4.2.2 Tokenization in the Blockchain/DLT Space

Tokenization arises as a solution to liquidity challenges in diverse economic sectors. Traditional financial systems, with multiple intermediaries each adding their own costs, reduce liquidity and increase participant costs. Tokenization, by contrast, facilitates direct peer-to-peer markets for free and instant asset exchange, improving liquidity and efficiency while cutting costs.

At the heart of the transformation brought about by Blockchain and Distributed Ledger Technology (DLT) are 'tokens', unique digital assets that encapsulate system value. In decentralized networks, tokens represent the network's value, driving participation and securing consensus. Without tokens, participants lack the incentive to maintain the network, potentially leading to security issues. Tokens are pivotal in decentralized economies, fostering innovation and unique services.

Tokens within blockchain possess unique properties and a life cycle. They are created (minted), transferred, and can be destroyed (burned). The transparency and immutability of blockchain offer a security layer, reducing fraud or counterfeiting. However, to mitigate the risk of scams and fraudulent schemes in these open environments, proper governance mechanisms, smart contract auditing, and regulatory compliance checks are necessary.

'Coins' and 'tokens' in blockchain and DLT are two different types of digital assets. Native coins are inherent to a particular blockchain, often used to incentivize system maintenance and security. Secondary tokens, built on an existing blockchain, represent an extension of the value beyond the native coin, embodying real-world assets, digital goods, access rights, or stakes in a project.

Ethereum's token standards, notably the Ethereum Request for Comments (ERC) standards, have been pivotal in shaping the blockchain space. They provide crucial guidelines for token behavior within the Ethereum ecosystem. It's crucial to note, however, that these classifications lean more towards understanding the nature and functionality of tokens rather than dictating network choice.

ERC Standard	Description	Key Functions
ERC-20	Standard for fungible tokens.	Transfer, balance inquiry, and emission control.
ERC-721	Introduced non-fungible tokens (NFTs). Each token is unique and not interchangeable with any other.	Ownership representation and transfer of unique assets.
ERC-777	An improved standard over ERC-20. It allows tokens to implement a mixer contract for transaction privacy and an emergency recovery function.	Token holder control, improved security, and transaction handling.
ERC-1155	This standard allows a smart contract to manage multiple token types. Fungible, non-fungible or a mix.	Efficient multi-token management, batch transfers.
ERC-1400	Standard for security tokens.	Investor restrictions, compliant transfers, document management.
ERC-223	This standard aims to solve the issue of accidentally losing tokens inside contracts that are not designed to handle them.	Safeguards against token loss, more efficient transfers.
ERC-998	Allows for the composition of non-fungible tokens.	Aggregation of multiple NFTs or a mix of NFTs and fungible tokens.
ERC-4626	A tokenized vault standard designed to optimize and unify the technical parameters of yield-bearing vaults.	Unified parameters for yield-bearing vaults, improved interoperability.

While the ERC standards aren't exhaustive, the understanding and adoption of token standards extend beyond Ethereum, influencing the broader blockchain landscape and serving as a reference for token design across various platforms.