Bringing everything on the blockchain: What’s asset tokenization?

Blockchain began as the foundation for peer-to-peer (P2P) crypto transactions, but its applications have expanded well beyond digital currencies. In fact, some analysts argue that cryptocurrency may not be blockchain’s most valuable use case. One area drawing growing attention is asset tokenization, which some industry forecasts estimate could reach a $2 trillion market by 2030.

As interest in tokenization increases, more investors and developers are exploring what it means, how it works, and why many see it as the next chapter in crypto’s evolution. In this guide, we’ll break down the essentials.

What’s tokenization of assets? Explaining blockchain tokenization and real-world assets

Tokenization is the process of creating a digital representation of a real-world asset (RWA) on a blockchain – whether it's physical property, a financial instrument, or a collectible item like vintage wine or gold.

When an asset is tokenized, it’s issued as a crypto token on a decentralized P2P blockchain. While these tokens share many traits with cryptocurrencies – such as immutability, transparency, and self-custody – they’re linked to an underlying asset outside the blockchain ecosystem, such as real estate, precious metals, or a bottle of vintage wine.

Investors who hold tokenized RWAs may have partial or full rights to the original asset, but they can store, transfer, or trade their ownership digitally through self-custodial wallets and supported crypto exchanges.

Benefits of tokenization

Tokenization is gaining momentum as a way to bridge blockchain technology and traditional finance. By merging crypto infrastructure with RWAs, tokenization offers benefits like improved liquidity, greater transparency, and the ability to embed decentralized finance (DeFi) features into legacy markets. Here are some of the key advantages driving interest in tokenized assets:

Transparency

On blockchains, ownership records are publicly verifiable. When a tokenized RWA changes hands, its transaction history and current holder can be confirmed via blockchain explorers like Etherscan. This openness reduces the risk of fraud and increases trust among investors.

Liquidity

Tokenization makes it easier to transfer and trade traditionally illiquid assets like real estate or fine art. Unlike physical items, tokenized assets can be exchanged globally, 24/7, with fewer intermediaries and less paperwork. Features like fractional ownership further boost liquidity by allowing multiple investors to buy, store, and swap their tokenized RWAs – either directly or through dedicated tokenization exchanges.

Accessibility 

Many of the same features that improve liquidity also increase accessibility. Fractionalization lowers the barrier to entry, enabling more people to gain exposure to high-value assets with smaller investments. And because blockchains are borderless, anyone with an internet connection can trade tokenized RWAs, regardless of geography.

Diversification 

Tokenization also unlocks access to a wider range of assets than traditional crypto holdings. Instead of being limited to native digital assets like Bitcoin (BTC) or Ethereum (ETH), investors can diversify their portfolios with tokenized versions of real estate, commodities, collectibles, or even carbon credits – assets previously out of reach for most crypto-native traders. This growing variety makes it easier to build balanced portfolios entirely on-chain.

Programmability

Another key advantage of tokenized assets is their ability to support built-in functionality through smart contracts. These contracts can automate features like dividend payments, royalty distributions, or on-chain governance. By embedding these rules directly into the token, programmability reduces the need for manual oversight and adds transparency to how assets are managed and transferred.

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How to tokenize an asset

Tokenizing an asset takes more than just writing code – it also involves legal and technical steps. While there are many ways to tokenize RWAs, most projects follow four steps:

1. Define the asset and prepare legal documentation

To start, project teams must clearly define the RWA and prepare the necessary legal paperwork. 

This includes outlining ownership rights, complying with regulatory requirements from government authorities (e.g., the U.S. Securities and Exchange Commission or the EU’s Markets in Financial Instruments Directive II), and drafting materials such as disclosures and offering memorandums.

2. Select the technology stack

Once the legal framework is in place, the next step is to choose the blockchain infrastructure. Factors to consider include transaction speed, gas fees, security, and developer support. For example, Ethereum offers strong security and the highest total value locked (TVL) in DeFi, but it may face congestion and higher costs. Developers need to compare platforms to determine the best fit for their project’s needs.

3. Create and issue smart contracts

Next, developers write the smart contracts that govern the token’s core functions, such as supply, minting schedule, and wallet transferability. This stage often involves testing for bugs, running simulations, and conducting third-party audits to ensure the smart contracts are secure and production-ready.

4. Settle payments and enable secondary market trading

Once the tokens are issued – often through an initial coin offering (ICO) or private sale – they become available for purchase using fiat or other cryptocurrencies. After distribution, tokens may be listed on regulated exchanges or decentralized marketplaces (DEXs) for liquidity and broader investor access.

What assets can be tokenized? 

In short, just about anything – if an asset exists in the real world, it can likely be tokenized. While legal frameworks for some tokenized RWAs are still evolving, the ability to represent ownership or value on-chain is already a practical reality.

Below are a few categories already seeing real-world adoption:

• Real estate: Tokenized representations of residential and commercial property are increasingly common. Some platforms offer fractional ownership to improve liquidity and accessibility, while others use blockchain to digitize documents like deeds in the form of non-fungible tokens (NFTs), streamlining transactions and reducing paperwork.
• Private equities: Startups and private companies use tokenized shares to raise capital without a traditional initial public offering (IPO). These shares can be accessed globally, transferred across borders, and traded more easily, opening new fundraising opportunities for early-stage ventures.
• Public equities: Regulatory efforts are underway to bring tokenization to publicly traded stocks. For example, Coinbase has sought SEC approval to offer blockchain-based shares that function as tokenized equity. Traditional equities still dominate the market, but if this trend takes hold, it could mean easier access, 24/7 trading, and fewer administrative hurdles than today’s stock markets.
• Employee stock options (ESOs): Companies can tokenize ESOs as a more efficient way to manage employee compensation. Smart contracts allow these options to be issued, vested, and exercised automatically, while on-chain trading platforms offer greater liquidity than traditional methods.
• Debt: Tokenizing assets like loans or bonds offers a flexible option for financing and investing in debt. Thanks to smart contracts, these digitized debt instruments automate processes like distribution, maturity, and compliance. 
• Funds: Although ETFs and mutual funds are accessible through many brokerages, tokenized funds aim to reduce administrative friction in subscriptions and redemptions. They also offer greater transparency into fund operations, reducing the risk of mismanagement.

Challenges of asset tokenization

Despite the many advantages of RWA tokenization, several hurdles remain before this technology can achieve mainstream adoption. Developers, legislators, and financial analysts are still grappling with the many implications of tokenization, including those related to ownership, legality, and taxation. 

• Technical complexity: Tokenizing RWAs isn’t as simple as clicking a button and minting tokens. Developers need specialized knowledge of smart contracts and blockchain infrastructure. Even minor coding bugs can lead to major vulnerabilities or unintended consequences in ownership and asset transfers.
• Regulatory uncertainty: More lawmakers are paying attention to tokenized assets, but there’s still significant ambiguity around how to define and classify them. The lack of clarity over RWAs’ legal status affects how they’re issued, traded, and taxed. In many jurisdictions, it’s unclear whether fractionalized tokens are subject to capital gains taxes or if token transfers trigger taxable events.
• Interoperability limitations: Tokenization promises broader transferability, but many blockchains still operate in isolated ecosystems. Sending tokenized RWAs across web3 still isn’t a reality, which limits liquidity and access to many DeFi services like lending and borrowing. 
• Market adoption: Despite growing interest from traditional finance, many institutions remain cautious due to legal and regulatory uncertainties. Retail investors may also face technical barriers or concerns about the credibility and liquidity of tokenized RWAs, especially given the limited development of secondary markets. 
• Security and backing: The safety of a tokenized asset depends on both its technical infrastructure (its software) and the reliability of the underlying asset. A smart contract exploit could result in stolen or frozen tokens. Worse, if the real-world asset is compromised – such as a property being damaged or a fund collapsing – token holders may suffer losses without clear legal protections.

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Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.