Tokenization involves creating a digital representation of an asset on a blockchain, allowing it to be traded on both centralized and decentralized platforms. Each token represents a unit of the underlying asset, with the blockchain ensuring that ownership and transactions are recorded in a secure, transparent, and immutable manner (for more information, see Blockchain and Distributed Ledger Technology (DLT): Overview on Practical Law).
Tokens representing an asset can vary widely. Beyond cryptocurrencies, the primary vehicles for tokenization on the blockchain are:
Security Tokens: These digital assets derive their value from an external asset and can offer ownership rights similar to digital shares. Security tokens may modernize traditional financial instruments or introduce new methods for sharing value. They enable issuers to encode certain criteria into a blockchain, with the resulting tokens used to track investment performance, distribute dividends, and implement vesting and lockup periods. Security token holders are entitled to specific rights, which are enforced automatically through smart contracts instead of traditional legal documents.
Utility Tokens: These tokens grant users access to a product or service and are typically unique to a specific ecosystem. For instance, Brave’s Basic Attention Token (BAT) can only be used to tip content creators through the Brave browser or other applications with integrated BAT wallets, such as X. BAT’s use is limited to its ecosystem, beyond which its value is purely speculative.