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. It could also be for something intangible like time or intellectual property.
• Underlying asset: The asset whose ownership is being represented by the token. If the 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 that the issuer holds the underlying asset or show that it does not.
• Blockchain network: A distributed ledger of transactions.
• Ledger: A record of accounts and associated transactions. In practice, a list of things that happened.
• Token: A programmatic record on a blockchain network. Tokens can track permissions, ownership, and related data.
• Asset: Something useful or valuable, usually in the context of ownership.

What is an example of a tokenized asset?

Stablecoins are a type of tokenized asset. The underlying asset is generally a currency like the US dollar. US dollars do not exist on blockchain networks by default, so issuers create tokenized dollars that let people hold value and transact onchain.

The "stable" in stablecoin comes from its price being fixed, or pegged, to the underlying asset. In 1:1 backed stablecoins, the issuer holds the same number of dollars as the number of tokens in circulation. If provenance is good, an issuer can redeem the token for the underlying currency.

What can tokenized assets do?

The core advantage is that tokenized assets can move on the blockchain where they are issued. That means they can be used for a wide variety of financial operations at any time, from anywhere, without relying on traditional intermediaries to begin the process.

Tokenized stocks are a clear example. They can trade 24/7, while traditional stocks stop trading after market hours and do not trade on weekends. Tokenized stocks also do not require a traditional broker in the same way.

What can't tokenized assets do?

Generally, tokenized assets are IOUs for the underlying asset. Their value depends heavily on good provenance. A token can behave economically like the underlying, but only if the issuer is actually managing the underlying asset correctly.

An example of this risk came in March 2023, when the US dollar stablecoin USDC temporarily lost its peg after Silicon Valley Bank collapsed. Because Circle held part of its reserves there, USDC briefly traded below $1. The token recovered once regulators stepped in and restored access to the reserves, but the episode showed how much tokenized assets still depend on off-chain issuers and custody.

What are alternatives to tokenized assets?

The alternative is ownership through traditional systems. Those systems vary widely by asset class. Stocks are held through brokers. Homes rely on deeds and local legal systems. In general, traditional ownership is a mix of legal frameworks, legal documents, and institution-managed ledgers that are only visible when firms choose or are required to reveal them.

Where are tokenized assets bought and sold?

Tokenized assets are bought and sold on many blockchain networks, with Solana and Ethereum being the most prominent venues. As the space matured, marketplaces and exchanges emerged to support different asset categories, from art and NFTs to stocks and stablecoins. Examples include OpenSea, Magic Eden, Uniswap, and Raydium.

Before buying or selling, it is important to understand the issuer, the venue, and the protections in place to ensure that redemption for the underlying asset is actually possible if something goes wrong.

Summary

Tokenized assets are assets whose ownership is represented by tokens on a blockchain network. Those tokens can make assets more transferable, composable, and accessible, but they do not remove issuer, legal, or operational risk. Understanding who issues a tokenized asset, how it is backed, and how redemption works is as important as understanding the technology itself.

Originally published for Meridian.