They cannot be replicated or substituted for an identical token because there are no identical tokens. This makes them useful for representing rare or one-of-a-kind assets. If you own an NFT, you are the sole owner of that token and your ownership is verifiable transparently on the blockchain. Common types of NFTs are digital art like .jpgs and .gifs, unique game items, branded collectibles, and real world asset-backed NFTs.

Summary

Now that you know what all of these terms mean, don’t let them go to waste!

Read up on your favorite areas and use cases of tokenization and plan your forays into the wonderful world of tokens.