Tokenization is the process of representing an asset, right, or unit of value as a digital token on a blockchain. Tokenization can apply to financial assets (such as cash, bonds, or funds), real-world assets (such as real estate or commodities), or digital rights (such as access, entitlements, or claims).
The token serves as the on-chain representation that can be transferred, held, and, in some cases, programmed within smart contracts.
How Tokenization Works
Tokenization generally involves creating a token that corresponds to something of value and defining the rules that govern ownership and transfer.
A typical tokenization flow includes:
- Asset definition: specifying what is being tokenized (asset, claim, entitlement, or right)
- Token issuance: minting tokens on a blockchain that represent ownership or a claim
- Custody and control model: determining whether tokens are held in self-custody wallets or by custodians
- Transfer rules: enforcing how tokens can move (open transfer, restricted transfer, allowlists, limits)
- Redemption or settlement (if applicable): defining how tokens map back to off-chain assets or rights
Tokenization can be implemented with purely on-chain assets (native tokens) or with tokens linked to off-chain assets through legal, custodial, and operational structures.
What Tokenization Is Used For
Tokenization is commonly used to:
- Enable faster settlement and programmable transfer rules
- Improve asset portability across platforms and jurisdictions (subject to compliance constraints)
- Support fractional ownership where appropriate (splitting exposure into smaller units)
- Increase operational transparency by recording transfers on-chain
- Integrate assets into DeFi workflows where tokens can be used in smart contracts (when permitted)
Types of Tokenization
1. Tokenized Money
Stablecoins and tokenized deposits are forms of tokenized money used for payments and settlement.
2. Tokenized Securities and Funds
Tokens that represent interests in securities, funds, or similar financial instruments, typically with transfer restrictions and compliance controls.
3. Tokenized Real-World Assets (RWAs)
Tokens linked to real-world assets such as commodities, invoices, or real estate, depending on the issuer structure and legal framework.
4. Utility and Access Tokens
Tokens that represent rights such as access to a product, service, or network function.
Risks and Considerations
Tokenization introduces design and legal-operational trade-offs:
- Legal enforceability: how token ownership maps to real-world rights and claims
- Custody risk: key management, access control, and recovery procedures
- Issuer and counterparty risk: dependence on the entity managing the asset linkage (for off-chain assets)
- Compliance and transfer restrictions: regulatory requirements may limit who can hold or transfer tokens
- Settlement layer risk: network congestion, fee volatility, and finality policies
- Data and valuation risk: ensuring accurate valuation, disclosures, and record alignment between on-chain and off-chain systems
Summary
Tokenization is the conversion of assets or rights into blockchain-based tokens that can be held, transferred, and, in many cases, used within smart contracts. It can improve settlement and enable programmability, but it also introduces legal, custody, issuer, compliance, and network-related risks.
Related Terms: