Architecture

Digital asset tokenization involves representing ownership rights of an asset as digital tokens, which are stored on a blockchain. These tokens function like digital certificates of ownership and can represent virtually any valuable object, whether physical or digital, fungible or non-fungible. By being stored on a blockchain, these tokens enable owners to retain custody of their assets, especially if they are kept in a secure crypto wallet.

To grasp the workings and significance of asset tokenization, it’s essential to review the fundamentals of Web3 technology. Smart contracts are secure digital agreements written in computer code and stored on a blockchain, a highly secure database. To issue tokens, a developer creates a smart contract on a blockchain, which assigns positive balances to a series of wallet or smart contract addresses. These smart contracts also include functions that allow users controlling those addresses to add or subtract from these balances.

Asset Tokenization Examples:

• Real-world asset tokenization involves converting tangible assets such as fiat currency, equities, T-bills, credit, commodities, carbon credits, intellectual property, and fine art into digital tokens stored on a blockchain. Like gold bullion warrants and house deeds, these tokens are bearer assets that grant the holder a claim to a real-world asset. The primary advantage over traditional bearer assets is that tokenized physical assets can be stored, traded, and used as collateral across blockchain networks.
• Digital asset tokenization involves creating tokens for assets that exist solely in digital form on a blockchain network. This process is vital for Web3 applications, such as representing DAO governance rights and cross-chain assets. Since these assets are entirely digital, tokenization allows the owner to directly hold the asset itself, rather than merely owning a claim to an underlying asset.
• In-game asset tokenization, a specific type of digital asset tokenization, involves representing assets used in GameFi projects or metaverses—such as skins, weapons, or in-game currencies—as tokenized assets.

Tokenization consolidates origination, distribution, trading, clearing, settlement, and safekeeping into a single layer, creating a streamlined and efficient financial system supported by blockchain technology. The creation of tokenized assets involves several steps: defining the token type (fungible or non-fungible), selecting the blockchain platform for token issuance, choosing a third-party auditor to verify off-chain assets, issuing the assets, and more. Blockchain’s decentralized nature ensures transparent safekeeping, as immutable and tamper-resistant asset ownership records bolster users’ confidence in the system’s integrity.

Beyond providing a decentralized and trust-minimized alternative to traditional real-world products, investment vehicles, or services, asset tokenization offers numerous additional benefits. Utilizing blockchain technology to tokenize real-world assets significantly enhances their value, accessibility, and utility. Furthermore, it enables off-chain data to augment these assets’ functionality within the DeFi ecosystem, thereby creating new opportunities for their use.

Liquidity

In traditional markets, financial events are typically recorded on isolated ledgers, leading to major inefficiencies like higher costs and longer settlement times. The lack of interoperability between these systems presents a significant opportunity for asset tokenization. By creating interoperable tokenized assets, asset tokenization can address and resolve the issues of fractionalized liquidity.

Tokenization can significantly enhance the liquidity of traditionally illiquid assets. By representing an asset as millions or even billions of tokens, tokenization enables fractional ownership. These tokens can then be listed on numerous widely accessible exchanges, broadening the potential buyer pool and eliminating the need for expensive intermediaries. At the same time, the tokens remain linked to a unique asset.

Accessibility

Many high-upside assets are inaccessible to average investors due to financial and regulatory constraints. For example, financing a big-budget movie involves substantial upfront costs and the risk of the production crew exceeding the budget, making it feasible only for the wealthiest investors. However, a successful film can generate returns multiple times the initial investment in a short period. Other examples of low-access, high-return investments include collecting sports cars, investing in distressed foreign assets, or purchasing and renting multifamily real estate.

Transparency

Many high-value assets often lack reliable and readily available information on returns, ownership history, sale history, and other crucial metrics necessary for informed economic decisions. This information gap is particularly pronounced when evaluating foreign assets or in situations where buyers cannot personally inspect the asset before purchase. A key advantage of tokenization is that it enables the open tracking and auditing of all these records, thanks to the inherently public nature of many blockchains.

Composability

One of the most promising yet underexplored benefits of asset tokenization is linking the value of real-world assets with the composability of the DeFi ecosystem. Decentralized money markets centered around tokenized real-world assets allow users to earn equity in the interest generated from off-chain collateral. This not only boosts liquidity in the broader DeFi space but also provides retail investors with access to an investment class that would otherwise be challenging to reach.

Asset tokenization has the potential to increase the utility of various real-world assets and support growth and innovation within the DeFi space. However, its effectiveness heavily depends on secure oracles. For assets to be accurately represented and traded on the blockchain, reliable information about the asset is essential. This need is particularly critical at four stages of a tokenized asset’s life cycle: during token creation, when tokens are used as collateral, when users check valuations, and when they are sold on secondary markets.

TMA Proof of Reserve

Tokenized asset projects can leverage TMA Proof of Reserve (PoR), a decentralized verification service, to relay off-chain information on-chain. TMA PoR offers unmatched transparency into off-chain collateral, thereby enhancing the security and verifiability of tokenized assets. By using TMA PoR’s decentralized verification mechanism to transmit collateralization data, tokenization projects can achieve a new level of transparency and security. Leading tokenization projects are already utilizing or integrating TMA Proof of Reserve to transmit off-chain valuation data on-chain, including:

• OpenEden for tokenized T-bills ‍
• Backed Finance for tokenized equities‍
• TUSD and Poundtoken for tokenized fiat currency
• Fortunify for tokenized credit‍
• Cache Gold for tokenized gold

Some tokenization projects are employing TMA PoR in another critical function: providing cryptographic guarantees that newly minted tokens are backed by reserves, thus preventing infinite mint attacks. Projects like TUSD, Poundtoken, and Cache Gold are using TMA PoR Secure Mint within their minting smart contracts to verify that reserves are adequate before minting new tokens.

Different assets require different oracle network structures and capabilities. Depending on the use case, TMA oracles can either provide direct asset valuations or serve as benchmarks for decision-making. Since TMA can interoperate with any API and off-chain system, its oracles can source data from a variety of avenues, such as professional data providers (e.g., Kelley Blue Book for cars), independent or expert appraisers, exchanges or OTC markets, or custom aggregations of data sources to create a single trusted valuation. This process can be supported by a decentralized network of independent TMA nodes that retrieve data from off-chain APIs, or data providers and appraisers can run TMA oracles themselves to directly relay data to smart contracts.

To further preserve network integrity and ensure high data quality, unique crypto-economic incentives can be integrated into the oracle network. Techniques such as staking-backed service agreements and immutable reputation systems can track the historical accuracy of valuations provided by appraisers, nodes, and data providers. This framework incentivizes precise valuations, as dishonest appraisals will result in financial penalties and lower reputation scores, reducing their ability to earn future revenue as data providers. Additionally, this system allows even niche and esoteric assets, which depend on expert appraisals, to enter the tokenized market while maintaining robust crypto-economic guarantees of accurate valuation data.

Cross-Chain Interoperability Protocol (CCIP)

Some tokenized assets need to be interoperable across various computing environments to access a broader liquidity pool and reach more users across different platforms and ecosystems. The Cross-Chain Interoperability Protocol (CCIP) is designed to simplify this process by eliminating the need for developers to write custom code for chain-specific integrations, thereby facilitating the creation of native cross-chain tokenized assets.