Analysis of Tokenization Technology for Real-World Assets

Tokenization of real-world assets refers to digital tokens on the blockchain that represent ownership or legal rights to tangible or intangible assets. Tokenization encompasses a wide range of asset classes, including real estate, commodities, artworks, intellectual property, and financial instruments.

By implementing fractional ownership, tokenization increases asset liquidity, allowing more people to participate in investments. The immutable ledger of blockchain ensures transparent ownership records, reducing the risk of fraud. Meanwhile, tokenized assets traded on decentralized exchanges bring unprecedented market accessibility and efficiency.

According to the analysis, it is expected that by 2030, the total market value of various tokenized assets (, excluding cryptocurrencies and stablecoins ), will reach approximately $2 trillion, with a pessimistic scenario of $1 trillion and an optimistic scenario of up to $4 trillion. These estimates do not include stablecoins to avoid double counting.

Current System

The tokenization of real-world assets refers to representing off-chain asset ownership in the form of digital tokens through blockchain or similar distributed ledger technologies. This process connects the characteristics, ownership, and value of the assets to their digital form. Tokens serve as a digital holding tool, allowing their holders to claim ownership of the underlying assets.

Historically, physical certificates of ownership have been used to prove asset ownership. While useful, these certificates are vulnerable to theft, loss, forgery, and money laundering threats. In the 1980s, digital holding tools began to emerge as a potential solution. However, limited by the computing power and cryptographic technology of the time, these tools failed to materialize. Instead, the financial industry turned to centralized electronic registration systems to record digital assets. Although these paperless assets brought some efficiency improvements, their centralized nature necessitated the involvement of multiple intermediaries, which in turn introduced new costs and inefficiencies.

System Based on Distributed Ledger Technology

The development of distributed ledger technology ( DLT ) makes it possible to re-examine the concept of digital securities or tokens.

DLT is composed of a series of protocols and frameworks that enable computers to propose and verify transactions within a network while maintaining the synchronization of records. By decentralizing the storage of records, this technology shifts responsibility away from a single central authority. Such decentralization reduces administrative burdens and minimizes the risk of system failures associated with reliance on central entities, thereby making the system more resilient.

In traditional systems, multiple intermediaries handle transaction execution, clearing, and settlement. DLT-based systems simplify these processes through a single consensus mechanism.

Decentralized Solutions

Blockchain is a distributed ledger technology that operates through a decentralized network of computers. Tokens can be issued on two types of blockchains: private permissioned chains and public permissionless chains.

A private permissioned chain is controlled by a central entity and restricts access to specific users, forming a controlled ecosystem. A public permissionless chain, on the other hand, does not require a central authority for control and provides open access to all users. When tokens are issued on a public permissionless chain, they can be integrated with decentralized finance ( DeFi ) protocols, thereby enhancing their utility and value.

The choice of blockchain determines the level of control that the token issuer can maintain. Compared to private permissioned chains, public permissionless chains grant the issuer less control. The choice of blockchain architecture should align with the issuer's goals and the intended functions of the token.

A key advantage of asset tokenization is the automation achieved through smart contracts. Smart contracts are programs on the blockchain that execute when both parties meet specific conditions. These contracts automate financial transactions and administrative tasks, reducing the need for manual work and intermediaries. By eliminating counterparty risk, this automation makes operations more efficient and secure, enabling faster and lower-cost transfers.

Tokenization Methods

The tokenization of real-world assets can be analyzed through two key attributes of the asset: its form and ownership.

Forms of expression include the economic characteristics of the assets—their functions, underlying assets, maturity dates, and interest rates. In addition, ownership verification requires a ledger, which can be off-chain or on-chain. Off-chain assets maintain their rights and forms of expression through physical certificates or paperless forms, all operating within a legal framework. On-chain assets, on the other hand, exist in digitally enhanced or natively digital forms, managed by blockchain consensus mechanisms.

Digital enhanced assets maintain ownership through an off-chain ledger, which serves as their security assurance, while using blockchain tokens as a digital representation. Digital native assets are essentially digitized, with their tokens directly representing value and ownership.

The four methods of tokenization include:

1. Direct ownership: Digital tokens themselves serve as official ownership records, eliminating the need for custodians.

2. 1:1 Asset-Backed Token: The custodian holds the assets and issues tokens that represent direct rights to the underlying assets.

3. Over-collateralized Tokens: Issuing asset tokens by using assets that represent assets or related rights different from what was expected as collateral.

4. Insufficient collateral tokens: The issued tokens aim to track the value of a certain asset, but are not fully collateralized.

Why Choose Tokenization

The tokenization of real-world assets is primarily achieved through distributed ledger technology to enhance efficiency. This technology increases transparency, automates processes, reduces operational costs, and eliminates intermediaries and counterparty risks. Compared to traditional financial systems, these advantages enable faster settlements and cost savings through streamlined and flexible market infrastructure.

The main advantages include:

• Atomic settlement: By executing two stages of a transaction simultaneously through smart contracts, counterparty risk is eliminated.

• Liquidity enhancement: It has increased the transferability of assets, making previously non-tradable assets tradable.

• Reduce intermediaries: Smart contracts replace traditional intermediaries to verify data and automate processes.

• Achieve Automation: Automatically execute predetermined conditions through smart contracts, simplifying manual tasks.

• Promote Compliance: Directly encode regulatory requirements such as KYC and AML into the blockchain to improve compliance efficiency.

• Automated Market Maker: An asset pool managed by smart contracts automatically matches buyers and sellers, providing continuous liquidity.

Risks and Costs of RWA Tokenization

Despite the many advantages of tokenized assets, their adoption still faces significant challenges. The main risks stem from underlying technology and regulatory considerations. Technical concerns include cybersecurity vulnerabilities, system scalability limitations, settlement processes, network stability, and efficiency issues. On the regulatory front, key issues involve anti-money laundering compliance, governance frameworks, identity verification, and data protection and privacy.

Investor behavior and market dynamics have also added extra complexity. Achieving widespread adoption requires a significant amount of education and awareness-raising efforts. Market risks include the possibility of assets being overvalued due to speculative trading, as well as increased price volatility triggered by the digital nature of these assets. The high energy consumption of blockchain consensus mechanisms has also raised environmental concerns.

The transition to a tokenized financial system involves significant costs. The most notable expenditures stem from the infrastructure changes required to support blockchain and tokenization technologies. Organizations need to invest in secure, scalable blockchain platforms, acquire specialized software to manage tokenized assets, and train employees to adapt to these new systems. Integration costs are also not to be ignored—there is a need to connect these new systems with existing financial infrastructure while maintaining security and operational integrity. Educational efforts aimed at improving understanding and overcoming skepticism also represent significant direct and opportunity costs for governments. Finally, the high energy consumption of blockchain consensus mechanisms presents dual financial and environmental challenges.