As blockchain technology and the financial sector increasingly converge, tokenization is evolving from a mere buzzword into a powerful tool with the potential to reshape finance in 2025. Or so the argument goes.
At present, the tokenization market is very small, but we are still at the very beginning and tokenization’s full potential, say, two decades into the future, is arguably in the trillions of dollars mimicking the value of the underlying, i.e. tokenized, assets.
Will tokenization’s potential start to be realised in the short term or will it go the way of digital art-based NFTs which have decidedly fallen off a cliff?
But first…
What is tokenization?
At its core, tokenization is the process of representing ownership rights of real-world assets as digital tokens on a blockchain platform. This process can be used for traditional financial instruments (such as shares, bonds, investment funds, fiat currencies), physical assets (such as real estate, art, commodities), and intangible assets (such as intellectual property rights). It can increase liquidity, enable fractional ownership, and streamline transactions across sectors.
Leveraging blockchain technology, tokenization creates a transparent and secure ledger for transactions and ownership. Various processes (such as trading, settlement) can be consolidated into a single blockchain-based layer for a more efficient financial system. Smart contracts can reduce the need for intermediaries and lower costs and time by automating processes like revenue sharing among investors.
What’s the point of tokenization?
Tokenization offers multifaceted benefits for real-world assets. By enabling fractional ownership of high-value assets like real estate or art, it expands investor access and increases liquidity.
Smart contracts (self-executing contracts on a blockchain) are key to tokenization as they enable complex transactions and new financial products, eliminating intermediaries and enhancing efficiency (for instance by automatically paying returns to investors).
Tokenized assets can be traded 24/7, creating more dynamic markets with better price discovery and faster settlement cycles. This technology also enables secondary markets for previously illiquid assets (such as private equity, loyalty points, real estate), enhancing market flexibility.
Public blockchain platforms ensure transparent, immutable record-keeping, providing unprecedented trust and security in asset ownership and transaction history. This reduces fraud potential and enhances market confidence.
Overall, tokenization democratizes investment, streamlines processes, and has the potential to reshape financial markets significantly, though full realization of these benefits will unfold gradually.
Have we seen any real-world adoption?
Several companies have already embraced tokenization, recognizing its transformative potential. For instance, Ondo Finance bridges traditional finance and DeFi by tokenizing real-world assets like U.S. Treasuries, making them accessible 24/7. Similarly, traditional finance titans like BlackRock and Franklin Templeton have launched tokenized money market funds (backed by U.S. Treasury bills, cash, and repurchase agreements) on multiple public blockchains including Ethereum, Solana, Avalanche, and Aptos.
Other examples include Propellr and Fluidity collaborating to tokenize an apartment building in New York, and Paxos issuing the Pax Gold stablecoin which tokenized physical gold, both on the Ethereum blockchain. The Diamond Standard Fund has tokenized diamond commodities while Metavisio launched a tokenized corporate bond. Major crypto gaming firm, Axie Infinity, has tokenized in-game assets.
Tokenization infrastructure is also developing fast, for instance, Securitize is a financial technology company that facilitates asset tokenization, while Aconomy is a decentralized exchange that enables the tokenization of premium wine collections. Tether, issuer of the USDT stablecoin, has launched an asset tokenization platform.
Progressive regulators are also acting with Singaporean authorities actively coordinating industry players to test tokenized products.
These examples showcase how tokenization is transforming asset ownership and creating new investment opportunities.
What are the barriers to adoption?
Despite its promising outlook, tokenization of real-world assets faces several challenges. Varying legal and regulatory frameworks across jurisdictions create complexities for issuers and investors, making compliance with securities, property, and tax laws difficult.
Technological and cybersecurity risks persist as blockchain technology evolves, raising issues of scalability, security, and interoperability, while smart contracts remain vulnerable to coding errors or attacks. Verifying ownership of tokenized assets and preventing fraudulent claims is an ongoing challenge.
Integrating traditional asset management with blockchain introduces complex operational processes and requires robust infrastructure. Pricing mechanisms, especially for unique assets like real estate or art, are difficult to establish, and liquidity risks remain despite increased accessibility.
Bridging the gap between traditional finance and decentralized platforms necessitates significant technological upgrades, and the potential for lost or stolen private keys poses a security risk. Ultimately, widespread adoption hinges on integrating standards and building a robust ecosystem to navigate these complex challenges.
Looking ahead
Tokenization has the potential to revolutionize asset ownership and trading, but potential alone is insufficient. We must identify the areas of genuine demand for tokenized assets. For instance, while the technology to tokenize real estate exists, the question remains: does the demand?
The most successful application of tokenization so far has been fiat currencies, solving a practical need for crypto traders seeking a stable store of value. This success underscores the importance of demand pull in the tokenization space.
Realizing tokenization’s full potential requires addressing challenges such as regulatory clarity, enhanced security, and robust secondary markets. Ongoing technological improvements in blockchain scalability, interoperability, and smart contract safety will enhance the efficiency and utility of tokenized assets.
In conclusion, tokenization represents a significant leap in how we interact with real-world assets, potentially transforming the global economy by increasing liquidity, democratizing investment access, and streamlining financial processes. While some market growth is expected in 2025, the wider transformation will, I believe, unfold over a much longer timeframe
Olu Omoyele is the founder & CEO of DeFi Planet. Chain of Thoughts is his monthly column on the cryptoverse.
Disclaimer: This piece is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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