Non-Fungible Token (NFTs) Vs Tokenization

Contrary to popular belief, not all tokenized assets are NFTs.

Tokenization is an innovative way to give on-chain value to off-chain assets. This practice predates the NFT landscape, and was originally touted as one of the core use cases for blockchain technology.

But what does tokenization look like in 2024? 

And how are tokenized assets different from NFTs?

Let’s find out.

What Is an NFT?

Non-fungible tokens (NFTs) are a way of giving value to digital works like art, collectibles, music, in-game items, and more. 

They function as a limited supply of an asset that is deployed on a blockchain. Each asset (or token) in the supply has its own value based on its perceived worth.

Unlike cryptocurrencies, NFTs represent digital goods rather than currency. Instead of explorers like Etherscan, we use NFT marketplaces like OpenSea.

Cryptopunks (June 2017) was the first popular NFT collection on the Ethereum blockchain. Each cyberpunk belongs to the same contract under a different ID, each with different values. For example, this contract has a supply (or collection size) of 10,000 NFTs:

Each piece in this collection is worth whatever the owner resells it for, and only if he decides to sell it. 

NFTs are bought either due to their perceived value (digital art), utility, or in anticipation of a later price increase. 

The main NFT use case is proof-of-ownership, which is valuable for creating digital economies in video games, online stores, or Web3 services.

What Is Blockchain Tokenization?

In the crypto landscape, tokenization refers to a secure system in which an asset can be represented on a blockchain. Most commonly, it’s a way of allowing real-world assets to be traded on-chain.

Tokenization can often be paired with fractional ownership, which is a process that allows multiple users to own “shares” of illiquid assets like property. 

A core use case for tokenization is real asset transmutation. This allows digital tokens to be backed by physical assets like real estate, precious metals, and more. 

Some examples of tokenization include:

• Digital gold. Paxos Gold, for example, claims to have backed its tokens with physical gold and made them divisible.

• Fractionalized NFTs. Some NFTs can share ownership among users, similar to security tokens. 

For example, you could divide one NFT into a collection of 100 fragments (sub-NFTs), each with different owners or prices. A more complex alternative could involve a smart contract dictating that whoever owns over 50% keeps ownership rights, while everyone else is just an investor.

• Website domain tokenization. Tokenization applies both to traditional names and crypto domains like ENS (Ethereum Name Service). Domain flipping has made a comeback, except the entry barrier is lower. Instead of buying one domain for thousands of dollars, you can buy a 10% stake and sell if it gains value.

• Real estate tokenization. NFTs feature public records about who owns an asset, what they paid, how long they held, and everyone who owned it before them. Applied to real estate, NFTs can reduce the need for blind trust and save on time and costs.

4 Differences Between NFTs and Tokenization

#1 Fungibility

Fungible assets meet two conditions: they’re interchangeable and indivisible. Each token from the supply has equal value and can be broken down into decimals. 

Every unit of BTC, for example, is worth the same amount. BTC can also be broken down into smaller units, so you don’t need to own an entire bitcoin to hold the asset.

Tokenized assets are fungible. NFTs can be divisible when tokenized, but they’re still non-fungible. Just like NTFs have different rarities within their collections, NFT fragments do too. 

#2 Format

Tokenization involves off-chain assets, especially physical goods and services.

This can deliver interesting use cases beyond what is possible with NFTs, which are mostly virtual and based on perceived value. 

Tokenized assets are less speculative, provided they are based on a relatively stable physical asset.

#3 Entry Barrier

In the market today, trading tokenized assets isn’t that easy. Many different types of real-world assets can be tokenized, and there is no single resource that a user can leverage to start trading.

Listing an NFT, on the other hand, has become incredibly straightforward due to the popularity of OpenSea.

#4 Value

You may own a blockchain asset, but do you control its value? 

That’s the problem with NFTs that are not backed by utility or real assets. 

In contrast, it’s easier to find intrinsic value in tokenization, as they are digital representations of assets that are already perceived to have value.

Tokenization vs. NFTs

While the two terms are often used interchangeably, tokenization and NFTs have more differences than it seems. 

NFTs are the most volatile marketplace since memecoins, which can appeal to traders, collectors, and creatives. 

Tokenization, on the other hand, is about security and digitizing physical assets. 

What they have in common, however, is that both NFTs and tokenization achieve trustless proof of ownership.

As of 2024, NFTs are more popular due to their low entry barrier and the hype that has surrounded NFT marketplaces. 

While tokenization has more real-life use cases, it is yet to ignite the market in the same way.

The challenge for NFTs lies in gaining more utility and broader appreciation, especially in the face of a turbulent NFT market that has left many feeling disillusioned.

Meanwhile, the challenge for tokenized assets lies in the fact that they are yet to be tested on the same scale. Until we see more projects offer easy access to tokenized representations of physical goods, we won’t know the extent of their impact.

Only the future will tell what both of these blockchain-enabled asset classes have in store. 

But as of 2024, both NFTs and tokenization have proven to have significant staying power.