What are tokenized assets?
What are tokenized assets?
Put most directly, a tokenized asset is something one can own whose ownership has been made trackable through a digital representation on a blockchain network. That digital representation on a blockchain is called a token. A tokenized asset can be purchased, held, sold, transferred, borrowed, or lent out through actions taken with its token.
Key Concepts
- •Tokenization: The process of creating a digital representation, on a blockchain. This could be for something tangible like currency, art, or real estate. This could also be for something intangible like time or intellectual property (IP).
- •Underlying asset: This is the asset whose ownership is being represented when the tokenization process is applied. If the resulting token is redeemed, this is the asset the issuer should return.
- •Issuer: The body, generally a company, responsible for the tokenization and redemption processes for a tokenized asset.
- •Provenance: The record of ownership for an asset. For a tokenized asset, this can certify the issuer holds the underlying asset ("good" provenance) or it can show the issuer doesn't hold the underlying asset ("bad" provenance).
- •Blockchain network: A distributed ledger of a list of transactions.
- •Ledger: A record of accounts and associated transactions. This a complex way of saying "a list of things that happened". When accurate, one should be able to use that list to understand who owns what in a financial context.
- •Token: Most accurately, a token is a programmatic record on a blockchain network. Tokens tend to track permissions, ownership, and related data. The programmatic nature of a token means it can represent anything within the bounds of a particular blockchain's rules. Colloquially, "token" is used interchangeably with cryptocurrency or cryptoasset.
- •Asset: Something useful or valuable. Generally speaking, this is used in the context of ownership.
What is an example of a tokenized asset?
Stablecoins are a type of tokenized asset. The underlying asset that has been tokenized is, generally, a currency like the US dollar. US dollars do not exist on blockchain networks by default. Several issuers have tokenized US dollars so that people can hold value and transact in US dollars on blockchains.
The "stable" in stablecoin comes from its price being fixed ("pegged") to that of its underlying. This is generally done using a 1:1 ("one to one") backing method. In 1:1 backed stablecoins, the issuer holds the same number of US dollars as they put tokens in circulation. This means that, so long as the provenance is good, an issuer can facilitate a token holder redeeming a stablecoin for its underlying currency.
In this case, the tokenized asset is just a currency. Instead of moving through things like Venmo and bank transfers that can take several days, these tokenized versions of currencies can be transferred effectively instantly on the blockchain network where they have been tokenized.
What can tokenized assets do?
The core thing tokenized assets can do, in difference to assets that are not tokenized, is move seamlessly on the blockchain on which they are tokenized. From a technical perspective, they are only constrained by the rules of that blockchain. This means that they can be used for a wide variety of financial operations at any time, from anywhere, and without needing to rely on intermediaries to allow a person to commence that operation.
The most clear comparison is for tokenized stocks versus those trading on traditional exchanges. Tokenized stocks trade 24/7 by definition. Meanwhile, their non-tokenized counterparts stop trading after 4 p.m. in New York City and do not trade on weekends. Tokenized stocks do not require a broker. Meanwhile, their non-tokenized counterparts do.
What can't tokenized assets do?
Generally, tokenized assets are IOUs for the underlying asset. The value of the token is largely, arguably completely, dependent on good provenance. This means the tokenized asset can be used economically like the underlying, but not without confirmation that the issuer is managing the underlying asset holdings correctly.
An example of a tokenized asset running into issues related to its underlying is when the largest, widely trusted US dollar stablecoin USDC temporarily lost its peg in March of 2023. Silicon Valley Bank (SVB), which held some of Circle's actual dollar reserves (Circle is the issuer of USDC) collapsed. It held about 8.8% of the total Circle treasury. This led to USDC's value dropping to $0.87, 13 cents off its intended $1.00 value. So for every one of the IOUs held (USDC tokens), one could have only recovered 87% of the value put in. This situation was resolved with SVB once the Federal Deposit Insurance Corporation (FDIC), US Treasury Department, and US Federal Reserve stepped in to right the SVB ship. USDC immediately regained its peg to the US dollar, restoring one-to-one redemption.
The SVB situation is an excellent example, because it came from a highly unlikely event, not from obvious mismanagement, criminal activity, or extremely risky business practices.
What are alternatives to tokenized assets?
The alternative to tokenized assets is ownership through traditional methods. Traditional methods are not uniform across asset types. For example, for homeownership, there are highly varied ways of managing deeds across geographies. Stocks owned through traditional methods are held through brokers, who serve as gatekeepers for how someone can and cannot buy, hold, sell, or otherwise execute financial operations on their stock ownership. Generally speaking, traditional ownership is a mix of legal frameworks, legal documents, and old-school ledgers managed by companies under non-disclosed, non-uniform database operations. As a note, these database operations are only verifiable if and when companies elect, or are compelled by regulation, to reveal them. Meanwhile, blockchain networks like the Solana network are constantly and publicly verifiable by any third party without requiring the involvement of or permission from the blockchain network.
Where are tokenized assets bought and sold?
Tokenized assets are available to be bought and sold on most blockchain networks. Solana and Ethereum are the premiere blockchain networks for tokenized asset issuers. In the early days of tokenized assets issuers of illiquid tokenized assets like NFTs and art typically had "drops" they would advertise. As the space matured marketplaces emerged that issuers would partner with. For example. OpenSea built on Ethereum and MagicEden built on Solana. For more liquid tokenized assets like stocks and stablecoins they were initially deployed on exisiting exchange infrastructure like Uniswap on Ethereum and Raydium on Solana. All these venues allowed for 24/7 buying and selling and for anyone with an internet connection to participate.
Before buying or selling it is important to do your own research into the issuer and exchange/marketplace to understand what protections are in place to ensure you will be able to redeem for the underlying. The question you should always ask is who will ultimately take responsibility if something goes wrong.
Summary
Tokenized assets are assets whose ownership is represented by tokens on a blockchain network. Those tokens are usually issued by an entity and function as programmable IOUs for an underlying asset like dollars, stocks, real estate, art, or even time and intellectual property.
Because tokens live on blockchains, tokenized assets can move globally, nearly instantly, 24/7, and interact with a wide range of onchain protocols without relying on traditional intermediaries like brokers or banks. This makes them powerful new financial tools.
At the same time, most tokenized assets still depend on off-chain issuers and good provenance. If the issuer mismanages reserves, takes excessive risk, or loses access to the underlying (as the USDC/SVB example showed), the token can trade below its intended value, or in the worst case become worth nothing.
In short, tokenized assets expand where and how assets can move and be used, but they do not remove issuer, legal, or operational risk. They are a fast-growing part of the crypto ecosystem, and understanding who issues them, how they’re backed, and how they can be redeemed is as important as understanding the technology that moves them.