After the peak of 2017, the world’s attention shifted to cryptocurrencies. Thousands of new digital currencies appeared on the market, accompanied by innovative technologies that offered to answer the questions of new and old investors.
Then the bubble burst: the market capitalization of cryptocurrencies plummeted, driving away those who had been interested in this technology with the sole purpose of getting rich. This allowed the crypto environment to evolve significantly, decreasing the risk carried by unwary investors.
This is when tokens stole the space under the spotlight: within the last two years, the token stablecoin Tether went from a market capitalization of two billion dollars to one of thirteen billion US dollars. A 650% increase. A similar token, the USD Coin, has surpassed a capitalization of two billion dollars in less than two years.
The popularity of this trend is due to the combination of blockchain and tokens, which open up countless opportunities for the cryptocurrency world. Let’s take a look at it together.
What is a blockchain
First of all, we need to establish – in principle – what a blockchain is and how it operates, without going too much into technical details that would take more than a paragraph to analyze.
A blockchain (literally blockchain) is a shared and immutable data structure. As the name suggests, each blockchain is composed of a series of interconnected blocks, each containing three pieces of information:
- Data, which varies depending on the type of blockchain. For example, Bitcoin stores each transaction within this field, transcribing three elements per transaction: the sender’s public key (i.e., the wallet from which the crypto came), the recipient’s public key, and the amount of bitcoin exchanged. Other blockchains, such as Ethereum, also store smart contracts in blocks: we discuss this in the next section.
- The hash of the block, i.e., its unique “fingerprint” calculated using an algorithm. The hashes are obtained by exploiting the computing power of computers, which often come together to solve the block algorithm and then obtain a reward represented by a cryptocurrency amount.
- The hash of the previous block, which is necessary to keep the chain unique.
Since each block is automatically confirmed by each participant of the blockchain (called a node), to compromise a cryptocurrency it is necessary to obtain 51% of the computing power of all nodes: this attack would require a sum of money that, in the case of networks such as Bitcoin and Ethereum, would exceed the potential gain. This is because, in addition to requiring a very high computational power, there are other conditions to compromise even just one block of the blockchain, such as a proof of work and the recalculation of all the following hashes.
Finally, each blockchain has three characteristics: immutability, transparency and uniqueness. This means that once a block is calculated, it can no longer be modified. In addition, the information it contains is accessible to anyone, and is unique: given the nature of the blockchain, it is not possible to insert “duplicate” blocks, i.e. that refer to the same previous block.
Tokenization and blockchain: how they combine
As identified in a previous article, a token is a digital representation of an asset or resource.
Unlike cryptocoins (often confused with cryptocurrencies, a term that instead encompasses both coins and tokens), tokens do not require a unique blockchain: 80% of tokens in fact reside in the Ethereum blockchain, which in turn hosts the Ether cryptocoin.
To create and manage a token, you need to place smart contracts within the blockchain. As inferred from the name, a smart contract is strings of code that govern the creation and transactions of tokens in an immutable and transparent manner, akin to coins. These contracts allow the transfer of tokens without intermediaries: once the conditions stated on the smart contract are met, an agreed sum will be transferred to the wallet that completed the contract.
Blockchain and tokens thus combine to create a new way to transfer assets in absolute security and transparency. The possible uses of blockchain-based tokenization are countless: real estate can be tokenized to make a privileged market accessible to anyone; digital artworks can be tokenized to ensure their authenticity and uniqueness; votes in an election can be tokenized, preventing fraudulent methods from being used to compromise votes.
Tokenization is quickly making its way into a wide variety of industries, providing efficiency, security and value. And you, how will you relate to this new technology?