token nft erc721 erc1155 erc20 crypto art culture

Tokenization of Assets: What is it?

Tokenization vs. Cryptography

Before diving into the subject, it is important to determine the difference between tokenization and cryptography. Tokenization prevents external systems from accessing actual data because it is not mathematically related to the original data being replaced.

Cryptography, in turn, uses an algorithm that encrypts data by camouflaging it. Unfortunately, it can still be broken with more elaborate cryptographic keys, causing sensitive data to be breached by more insightful cybercriminals since there is, in fact, a patent relationship with the data it tries to protect.

Tokenization of Assets

Tokenization is the conversion of virtual or physical assets into a digital entity that allows a fair exchange for a specific monetary value. The NFT (non-fungible tokens) standard enables you to “tokenize” almost all tangible or intangible assets. Tokenization also removes the geographical barrier for transactions in works of art, antiques, music, videos, games, etc. 

The uniqueness of NFTs is what creates their value. Owning an NFT is equivalent to owning an antique or a unique work of art. When an NFT is transferred, the code that represents the NFT is also transferred to the new owner on the blockchain.

Data records contained in the NFT, such as owner and creation data, are updated in the digital ledger so everyone can prove their validity and authenticity.

Tokens and Their Standards

As we already know, a non-fungible token or NFT is cryptographic data in a digital ledger – the blockchain – with unique metadata and identification codes. Therefore, each NFT is unique and useful for proving ownership of digital assets, images, games, music, and art. If you still don’t know what an NFT is, check out this other article on our blog: NFT: Sorcery or Technology?

NFTs are, primarily, characteristic of the Ethereum environment, a decentralized and open blockchain-based platform. An NFT is a cryptographic token that follows the ERC-721 smart contract methodology.

A smart contract is a code that is programmed to self-execute according to certain rules. Imagine an amount deposited into an account waiting for certain goods to arrive at a port. When the goods arrive, the money is released from the bank to the seller. Here, the smart contract allows buyers and sellers to carry out the transaction directly and without intermediaries.

The code itself is responsible for the transfer of resources once the goods have been proven to have arrived.

The tokenization of an asset is nothing more than the digital representation, through a smart contract, of a real-world asset.

The ERC-721 standard describes the NFT’s origin on the Ethereum blockchain. It defines how the exchange of game tokens can be done with little metadata and ownership, and security details.

The ERC-1155 smart contract further expands the NFT concept and makes it very efficient in terms of storage and transaction costs. ERC-1155 also facilitates batch processing of multiple non-fungible tokens through a single contract.

Due to their unique features, NFTs do not allow for swaps or negotiations to take place. NFT tokens define individual identities and are used in highly secure identity requirements.

Fungible Token vs. Non-fungible Token

ERC-20 is the most widely used fungible token on Ethereum platforms. It is used in all smart contracts on the Ethereum blockchain. ERC-20 tokens are worth a determined amount and therefore can be used in equivalence transactions.

On the other hand, NFTs follow the smart contract rules of ERC-721 and ERC-1155. Unlike the ERC-20, NFTs cannot be used in transactions or trades in exchange for a certain number of NFTs. This is because all NFTs are unique datasets on the Ethereum blockchain.

ERC-20 is a smart contract standard, while NFT is a data token that complies with the rules set by smart contracts. Cryptocurrencies can be exchanged under the ERC-20 smart contract rule.

Article and Research | Marcus Ferreira
Translation and Review | Carolina Martins
Share this Post