Asset Tokenization: How It Works

By Guest Author

March 26, 2024

Blockchain technology and, more specifically, smart contracts have revolutionized a wide range of industries. Finance, fine art, real estate, and supply chain are just a few examples of areas where smart contacts have enabled decentralization and traceability.

Moreover, blockchain has democratized asset tokenization, allowing various entities to represent their assets on the decentralized ledger. Companies can issue their stock in an STO, real estate agencies can use NFTs for deeds, and much more. As a result, assets have become much more easily transferable, and secure and provide transparency to all market participants.

What is an STO, and how does asset tokenization work? If you’ve been wondering that yourself, you've come to the right place. This article will delve into the intricacies of tokenized assets, their different types, and the process of creating them.

What Are the Types of Tokenized Assets?

Smart contract-capable blockchains use token standards that allow developers to tokenize anything on the blockchain. Tokenized assets usually fall into two major categories.

1. Fungible tokens. Fungible tokens are the most commonly used assets on blockchains in general. The Ethereum blockchain and the ERC20 standard popularized fungible tokens. Their popularity exploded during the 2017 ICO boom when users used them to invest in crypto at a large scale. This standard allows developers to issue tokens that are identical to each other, regardless if they are collateralized or not. “Fungible” means that any token of the same type is mutually interchangeable with another.

2. Non-fungible tokens. In contrast to fungible tokens, non-fungible tokens are unique, and users cannot exchange them for one another liberally. Each of these NFTs holds different sets of data, including images, videos, text, etc, all of which contribute to their uniqueness.
These play a major role in the blockchain industry and singlehandedly managed to define decentralized finance as a whole.

Asset Tokenization Examples

In the current blockchain industry, there’s a wide variety of different asset tokenization examples. Let's try to cover the most common ones.

Real-world asset collateralization. One of the main use cases of tokenization is the ability to represent real-world assets on the blockchain. This includes stocks, commodities, fiat currencies, real estate, fine art, and many more.
2. Collateralized stablecoins. Stablecoins are fungible tokens that are pegged to a fiat currency. To achieve this, the issuer of the stablecoin holds a certain amount of fiat assets (or equivalents) in their reserves. These reserves serve as a basis for minting tokens, and the collateral helps conserve the peg to the fiat currency at a ratio of 1:1.
Digital asset tokenization. Tokenizing digital assets is also possible on the blockchain. For example, one can tokenize digital identities, which are vital to accessing the broader Web3 space.
In-game asset tokenization. One of the pillars of the Web3 industry is gaming. Tokenized gaming assets present a huge opportunity for gamers to monetize their hobby and turn it into a career. This way, the time they spend in a game can be directly valued on the open market through NFTs representing game characters, skins, or digital land.

All in all, asset tokenization is the main driving force behind DeFi and Web3. It allows users to access and share value over the internet while conserving ownership on the blockchain.

Tokenized Assets Creating Process

The asset tokenization process might range from simple to fairly advanced. Depending on the type of asset, you might need to hire a developer to guide you through the full procedure. Nevertheless, some onboarding tools such as launchpads could help you achieve the desired effect. Let’s have a look at the basic process of tokenizing an asset.

Step 1: Define Token Type

First, you will need to define the token type that you will need to issue. For example, if you are looking to issue a stablecoin, you will need to issue fungible tokens. This would be the case for other types of real-world assets such as stocks or bonds, as they are undifferentiable from one another.

If, on the other hand, you wish to tokenize a more complex asset such as real estate, your obvious choice should be NFTs. The NFT could hold the property’s deed, pictures, address, and previous owners. The same is true for assets like fine art or luxury goods.

Step 2: Select a Blockchain

Your next step would be to choose the blockchain where you want to issue your tokens. There are a few factors you should consider:

Smart contract capability. EVM blockchains like Ethereum, BNB, or Polygon can easily host your tokens. Moreover, they will require very little modification to port tokens from one chain to another. Non-EVM blockchains like Sui, Cardano, or Solana, on the other hand, will need specific deployment.
Gas fees. Deploying fungible tokens is usually pretty cost-effective, regardless of the blockchain. However, NFT minting can quickly rack up in gas fees, which requires you to carefully pick your blockchain. Hyperscalable chains like Solana or Polygon are a great solution for non-fungible tokens.
Security. Security is probably the most important aspect when choosing a blockchain for your tokenized assets. Bitcoin and its ordinals protocol provide the highest possible decentralization and security. However, they might require specialized development and aren’t compatible with existing DeFi protocols. Consequently, you might consider Ethereum, which is also highly decentralized and secure.

Conclusively, you should carefully weigh the caveats of each deciding factor when tokenizing assets.

Step 3: Verify Off-Chain Assets

Finally, verifying the off-chain assets is an essential step in the process, more so if you are collateralizing them with real-world assets.

In this case, you will need a trusted third party to verify the collateral reserves. Additionally, oracles will allow you to link their real-world value with on-chain data.

Why Is Asset Tokenization Important?

Tokenizing assets on the blockchain is a revolutionary feature of smart contracts that allows users and institutions to port real-world value on the blockchain. As such, these assets become fully transparent and traceable while benefitting from the immutability of the decentralized ledger.

Consequently, real-world assets may become much more accessible to mainstream investors. They are much more easily transferable and tradeable, taking advantage of blockchain’s inherent trustless ecosystem.

Asset Tokenization: How It Works

What Are the Types of Tokenized Assets?

Asset Tokenization Examples

Tokenized Assets Creating Process

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