Digitized Assets (Tokens)

Digital asset tokenization is a recently popular trend in the enterprise blockchain space; in fact, the term “token” is no longer just a concept associated with public chain based cryptocurrencies and ICOs (Initial Coin Offering).  Due to their well-defined and easily understood attributes and lifecycle, tokens make it easier to manage and exchange digital assets amongst parties in a shared business network.

The most fundamental concept about tokens is fungibility. It can be loosely interpreted as “being exchangeable.”  Currency is a fungible asset class because all U.S. dollar bills are worth exactly the same and you do not have to have any particular dollar bill to get the value. Real estate, on the other hand, is a non-fungible asset class because every house is unique. Even if the design is exactly the same, the difference in location can drastically affect the values of any two houses.

Typical features of a token include the following:

  • Ownership: who owns a particular token (non-fungible) or what amount of tokens (fungible).
  • Transfer: to allow the digital assets to be traded.
  • Minting: for new tokens to be created for circulation.
  • Burning: owners are allowed to “burn” tokens. This is used in cross-chain trades. Since tokens can not transfer across chains, they get burned in the sender’s chain and minted in the receiver’s chain.
  • Custody: owners can approve certain accounts to look after a portion of their tokens. In scenarios where an escrow is involved, the escrow account can be approved as a custodian by the tokens owner.

The simplicity of the tokens also makes it easier to utilize advanced cryptographic techniques such as zero-knowledge proofs and homomorphic hashes to enhance privacy.

The Ethereum community has done a great deal of work to evolve token contract design in order to support various use case scenarios, from fungible to non-fungible to partially fungible token specifications. The result is a rich collection of token contracts covering a wide spectrum of real world requirements.

The Ethereum protocol design has some unique advantages when it comes to tokens. Smart contracts in Ethereum can act as a mutually trusted escrow, which makes it much simpler to use Ethereum to implement use cases where token trades must be brokered by a trusted 3rd party. Indeed, most decentralized exchange services are built on this feature. It is also essential in popular techniques such as Atomic Swaps based on Hashed Timelock Contracts, a proven technique to broker token trades between different token contracts from the same blockchain or across different blockchains.

Another advantage is the wide variety of real world deployments for all types of tokens in the Ethereum community. From stable coins to CryptoKitties, companies and consumers alike have already used tokens on Ethereum for a long time, resulting in a robust technological foundation and a wealth of technical information at your disposal. High quality smart contract libraries such as OpenZeppelin make it trivial for a developer to get started.