Demystifying blockchain tokenization is a daunting task. So far we have gone over the basics of tokenization and have gone into more detail about a specific type of tokenization, asset tokenization. However, these assets that are tokenized with cryptocurrencies have to be “redeemable” for ownership of their underlying asset or there would be no value in the token that represents the asset. Of course, along with a method of asset tokenization Divistock has created a method of untokenization as well.
From the method discussed in our last article, two methods of untokenization are created in order to create a trustless protocol of tokenization. One of these is a simple method with smart contract technology, and one requires litigation. The method done with a smart contract is much more desired, the latter is for the case of a tokenizing company not accounting for and/or stealing the underlying asset that has been tokenized. This is possible because the asset is somewhat in their control legally by the holding company that the tokenizing company uses.
The Simple Method
This is the method that transpires between the tokenizing company and its user. First the user will send the tokenized assets or the token to a smart contract address created specifically for untokenization. The smart contract will then freeze these tokens on the blockchain network, movable by no one unless certain requirements are met.
From there the holding company which holds the assets will sign over ownership to the user legally through a legal agreement. This agreement will be notarized and stored on the blockchain network just as the tokenizing documents were. Immediately following the signing of ownership the tokenizing company will issue a “check” to the smart contract stating that the assets are transferring to the user. The user will send the same check back to the smart contract stating the same thing and the contract will immediately burn those tokens. This method is very secure technologically, but not legally.
The Litigation Method
If in the case the tokenizing company commits some sort of act of fraud, attempts to steal the asset, or for any reason refuses to sign over the assets to the user that holds the tokens representing the tokenized asset, the user has the option to move to litigation against the company.
Within the original tokenization agreement is a clause that states that whoever holds the tokens that represent an asset has the legal right to claim ownership of them from the tokenization holding company. Therefore, if they are unable to obtain their assets from the company they have the ability to sue for the assets. This is in place to add extra security for the users of the tokenization protocol.
A Strong Combination
Both of these methods combined create a strong security complex for a tokenized assets protocol and platform, while also creating a completely trustless system. These methods are most certainly necessary for structuring any organization’s asset tokenization protocol and legal agreements. Without this none of the value from these assets will be able to be maintainable. One failure to deliver assets for untokenization by the user will devalue the protocol and platform that is hosting. In addition, it also devalues all tokenized assets (specifically the tokens that represent them) on all platforms and protocols.
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