Tokenization is the process of converting rights to an asset into a unique digital representation — a token. This process can be applied to nearly anything: art, real estate, stocks, precious metals, intellectual property, and even sports teams or celebrities.
A brief history of tokenization
Although the concept of tokenization (a term originally associated with data security) has been around since the 1970s, how it’s commonly used today is a rebranding based on recent events. The new popularity of tokenization is attributable to the 2017 rise of initial coin offerings (ICOs).
ICOs allowed entrepreneurs to sell blockchain-based tokens representing physical, or already digital, assets. With the help of the blockchain’s cryptographic promises and ability to eliminate costly intermediaries, it suddenly became possible to create fractional shares cheaply and efficiently.
Most ICOs flamed out, but as we enter 2021, the trend of tokenization is more popular than ever. With tokens mirroring real-life assets on the Blockchain, we can create a second layer that is immutable and easier to exchange. This new token economy offers the prospect of a more fair and efficient financial world by reducing the friction of creating, buying, and selling securities.
Anyone or anything with the potential to accrue value over time can now be tokenized and sold online. Indeed, according to 2020 forecasts, the global tokenization market has reached a value of US$1.2 billion and is estimated to rise to US$4 billion by 2027.
A tokenized future
Tokenization has been growing because it can increase the core value of ownership rights and value exchange through increased liquidity. With the advent of blockchain and DeFi, these rights can be traded more easily, increasing their liquidity. Tokenized rights can also be integrated across systems, thus increasing their utility.
Blockchain-based tokenization represents a full rework of our relationship to ownership and value exchange. It allows the formation of entirely new asset classes impractical or simply impossible before the blockchain era. Not only that, it introduces a new set of producer-consumer dynamics, giving entrepreneurs the ability to create more accessible products and drive inclusion and engagement while generating revenue.
The state of play
As a practice, tokenization currently covers more than one section of the DeFi market, including non-fungible tokens (NFTs), security tokens (STOs), and some commodity coins. In particular, the NFT ecosystem, driven by the ability to prove digital scarcity, has been gaining momentum. NFTs are useful for any applications that require unique digital items such as digital art, digital collectibles, and in-game items. Companies can also deploy NFTs for non-financial applications, including the tokenization of intellectual property and virtually anything else.
In the last year, there have been more than a few exciting examples of NFT growth. In the Aave ecosystem, Aavegotchi, a digital collectible NFT staked with interest-generating aTokens, was introduced. By participating in various challenges and governance processes, Aavegotchi users can increase their asset’s rarity, which was assigned randomly when the Aavegotchi was first minted. There’s also Decentraland, a virtual 3D space where users can build worlds, play games, and explore various immersive experiences — including creating and selling art and buying real estate. Decentraland works with a standard web browser, and MetaMask is all that’s needed to give a user access to the cryptocurrency and NFT features.
As further testament to the excitement around NFTs, in 2020, the creator of CryptoKitties, Dapper Labs, raised $12 million in funding from NBA stars and others to build the Flow blockchain, a network designed to support digital collectibles. Dapper will feature items from Dr. Seuss Enterprises, Warner Music, and UFC (among others) and is letting its users own the digital items they collect with the assurance that the goods are genuine.
Tokenization & the entertainment industry
There are numerous opportunities to leverage tokenization to benefit consumers, producers, and filmmakers, i.e., anyone with an interest or stake in showbiz. To date, more than a few projects are harnessing tokenization with a focus on entertainment, each with its own unique angle.
Perhaps the most powerful feature tokenization offers is the simple ability to reward users for their attention and engagement directly.
Similar to Basic Attention Token (BAT), which compensates users for engaging with the Brave web browser, it’s possible to build a system where viewers are paid for their media consumption using a blockchain-connected token. Such a system can unlock an entire ecosystem of functionality — allowing token holders to do things like tipping their favorite creators or buying premium services with the platform token.
Indeed, Mzaalo, a next-gen entertainment platform that caters to the Indian market, is doing just that. With a new token-based incentive structure, its decentralized entertainment platform is redefining the relationship between content producers, brands, and viewers. With Mzaalo, ordinary users derive value for contributing their attention to the network. And Instead of paying for access or getting carpet-bombed with ads, users will be able to earn for watching content and engaging with the community.
Mzaalo is not alone. There’s also the Theta Network, which allows users to simultaneously watch video content and earn tokens for volunteering their spare bandwidth to relay video to other users. Notably, Theta recently launched native NFTs for content creators. The introduction of NFTs on Theta means that creators on the platform have an entirely new way to drive engagement by minting their own unique items, emotes, and badges to share with fans.
The benefits of tokenization for the entertainment industry are by no means limited to BAT-like incentives and investor access. Projects like Tokit are using ethereum-based tokens to help creators shore up control of their IP, manage royalties, and discourage piracy.
There’s also a trend emerging whereby celebrities, influencers, and athletes tokenize themselves or their contracts. This is a stab at disempowering the agents and other middlemen and giving the individuals control while allowing fans to become more involved.
What we’re witnessing today is a new dawn for the entertainment industry. And this is, in part, thanks to tokenization. Tokenization expands on the functionality of lesser-known DeFi protocols and opens the door wide to liquidity and new possibilities within entertainment.
The resulting integrations incentivize consumers in new ways while also generating knock-on benefits for the organizations and people that opt to issue a token. As these new assets continue to emerge and mature, tokenized assets will be the key that draws users to and connects them with tomorrow’s decentralized solutions.