A structured approach to tokenization, its goals, assumptions, applicability, techniques, features and differences from traditional systems.

1. Tokenization
Dr. Pavel Kravchenko
Vladimir Dubinin
Distributed Lab

2. What is tokenization?
A process of transformation of asset accounting and
management to represent each asset by a digital token.

3. Why is it needed?
Tokenization is the way to:
- digitize assets
- increase assets liquidity
- provide an assets management infrastructure to all
ecosystem participants
- implement collective management use cases

4. Examples
Everything will be tokenized:
- Money
- Stocks and derivatives
- Real estate and certificates
- Warehouse receipts
- Loyalty programs
- Precious metals

5. Assumptions
Tokenization is performed for real (i.e. existing somewhere
else) assets that are under control of some entity(-ies).
Principles of governance, requirements to KYC, privacy,
security and speed of processing are defined by that
entity(-ies)
Verification of transactions is performed by entity(-ies) that
are involved in specific transaction (have an ability to audit
real assets).

6. What does “transformation” mean?
Shift from order execution to direct asset management
in account.
This shift is enabled due to creation of the new type of
accounting infrastructure.

7. What does “transformation” mean?
A process of transition of depository, exchange,
payment systems to the uniform decentralized
infrastructure.

8. What does “uniform” mean?
Decentralized accounting system that combines in itself
a ledger, an order book and a transaction execution
engine.

9. How does the new infrastructure
differ?
1. Seamless integration of components
2. Decentralization of storage and execution
3. Management of the asset via cryptographic keys

10. What is token?
Token is an account that contains balance of specific
asset.

11. How blockchain is used?
Blockchain acts as a ledger for accounts. It enables:
1. keeping accounts secure even if ledger is publicly
available
2. decentralization of transaction processing and
storage and as a result:
3. make this process transparent and auditable for all
involved entities

12. Transparency & privacy
1. Transaction is processed by entities that are directly
involved in a transaction
2. Each transaction results to a cryptographically signed
confirmation
3. Transaction metadata is available only for entities that
are authorized to access it.

13. How does decentralization work?
Ledger is stored on the distributed nodes, that:
- store accounts and full history of transactions
- reach consensus about changes to the ledger
*approach to storing and updating of shared database
between entities that don’t trust each other is called
blockchain.

14. Who controls the nodes?
Control over nodes could be public or private. It
depends on the type of proof a particular node needs
from another node to accept its vote.

15. Security model
Each asset management system requires two types of trust:
1. Trust to a token issuer (proof of 1:1 ratio for collateral)
2. Trust to a transaction processing system (protection from
double spending attacks)
*tokens that represent physical assets require trust of the
first type

16. Security requirement
Tokenization system should provide a proof of correct
execution of transactions, i.e. protection from double
spending attacks.

17. Difference from centralized systems
1. Every token holder can prove that their balance
represents the result of correct execution of a set of
transactions (audibility)
2. No one, except token holder can change the balance of
its account without being noticed (integrity)
3. It is hard to delete the state of the ledger (robustness)
4. It is easy to prove who initiated which actions
(non-repudiation)

18. Typical components of a
tokenization system
1. Issuance module
2. KYC module
3. Limits module
4. Fees module
5. Ledger
6. Exchange
7. Mobile & web wallet
8. Key server
9. PoS and ecommerce module

19. Typical architecture
Decentralized storage and
audit with centralized
governance and
processing

20. Contacts
distributedlab.com
pavel@distributedlab.com
dubinin@distributedlab.com