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- Asset tokenization represents the ownership rights of real-world assets as digital tokens on a blockchain.
- Tokenized assets benefit from permissionless liquidity, open access, on-chain transparency, and reduced transactional friction compared to traditional assets.
Understanding Asset Tokenization
Asset tokenization refers to using blockchain technology and smart contracts to tokenize ownership or rights to an asset as a tradable, on-chain token. It has the potential to tokenize any asset with monetary value. Secure oracles are key for reliable off-chain data in asset tokenization processes.
Now that a number of large banks have discovered the advantages of tokenized assets, they’re looking to create more advanced applications on-chain. #Chainlink provides a single, universal interface for these financial institutions to access Web3.
Discover the role Chainlink… pic.twitter.com/b33RbtT3QY
— Chainlink (@chainlink) May 11, 2023
The Benefits and Challenges of Asset Tokenization
Asset tokenization offers increased liquidity, accessibility, transparency, and composability compared to non-tokenized assets. However, it relies on secure oracles to ensure accurate representation and trading of tokenized assets.
Asset tokenization is the process of representing ownership rights of an asset as digital tokens stored on a blockchain. These tokens act as digital certificates of ownership and can represent almost any object of value, including physical, digital, fungible, and non-fungible assets. When stored on a blockchain, owners can maintain custody over their assets if they hold them in a secure crypto wallet.
The adoption of asset tokenization is gaining momentum, with major enterprises such as Boston Consulting Group, BlackRock, Deloitte, BNY Mellon, and EY recognizing its disruptive potential in multiple industries. Microsoft and Vanguard have also announced or implemented projects involving the tokenization of industrial assets and securities. This growing adoption demonstrates the popularity and real-world enterprise use cases of asset tokenization.
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 include:
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.
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- 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.
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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.