Skip to main content

Tokenization

The process of converting a real-world asset, such as property, into digital tokens that can be traded onchain.

Tokenization of real-world assets will lead to blockchain technology becoming foundational to the future of exchanging value.

See top five resources on Real World Asset tokenization.

Engineering

Asset Classes​

Tokenization involves taking an asset from its ledger of origin to a new destination ledger, typically to unlock new use cases and value. RWAs include tokenized versions of:

See asset type definitions.

Benefits​

Note that success depends on factors like regulatory compliance, market demand, and the development of trusted marketplaces for pricing and trading tokenized assets.

  1. Efficient ledger system: Blockchain provides a public, decentralized, and cryptographically secure ledger for representing ownership of assets, which is more efficient than traditional ledgers.
  2. Easier fractional ownership: Tokenization makes it easier to provide and transfer fractional ownership of assets.
  3. Simultaneous transfer of securities and money: Tokenization allows for the simultaneous movement of securities and money (via stablecoins) on the same technology layer, making transactions more efficient.
  4. Improved settlement times: Unlike traditional international markets where settlement can take days, tokenized assets can be transferred and settled almost instantly, reducing counterparty risk and issues with reserves.
  5. 24/7 availability: Tokenized assets can be traded or liquidated at any time, unlike traditional markets with limited trading hours.
  6. Automation: Tokenization enables automated processes, reducing the need for manual interventions in transactions.
  7. Potential for increased liquidity: While tokenization itself doesn't guarantee liquidity, it makes assets easier to trade and transfer, which is a prerequisite for liquidity.
  8. Cross-chain interoperability: In the future, tokens will be able to move across different blockchains, increasing flexibility and potentially opening up new markets.
  9. Potential for broader market access: Tokenization could potentially open up assets to investors in different countries and jurisdictions, though regulatory challenges remain.
  10. Efficiency: Improves efficiency of asset-cash interactions on the same ledger.

Shared Transaction Ledger​

Asset-cash interactions on the same ledger: the blockchain makes transactions involving both assets and cash more efficient, faster, and less risky by eliminating the traditional separation between asset ledgers and cash ledgers.

  1. Seamless integration: Having assets and cash on the same ledger allows for more efficient and seamless interactions between the two. Transactions involving both assets and cash can be executed simultaneously without needing to reconcile separate ledgers.
  2. Instant settlement: Asset-cash transactions can be settled instantly and atomically, meaning either both parts of the transaction (asset transfer and cash payment) occur together or neither occurs. This eliminates settlement risk and the need for intermediaries.
  3. Reduced reconciliation: With both assets and cash on the same ledger, there's no need to reconcile separate asset and cash ledgers, which is a time-consuming process in traditional finance.
  4. Programmability: Smart contracts on the ledger can automate complex asset-cash interactions, enabling new types of financial products and services.
  5. Improved liquidity: The ability to quickly and easily trade assets for cash (and vice versa) on the same platform can improve overall market liquidity.
  6. Reduced counterparty risk: Direct asset-cash exchanges on the same ledger can reduce the need for intermediaries and thus lower counterparty risk.

Business Models​

Securitize:

  • Acts as a transfer agent, issuing tokenized securities on blockchain.
  • Serves as a placement agent/broker-dealer for distribution.
  • Generates revenue through fees from asset managers and small fees on feeder funds.
  • For securities, the tokenization process is more nuanced, involving issuers, transfer agents as intermediaries.

Potential​

The total value of real world assets that could be tokenized is estimated to be between $400 trillion to $800 trillion. This vastly exceeds the current cryptocurrency market, which fluctuates between $2-2.5 trillion. Only a small percentage of RWAs becoming tokenized would surpass the total value of cryptocurrencies.

Predictions:

  • Gradual adoption of blockchain technology in financial markets, similar to the transition from copper to fiber in telecommunications.
  • Blockchain industry will be defined more by RWAs than cryptocurrencies in the coming years.
  • A real world asset boom expected in the next year or two, based on current trends and developments.
  • Exciting potential in bridging tokenized real-world assets with DeFi ecosystems.

Impact:

  • The growth of RWAs is expected to bring mainstream adoption to blockchain technology.
  • It may shift the focus away from speculative cryptocurrencies towards more traditional asset classes represented on-chain.

Progress​

Role of traditional finance (TradFi) operators in leading adoption.

  • Major financial institutions like Fidelity and BlackRock are starting to bring assets on-chain.
  • The integration of TradFi with blockchain technology is seen as crucial for the growth of RWAs.

Challenges​

  • Careful vetting of assets required to ensure quality and avoid reputational risks.
  • Regulatory clarity, which is improving in some regions like Asia and Europe.
  • Complexity of structuring RWAs and providing assurances about the underlying assets.
  • User experience issues, particularly around private key management.

Infrastructure​

TradFi Adoption​

BlackRock has taken a significant position in supporting tokenization efforts through Securitize by leveraging partnerships and investments to drive innovation forwards to meet future client needs in this evolving market.

  1. Strategic Investment: BlackRock led a $47 million funding round for Securitize, demonstrating a strong commitment to the tokenization space.
  2. Board Representation: Joseph Chalom, BlackRock's Global Head of Strategic Ecosystem Partnerships, has been appointed to Securitize's Board of Directors.
  3. Tokenized Fund Launch: BlackRock launched its first tokenized fund, the BlackRock USD Institutional Digital Liquidity Fund (BUIDL), on the Ethereum network in partnership with Securitize.
  4. Strategic Vision: BlackRock believes that tokenization has the potential to significantly transform capital markets infrastructure.
  5. Digital Asset Strategy: The investment in Securitize is described as "another step in the evolution of our digital assets strategy" by Joseph Chalom.
  6. Market Leadership: BlackRock's iShares Bitcoin Trust (IBIT) has become the largest spot bitcoin ETF by assets, surpassing Grayscale's GBTC.
  7. Broader Crypto Involvement: BlackRock manages Circle's reserve fund, which underpins the USDC stablecoin, further expanding its presence in the crypto sector.

Institutions:

  • Blackrock
  • Franklin Templeton
  • UBS

Tokenization Process​

What is the best practice checklist for tokenization of real-world assets?

Decide on the best Blockchain Protocols for business case requirements where onchain logic automates key aspects like token creation, compliance checks, and asset management.

  1. Country and Regulations
  2. Consult legal counsel
  3. What legal contracts? protection?
  4. Select asset(s) to tokenize
  5. Partner with a qualified custodian
  6. Select accounting method
  7. Work with tokenization provider
  8. Perform audits
  9. List tokens on exchanges
  10. Integrate with DeFi

Navigating the regulatory landscape through KYC/AML processes, securities law adherence, and jurisdictional compliance is crucial for these platforms to operate legally and protect investors

  • No specific regulations preventing the use of public blockchains as ledgers for securities.
  • Blockchain can provide more transparency and accurate record-keeping.
  • Personal identifiable information is kept off-chain for privacy reasons.

Software Engineering​

Writing Smart Contract code to tokenize real-world assets.

  • Link Legal contacts into smart contracts
  • Best blockchain for RWA?
  • What pre-existing contracts/patterns?
  • What off-chain data? compute?

Languages, Virtual Machines and Implementations:

Tokenization and DePIN​

By leveraging RWA tokenization, DePIN projects can create more inclusive, efficient, and innovative infrastructure networks that bridge the gap between physical assets and digital economies. This synergy has the potential to revolutionize how we build, finance, and manage infrastructure on a global scale.

  1. Funding and Investment: RWA tokenization allows DePIN projects to more easily raise capital by tokenizing their physical infrastructure assets. This enables fractional ownership and lowers the barrier to entry for investors, making it easier to fund large-scale infrastructure projects.
  2. Liquidity: By tokenizing real-world assets used in DePIN projects, traditionally illiquid assets like real estate or equipment become more liquid and tradable. This increased liquidity can attract more investors and capital to DePIN initiatives.
  3. Democratization of Ownership: RWA tokenization enables fractional ownership of physical infrastructure, allowing a broader range of investors to participate in DePIN projects. This democratizes access to infrastructure investments that were previously limited to large institutions or high-net-worth individuals.
  4. Efficient Resource Allocation: Tokenization of physical assets in DePIN projects allows for more efficient allocation and utilization of resources. Assets can be more easily shared, traded, or repurposed within the network.
  5. Enhanced Transparency and Security: The use of blockchain technology in both RWA tokenization and DePIN projects provides increased transparency and security in asset ownership and transactions. This can build trust among participants and stakeholders.
  6. New Business Models: The combination of RWA tokenization and DePIN enables innovative business models, such as decentralized ownership and operation of infrastructure networks. This can lead to more efficient and community-driven infrastructure development.
  7. Incentive Mechanisms: RWA tokenization allows for the creation of sophisticated incentive mechanisms within DePIN projects. Participants can be rewarded with tokenized assets for contributing to the network, encouraging growth and participation.
  8. Integration with DeFi: Tokenized real-world assets from DePIN projects can be integrated into decentralized finance (DeFi) ecosystems, enabling new financial products and services based on physical infrastructure.
  9. Global Accessibility: RWA tokenization makes it possible for DePIN projects to attract global investment and participation, overcoming geographical barriers in traditional infrastructure financing.

Attachments​