Tokenization is the act of converting the value of a tangible or intangible asset into a token. The token itself is a piece of code made up of a distinctive asset reference, unique properties, and/or specific legal rights in accordance with the smart contract through which the token was generated. Once tokenized, an asset can be freely transferred, exchanged, or stored away in accordance with whatever digital platform(s) or marketplace(s) the asset's token was designed to be compatible with. Through tokenization, nearly any asset can be seamlessly integrated into the rapidly expanding ecosystem of blockchain networks and digital finance.
Tokenization standard refers to the specific technical architecture of a network's blockchain protocol, which in turn determines the nature of the tokens that are compatible with that network. In the years since the blockchain technology was first introduced, several token standards have gained prominence, with ERC-20 tokens on the Ethereum network leading the pack in terms of ubiquity and adoption. Tokenization standards can also be spun off to create new standards which exist within the same token standard family. For instance, security tokens (ERC-1400) and NFTs (ERC-721) are two distinct tokenization standards based on Ethereum.
Tokenization Value Chain
The tokenization value chain is a model that is based on the traditional value chain, or securities value chain, that facilitates the creation, distribution, trading, settlement, clearing, custody, and storage of tokenized assets through blockchain. The tokenization value chain is generally considered more streamlined and equitable than the traditional value chain and does not make use of rent-seeking third-party intermediaries to carry out many of its processes. The model allows for the creation of novel business types and potentially even entirely new industries.
Tokenized representation takes place when a digital asset is locked up with a custodian, who then mints a one-to-one representation of that token on another chain. Within the context of the Ren Virtual Machine (RenVM), the custodian involved in this process is a decentralized "Darknode'' instead of a centralized authority. By locking an asset up in a Dark Node until a user wishes to redeem it, Ren users are able to complete the asset conversion process in a trustless yet secure manner.
A tokenized security is a cryptographic tokenized version of a traditional security or asset that is generally used to represent a stock, stablecoin, commodity, or various types of traditional assets. Tokenized securities are often used for blockchain-based derivatives trading and other related decentralized finance (DeFi) mechanisms. While the term 'security token' sounds similar to the term ‘tokenized security’, the two are in fact very different. Security tokens are a specialized category of tokenized cryptocurrency asset type that makes use of very strict regulatory and compliance parameters that are designed to protect investors by giving them guaranteed equity in a company and guaranteed share in future returns.
ERC-1155 Tokenization Standard
ERC-1155 is an Ethereum-based token standard that incorporates non-fungible token (NFT) technology. The ERC-1155 standard allows for a single smart contract to manage multiple token types, including both fungible, semi-fungible, and non-fungible tokens. It is purported as the new multi-token standard. Other token standards like ERC-20 and ERC-721 require a separate contract to be deployed for each token type or collection, which results in excessive and redundant code on the Ethereum blockchain.
ERC-20 Tokenization Standard
The ERC-20 standard outlines the common set of criteria and technical specifications an Ethereum token must follow to function optimally and interoperably on the Ethereum blockchain. It enables the creation of tokenized assets that can be bought, sold, and exchanged alongside cryptocurrencies like bitcoin (BTC) and ether (ETH). The ERC-20 standard utilizes smart contracts to issue tokens that can be exchanged on the Ethereum network as well as used interoperably between Ethereum-based dApps. It is the most commonly used Ethereum token standard, and has been used as a framework to create many notable digital assets.
ERC-223 Tokenization Standard
ERC-223 is a tokenization standard that was proposed in 2017. It was designed to address some of the inefficiencies attributed to the ERC-20 Ethereum tokenization standard by developers building the Ethereum Classic blockchain, but for various reasons has not been implemented on a far-reaching scale. Notable for ERC-223 is a feature set designed to help prevent token losses that can occur with transfers of ERC-20 tokens.
ERC-721 Tokenization Standard
ERC-721 is a technical standard for the implementation of non-fungible tokens (NFTs) on the Ethereum blockchain which outlines and provides rules that all NFTs must follow. NFTs that adhere to the ERC-721 standard are interoperable with each other and the wider Ethereum ecosystem. The ERC-721 standard produces provably rare assets and is widely used for digital collectibles, games, art, and luxury items.
ERC-777 Tokenization Standard
Similar to ERC-20, ERC-777 is a tokenization standard for fungible tokens, and is designed to enable more complex interactions for token trading. It helps remove confusion around decimals, minting, and burning — and it employs a distinctly powerful feature known as a hook. A hook is a function in an informatic computer-based contract that is initiated when tokens are sent to it, and which simplifies how accounts and contracts interact while receiving tokens. Furthermore, because of this fact, ERC-777 tokens are much less likely to get ‘stuck’ in a contract (which has historically been an issue with ERC-20 tokens).
BEP-20 (Binance Smart Chain Tokenization Standard)
BEP-20 is the tokenization standard used to facilitate the transfer of ownership for Binance Smart Chain (BSC) assets operating on the Binance Smart Chain. All BSC addresses are identical to their Ethereum ERC-20 address counterparts, meaning that Binance Smart Chain assets are interoperable with the Ethereum network. This is an important feature that allows for the transfer of tokenized assets and other data between Ethereum, Binance Smart Chain, Binance Chain (BC), and eventually between other blockchain protocols like Cardano and Polkadot, furthering the blockchain industry's goal of interchain interoperability.
BEP-2 (Binance Chain Tokenization Standard)
BEP-2 is the tokenization standard which is used to facilitate the transfer of ownership for Binance Chain (BC) assets operating on the Binance Chain. All Binance Chain addresses begin with the first three letters as bnb paying tribute to the token symbol for Binance’s main asset, Binance Coin (BNB). Binance Chain is one of two main blockchain networks built and designed by Binance — the other being Binance Smart Chain (BSC).
TRC-10 is another tokenization standard used by the TRON blockchain that stands apart from its more common TRC-20 tokenization standard. Although TRC-10 and TRC-20 tokens have several technical differences, the key differentiation is that TRC-20 tokens are designed to operate in conjunction with smart contracts and the TRON Virtual Machine (TVM), while TRC-10 tokens are not.
TRC-20 is a smart contract standard for creating tokens using the TRON Virtual Machine. TRC-20 tokens are fully compatible with Ethereum’s ERC-20 standard.