4.2.1 Definition and Evolution of Tokenization

Tokenization is a process that converts real-world assets or their rights into digital tokens, which can be stored, managed, and transacted on a blockchain, a distributed digital ledger. Although tokenization and money share certain similarities as they both represent value, tokens differ in their specificity. Unlike universal representations of value like traditional or electronic money, tokens are unique identifiers associated with a specific asset or part thereof. Consider non-crypto examples such as airline miles or coffee shop loyalty points. These tokens represent a form of value (a free flight or coffee), tied specifically to the issuing organization, hence not universally accepted as money. Similarly, tokens in the crypto world signify value, with each token corresponding to a specific asset or utility within a specific blockchain ecosystem.

Tokenization enables "fractional ownership", allowing high-value assets to be broken into smaller, more affordable units. This introduces liquidity to traditionally illiquid markets like real estate or fine art by enabling smaller transactions, offering transparency through the immutable nature of blockchain, and reducing intermediation. Tokenization essentially redefines how value is perceived and handled, acting as a bridge between the physical and digital world. It revolutionizes asset management, trading, and ownership, laying the foundation for a new era of digital assets and blockchain technology.

Tokenization has a long history, evolving from rudimentary forms like commodity money (where items such as shells or gold nuggets served as tokens of value), to modern digital representations of fiat currencies, securities, and other financial assets. However, the advent of blockchain technology and Bitcoin marked a turning point, opening up the possibility for 'trustless transactions', with tokens representing assets or utilities on a decentralized ledger.

Today, in the rapidly evolving landscape of blockchain technology, tokens are foundational elements. Depending on their functionality, scope, and underlying mechanism, tokens can be categorized into various types, which are outlined in the table below:

#	Token Type	Description	Use Cases
1	Cryptocurrencies	These are tokens that act as digital currencies. They are used as a medium of exchange, store of value, or unit of account.	Bitcoin (BTC), Ethereum (ETH), etc.
2	Utility Tokens	These tokens provide holders with a claim on services produced by a network.	Filecoin (FIL), Golem (GNT), etc.
3	Security Tokens	These tokens derive their value from an external, tradable asset. They are subject to federal securities and regulations.	Blockchain Capital (BCAP), tZERO (TZROP), etc.
4	Asset Tokens	These are tokens tied to real-world assets like gold, real estate, etc.	Digix Gold Token (DGX), RealT tokens, etc.
5	Stablecoins	These are tokens pegged to a reserve of assets to stabilize their value.	Tether (USDT), USD Coin (USDC), etc.
6	Governance Tokens	These tokens give holders the right to influence decisions concerning a project.	Maker (MKR), Compound (COMP), etc.
7	Non-Fungible Tokens (NFTs)	These are tokens that represent a unique item or piece of content.	Cryptokitties, CryptoPunks, etc.
8	Soulbound Tokens (SBTs)	Non-transferable tokens representing a person’s identity. This could include medical records, work history, and any type of information that makes up a person or entity.	Identity verification systems, medical record systems, etc.