Tokenization and Decentralized Finance
DeFi, Digital Assets, Security Tokens - August 25, 2020
What is the goal of decentralization and DeFi? For starters, it’s not to replace the traditional system. It is to make it better. One way to make the traditional system better is through ‘disintermediation.’
What does ‘disintermediation’ mean in the financial world? It simply means making financial functions work without a lot of intermediaries charging unnecessary fees and creating unnecessary friction.
Now, where does tokenization fit into the disintermediation in DeFi picture? And how does it contribute to DeFi coins? Well, tokenization allows a whole range of assets which previously could not be represented digitally to now, be put on the blockchain in electronic form. And it’s doesn’t just end with e-representation. A token can fit in so much information, information that is important to both the issuing party and the investor who buys the token.
For instance, the regulatory and legal policies limiting the token sale can be encoded into the token. Only if an investor satisfies those regulatory and legal policies can their wallet accept the token. This creates an automatic and efficient secondary market, which doesn’t require needless third-party verification intermediaries that enforce trust within the traditional system. In the DeFi system, trust is outsourced to the computer programs and continuously executed.
These tokens can be differentiated based on geography, capital, risk-profile, sectors, industries, regulatory-authority, and more. And they aren’t controlled by any one party, offering complete decentralization.
Each point of differentiation can be monitored through data oracles, which retrieve and update the information on a real-time basis. These oracles can be wrapped in a smart contract, which is triggered automatically, and put on a blockchain so that its distributed and open.
The best thing about these tokens is that they don’t have to be limited to cryptocurrencies. They can be used to denote a whole range of real-world assets from bonds, to funds, to real estate and even art. The opportunities are endless!
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