What Is Asset Tokenization?

Digital asset tokenization is the process whereby ownership rights of an asset are represented as digital tokens and stored on a blockchain. In such cases, tokens can act like digital certificates of ownership that can represent almost any object of value, including physical, digital, fungible, and non-fungible assets. Because they’re stored on a blockchain, owners can maintain custody over their assets (if owners are holding them in their own secure crypto wallet).
If the long-term promise of this use case is impressive, so too are the strides toward adoption already being made today. Major enterprises, such as Boston Consulting Group and ADDX, BlackRock, Deloitte, BNY Mellon, and EY, have studied asset tokenization and concluded that it possesses the capacity to disrupt multiple industries, including the global securities industry. Additionally, Microsoft and Vanguard have announced or gone live with projects tokenizing industrial assets and securities, respectively. By these metrics, asset tokenization is already among the most popular blockchain use cases currently achieving real-world enterprise adoption.
To understand how asset tokenization works and why it matters, let’s revisit the basics of Web3 technology: Smart contracts are cryptographically secure digital agreements created with computer code and stored on a highly secure type of database known as a blockchain. In order to issue tokens, a developer writes a smart contract on a blockchain that maps positive balances to a series of wallet or smart contract addresses, along with functions that enable users in control of those addresses to add and subtract from those balances.

Asset Tokenization Examples

• Real-world asset tokenization—Real-world assets like fiat currency, equities, T-bills, credit, commodities, carbon credits, intellectual property, and fine art can be tokenized and stored on a blockchain. Similar to gold bullion warrants and house deeds, they’re bearer assets that give the holder a claim over a real-world asset. The key difference from legacy bearer assets is that physical asset tokenization enables assets to be stored, traded, and used as collateral across blockchain networks. ‍
• Digital asset tokenization—Tokenizing assets that only exist in a digital form on a blockchain network is critical to Web3, especially for use cases such as representing DAO governance rights and cross-chain assets. Because they’re entirely digital, tokenized assets stored on a blockchain enable the owner to hold the asset outright, rather than owning a claim on the underlying asset. ‍
• In-game asset tokenization—A subset of digital asset tokenization, in-game assets used in GameFi projects or metaverses, such as skins, weapons, or in-game currencies, can be represented as tokenized assets.

How Does Asset Tokenization Work?

By consolidating origination, distribution, trading, clearing, settlement, and safekeeping into a single layer, tokenization enables a streamlined and efficient financial system underpinned by blockchain technology. The process of creating tokenized assets involves several steps—defining the token type (fungible or non-fungible), selecting the blockchain to issue the tokens on, selecting a third-party auditor to verify off-chain assets, issuing the assets, and more. Meanwhile, the decentralized nature of blockchain networks ensures transparent safekeeping, as asset ownership records are immutable and resistant to tampering, providing users with greater confidence in the integrity of the system. If you’d like to learn more about how the asset tokenization process works, read How To Tokenize an Asset.
Asset tokenization involves creating a tokenized representation of a real-world asset on a blockchain network.
‍

Benefits of Asset Tokenization

In addition to offering a decentralized and trust-minimized alternative to a real-world product, investment vehicle, or service, there are many more benefits of asset tokenization. Specifically, the tokenization of real-world assets through the use of blockchain technology presents a clear path toward making numerous assets more valuable, accessible, and useful, as well as creating a vehicle by which off-chain data can augment their utilization within the DeFi ecosystem.
At the heart of both the current success of asset tokenization and its long-term potential is the remarkable number of advantages and additional utility that tokenized assets provide relative to non-tokenized assets. Tokenization can allow for increased liquidity of traditionally illiquid assets; greater accessibility and ease of access for otherwise cloistered investment opportunities; greater transparency regarding ownership and ownership history; and a reduction in administrative costs associated with the trading of these assets, including management, issuance, and transactional intermediaries. Finally, tokenization allows for assets that previously could not access the DeFi ecosystem a path toward doing so, unlocking a whole new realm of potential through asset-backed composability.

Liquidity

In traditional markets, financial events are generally recorded across siloed ledgers, resulting in significant market inefficiencies, such as increased costs and lengthened settlement times. This lack of interoperability between different systems represents a significant opportunity for asset tokenization to help solve the resulting fractionalized liquidity through interoperable tokenized assets.
Tokenization can also help improve liquidity for historically illiquid assets. With tokenization, an asset can be represented as millions or even billions of tokens, creating fractional ownership, which can be subsequently listed on a variety of widely-available and accessible exchanges. This eliminates the need for costly transactional intermediaries and expands the potential buyer pool while simultaneously keeping the tokens tied to a unique asset.

Accessibility

Many of the highest-upside assets are out of reach to common investors due to financial or regulatory constraints. For instance, consider financing a big-budget movie: the upfront costs, as well as the risk of a production crew going over-budget, comfortably price out all but the wealthiest investors. However, a successful film can earn a return on the investment multiple times over in a relatively short time frame. Other low-access, high-return examples include collecting sports cars, investing in distressed foreign assets, or the purchase and renting of multifamily real estate.
In this case, the benefits of tokenization essentially become similar to crowdfunding, but within a model where the group of investors funding or purchasing an asset also reap the financial rewards of their participation. This allows smaller investors a path towards investing in riskier, but higher-upside assets with relatively low capital.

Transparency

Many high-value assets suffer from a lack of reliable and easily-available information regarding returns, ownership history, sale history, and other key metrics users need to be able to make informed economic decisions. This lack of information is especially acute when evaluating foreign assets, or instances where a buyer cannot personally inspect an asset prior to purchase. A key benefit of tokenization is that it allows for the open tracking and auditing of all these records due to the fundamentally public nature of many blockchains.
With tokenization, users can see a record of ownership as well as returns in interest or dividends, depending on the smart contract logic of the asset. Provenance tracking on the blockchain allows for immutable records, significantly decreasing investment security risks by minimizing record-keeping trust. These features have the potential to significantly reduce the risk of fraud across multiple industries where forgeries and knock-offs are common, such as high-priced luxuries like wine and caviar, as well as fashion and art.

Composability

One of the most promising benefits of asset tokenization is also among the least well-explored: connecting the value of real-world assets to the composability of the DeFi ecosystem. Decentralized money markets around tokenized real-world assets enable users to earn equity percentage in the interest generated from off-chain collateral. This enhances the liquidity of the wider DeFi space while simultaneously giving retail investors access to an investment class that would otherwise be difficult to access.
Moving forward, asset tokenization will allow for a plethora of opportunities for smart contracts developers seeking to tap into real-world value. Whole new types of synthetic assets, indexes, and token baskets can easily be built by combining tokens tied to various assets, and the ability to turn real-world revenue streams into collateral offers another jolt of innovation for an already rapidly expanding DeFi field.

The Need for Oracles in Asset Tokenization

While asset tokenization has the potential to enhance the utility of a wide variety of real-world assets and simultaneously buttress growth and innovation within the DeFi space, it is also a use case whose functionality is highly reliant on secure oracles. In order for something of monetary value to be accurately represented and traded on the blockchain, there must be good information on the asset. This need is especially acute at four stages in a tokenized asset’s life cycle: when the tokens are created, when they are used as collateral, when users check their valuations, and when they are sold on secondary markets.