What is asset tokenization and how does it work?

What is asset tokenization?

Asset tokenization (or tokenization) is the process in which ownership rights of a physical or digital asset are converted into a token that is recorded on the blockchain. Through the blockchain, ownership rights are linked to the token, as well as rights to the underlying value of the asset. Think of tokenization of real estate, stocks, artworks, bonds, and commodities.

This means that traditional systems can be partially replaced, making notarized deeds, central registries, or paper certificates less necessary thanks to the use of distributed ledger technology (DLT). This provides a transparent, immutable, and programmable system of ownership registration. Within the crypto sector, tokenized physical and traditional financial assets are often referred to as real world assets (RWAs). Thanks to blockchain technology and smart contracts, tokens can contain programmable features, such as:

• automatic distribution of income (e.g., rental income or dividends),
• built-in compliance rules (such as restrictions on resale),
• and real-time transfer of ownership without the involvement of centralized parties.

Asset tokenization bridges traditional financial markets and blockchain technology by combining existing asset classes with the benefits of decentralization, transparency, and automation.

Key Takeaways

• Asset tokenization converts ownership rights of physical or digital assets into digital tokens on a blockchain.
• Thanks to fractional ownership, assets can be split into smaller parts, making investments more accessible.
• Smart contracts automate processes such as ownership transfer, dividend payouts, and compliance checks.
• Tokenized assets can be more liquid because tokens are easier to trade on online platforms.
• Popular assets for tokenization are real estate, stocks, art, commodities, and private equity.
• Asset tokenization offers benefits such as transparency, efficiency, and global accessibility.
• Challenges include regulation, technological risks, and limited liquidity of secondary markets.

Fractional ownership

A major advantage of asset tokenization is the ability to enable fractional ownership (shared ownership). This means that an asset can be split into multiple tokens that can be distributed among different owners. This allows investors with relatively small amounts to participate in markets that traditionally have high capital requirements, such as commercial real estate or private equity. This lowers the barrier to entry and increases the accessibility of investment opportunities.

Improving liquidity

In addition, tokenization makes it possible to improve the liquidity of traditionally illiquid assets. Assets such as real estate or art are normally difficult and time-consuming to trade. By tokenizing these assets, the associated tokens can be bought and sold more easily and quickly on digital trading platforms, which significantly increases tradability.

How does asset tokenization work?

Asset tokenization works by carrying out multiple steps where legal, technical, and financial components come together. From choosing the asset you want to tokenize to recording ownership rights, token creation, and issuance.

Choosing which assets you want to tokenize

You can tokenize various physical assets, such as real estate, gold, and art, but also already digitized assets such as stocks and bonds. Important factors in this selection are the value of the asset, the degree of liquidity, and the feasibility of legal structuring.

Structuring and legal documentation

Before an asset is tokenized, it must be legally defined what the tokens represent exactly. For this, a separate company is often established, a so-called SPV (Special Purpose Vehicle), which is officially the owner of the asset, such as a building, artwork, or stock.

Investors then buy tokens that entitle them to a portion of the value or proceeds of that asset, for example rental income, dividends, or profit.

Example: a company can tokenize a stock by issuing digital tokens that each represent a small part of that stock. Investors can buy these tokens and may then receive dividends or benefit from a rising stock price.

This legal structure is important because it clarifies what rights token holders have and how ownership is arranged. In addition, the project must comply with laws and regulations, such as identity checks (KYC) and anti-money laundering rules (AML).

Digitization (token creation)

After the legal structuring, the asset is converted into digital tokens on a blockchain. This is done through smart contracts that define the characteristics of the tokens, such as:

• the total number of tokens (supply),
• the distribution of ownership,
• rights to income (e.g., dividends or rent),
• and any transfer restrictions.

Depending on the nature of the asset, different token standards are used (e.g., fungible or non-fungible tokens). Each token represents a proportional share of the underlying asset.

Issuance

After the tokens are created, they are made available to investors. This often happens through a specialized platform or via a so-called Security Token Offering (STO), comparable to a digital share issuance.

Before investors can buy tokens, they usually have to go through a verification process, such as KYC and AML checks. This allows the platform to verify users’ identities and comply with financial regulations.

The price of the tokens can be determined in advance or set by supply and demand in the market.

Example: a company can issue 10,000 tokens that together represent one share. Investors can then buy a portion of these tokens and thus indirectly participate in the share’s value development.

Trading and secondary markets

After the initial issuance, tokens can be traded on secondary markets, such as digital exchanges or peer-to-peer platforms. This means investors can buy or sell their tokens without the entire underlying asset needing to be sold.

This often makes tokenized assets more liquid than traditional assets. Normally, for example, it takes a lot of time and money to sell real estate or private equity. With tokenization, such an asset is split into small digital parts that can be traded more easily and quickly. As a result, more investors can participate in the market and buying and selling becomes more accessible.

Example: instead of selling an entire building, investors can simply sell part of their real estate tokens to other buyers.

Management and lifecycle management

The management of an asset can be partially automated through smart contracts. Smart contracts describe how processes are automatically executed, such as paying out dividends to token holders or arranging voting rights.

Example: if a tokenized real estate project generates rental income, a smart contract can automatically distribute the proceeds among all investors based on the number of tokens they own.

However, not everything happens on the blockchain. Physical assets such as real estate still need to be maintained and managed in the real world.

What role do smart contracts and token standards play?

Without smart contracts and token standards, tokenization on the blockchain is not possible. They therefore form the backbone of asset tokenization. Together, they ensure that digital tokens not only represent ownership, but are also functional, secure, and interoperable within the broader blockchain ecosystem.

The role of smart contracts

Smart contracts are programmable digital contracts that run on a blockchain and can automatically execute actions when predefined conditions are met. Because these processes are automated, intermediaries can be partially replaced, making the process more efficient and cheaper. Think of saving on notary costs, brokerage fees, and administrative costs. Everything is recorded in the code, such as:

• Income distribution Smart contracts can automatically distribute income such as dividends, interest, or rental income among token holders, proportional to their holdings. This happens without manual intervention and with minimal delay.
• Ownership transfer and settlement When tokens are sold, ownership is transferred almost immediately once payment is received. This significantly shortens settlement time compared to traditional financial systems.
• Compliance and regulation Smart contracts can enforce rules, such as restrictions on who may own or trade tokens. This includes KYC/AML checks, geographic restrictions, or investor qualifications.
• Governance and voting rights In some cases, tokens grant voting rights over decisions related to the underlying asset. Smart contracts can automate voting processes and record them transparently.
• Lifecycle management Events such as token burns, the issuance of new tokens, or restructurings can be managed programmatically through smart contracts.

The role of token standards

Tokenization must take place on a specific blockchain. This is where token standards come into play. A token standard is a technical specification that a token must meet to be compatible with a particular blockchain and its ecosystem. They ensure that tokens function in a uniform way and can be easily integrated with wallets, exchanges, and other applications.

Take Ethereum as an example. There, ERC-20, ERC-721, and ERC-1155 are popular standards, each with its own advantages and use cases:

• ERC-20 This is the standard for fungible tokens, where each token is identical and interchangeable. ERC-20 is often used to tokenize financial instruments such as stocks or bonds, where each token represents an equal share.
• ERC-721 This standard is used for non-fungible tokens (NFTs). Each token is unique and cannot be replaced one-to-one by another token. This makes ERC-721 suitable for unique assets such as artworks or specific real estate properties.
• ERC-1155 A hybrid standard that supports both fungible and non-fungible tokens within one smart contract. This offers flexibility and efficiency, for example in complex tokenization structures where different types of rights or assets are combined.

In addition to these standards, there are also specialized variants (such as security token standards) that provide extra functionality for compliance and regulation.

Popular assets to tokenize?

Some assets are particularly suitable for tokenization, especially assets with a high value or limited tradability. By splitting these assets into digital tokens, they become accessible to a larger group of investors.

Popular examples are:

• Real estate – homes, apartments, offices, and retail properties
• Stocks and bonds – traditional financial products that are made digitally tradable
• Art and collectibles – such as paintings, luxury watches, and wine
• Commodities – for example gold, silver, and oil
• Private equity and venture capital – investments in private companies and startups

These assets are often chosen because they are normally difficult to trade, have high entry costs, or are not easily accessible for retail investors.

Types of tokenized assets

There are different types of tokenized assets, which you can divide into different categories depending on the type of asset and the rights you want to attach to the token. Examples are:

• Security tokens (often ERC-20) – represent financial assets such as stocks or bonds and can provide rights to dividends, interest, or voting rights. Example: a tokenized share.
• Utility tokens (usually ERC-20) – provide access to a product, service, or platform, but usually do not represent ownership. Example: a token that gives users access to an investment platform.
• Asset-backed tokens (often ERC-20 or ERC-3643) – linked to physical or financial assets such as gold, real estate, or currency. Example: one token that represents one gram of gold.
• Non-fungible tokens / NFTs (ERC-721 or ERC-1155) – unique tokens that represent individual assets, such as artworks or collectibles. Example: an NFT of a digital artwork or real estate property.

What are the advantages of tokenized assets?

Tokenization offers several advantages over traditional financial systems.

• Improved liquidity – assets such as real estate, art, or private equity can be split into smaller digital tokens. This means investors no longer have to buy or sell an entire asset, making trading easier and faster.
• Accessibility – tokenization lowers the barrier to entry for investments. As a result, retail investors can also participate with smaller amounts in markets that normally have high capital requirements.
• Transparency – transactions and ownership data are recorded on a blockchain. This makes it easier to verify ownership, transaction history, and asset distributions.
• Efficiency and lower costs – smart contracts can automate processes that are normally carried out by intermediaries. This can speed up transactions and reduce administrative costs.
• Programmability – tokens can automatically execute certain actions via smart contracts, such as dividend payouts, voting rights, or compliance checks.
• Faster transactions – traditional transactions can take multiple days due to intermediaries and administrative processes. Blockchain transactions can often be processed much faster.
• Global trading – tokenized assets can be traded worldwide via digital platforms, without relying on opening hours or local financial infrastructure.

Challenges for tokenizing assets

Despite the advantages, there are also several challenges that hinder large-scale adoption.

• Regulation and compliance – legislation around tokenized assets differs per country and is still developing rapidly. This sometimes makes it unclear which rules apply, and providers often have to meet strict compliance requirements such as KYC and AML checks.
• Legal linkage between token and asset – a token does not automatically represent legal ownership of an asset. Therefore, it must be clearly documented what rights token holders have exactly and how the token is linked to the underlying asset.
• Technological risks – smart contracts and blockchain networks can contain errors or vulnerabilities. Bugs in code or hacks can lead to loss of funds, incorrect transactions, or security issues.
• Adoption and market acceptance – many traditional financial institutions and investors are still cautious about blockchain technology. This is due in part to unfamiliarity with the technology, uncertainty about regulation, and integration issues with existing systems.
• Limited liquidity in practice – although tokenization can improve liquidity, markets for tokenized assets are still relatively small. As a result, there are sometimes few active buyers and sellers, which limits tradability.
• Operational management – although ownership is digitally recorded on the blockchain, physical assets such as real estate, gold, or art still have to be managed in the real world. Think of building maintenance, gold storage, or administrative management of investments.
• Scalability and transaction costs – some blockchains can experience delays or high transaction costs during periods of high activity, making usage less efficient.

On which blockchains can you tokenize assets?

Asset tokenization can take place on different blockchains, each with its own advantages, disadvantages, and characteristics in terms of scalability, costs, security, and ecosystem. The choice of a blockchain depends on the specific requirements and objectives of the project.

Ethereum

Ethereum is the most used blockchain for asset tokenization, mainly because of its extensive support for smart contracts and established token standards such as ERC-20, ERC-721, and ERC-1155.

Its large ecosystem of developers, tools, and DeFi applications makes Ethereum particularly suitable for complex tokenization projects. However, drawbacks include relatively high transaction costs and limited scalability.

Polygon

Polygon is a so-called layer-2 solution that operates on top of Ethereum. It offers lower transaction costs and higher speed, while remaining compatible with the Ethereum ecosystem.

This makes Polygon attractive for projects that want to leverage the benefits of Ethereum without the high costs.

Solana

Solana is known for its high transaction speed and low costs. The network is designed for scalability and can process large numbers of transactions per second.

This makes Solana suitable for applications where speed and low costs are crucial, although the ecosystem is less mature than Ethereum’s.

Avalanche

Avalanche offers a flexible platform with fast finality and low costs. The network supports the creation of custom blockchains (subnets), which can be interesting for institutional applications and specific compliance requirements.

Tezos

Tezos is often used for security token projects because of its focus on governance and formal verification of smart contracts. This makes it attractive in regulated environments where security and reliability are central.

Final thoughts

Asset tokenization combines traditional financial assets with blockchain technology by digitally recording ownership rights in the form of tokens. This makes assets such as real estate, stocks, art, and commodities easier to split, manage, and trade.

Thanks to smart contracts and token standards, processes such as ownership transfer, income distribution, and compliance can be largely automated. This can lead to greater efficiency, lower costs, and better accessibility for investors.

At the same time, the market for tokenized assets is still relatively early in its development. Challenges such as regulation, technological risks, and limited liquidity of secondary markets still play an important role.

Still, asset tokenization is seen by many companies and financial institutions as a promising application of blockchain technology. As regulation and infrastructure continue to develop, tokenization may come to play an increasingly larger role within financial markets.