{"id":11286,"date":"2023-04-26T21:43:46","date_gmt":"2023-04-26T21:43:46","guid":{"rendered":"https:\/\/cheesecakelabs.com\/blog\/"},"modified":"2026-03-06T19:22:17","modified_gmt":"2026-03-06T19:22:17","slug":"asset-tokenization","status":"publish","type":"post","link":"https:\/\/cheesecakelabs.com\/blog\/asset-tokenization\/","title":{"rendered":"Asset Tokenization on Blockchain: Your Comprehensive Guide"},"content":{"rendered":"\n

Asset tokenization lets banks and fintechs boost liquidity while reducing costs and reaching a wider retail audience. <\/p>\n\n\n\n

Though fairly new, it\u2019s off to a strong start. The bullish tokenization market topped $2.77 billion in 2022<\/a> and should reach $5.6 billion by 2026<\/a>. Projects are launching left and right \u2014 Santander’s Agrotokens<\/a>, Sygnum’s Art Security Tokens<\/a>, and Nigeria’s national wallet<\/a> are just a few examples. <\/p>\n\n\n\n

Touted as the key to democratizing finance and unlocking $16 trillion of illiquid assets<\/a>, tokenization sure looks promising. Experts even predict that tokenized assets could make up 10% of the world’s GDP<\/a> by 2027.<\/p>\n\n\n\n

But beyond the hype, what real strategic value does it offer banks and fintech companies?<\/p>\n\n\n\n

In this blog, we talk about what asset tokenization means and how it\u2019s changing finance as we know it.<\/p>\n\n\n\n

What is asset tokenization?<\/strong><\/h2>\n\n\n\n

To tokenize<\/em> means to create a digital representation of a tangible and tradable asset using blockchain technology. This digital representation \u2014 called a security token<\/a> \u2014 <\/a>can represent anything of value, from equity shares to art. <\/p>\n\n\n\n

What are the types of tokenization?<\/strong><\/h2>\n\n\n\n

Tokenization can be broadly classified into two categories \u2014 blockchain and non-blockchain, each with its pros and cons depending on the intended use.<\/p>\n\n\n\n

Blockchain<\/a> tokenization is more suitable for assets that require high trust and auditability. On the other hand, non-blockchain tokenization is easier and more affordable for assets that do not need the same level of transparency and security.<\/p>\n\n\n\n

There are four types of blockchain tokenization:<\/p>\n\n\n\n

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  1. Fungible tokenization<\/strong> uses tokens that have the same value and can be exchanged with any other token of the same type. It\u2019s the technology behind cryptocurrency applications that allows each currency unit (such as Bitcoin or Ethereum) to be interchangeable. It’s also useful for loyalty programs, making managing and distributing rewards to customers easier while offering flexibility and customization.
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  2. Non-fungible tokenization<\/strong> represents ownership of a unique asset (such as a piece of digital art or a specific real estate property). The value of these tokens is determined by the value of the underlying asset.

    Non-fungible tokens (NFTs) are created by recording information about the unique attributes of an asset onto a blockchain, allowing the secure ownership and transfer of that asset. This information can include details about the asset’s provenance, ownership history, and authenticity.

    NFTs<\/a> have become increasingly popular in the art world, where they represent unique digital artworks that can be owned and sold like traditional physical art. They can also be used to represent other unique assets, like virtual real estate, gaming items, or even tweets<\/a>.
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  3. Governance tokenization<\/strong> enables token holders to participate in the decision-making processes of decentralized networks. Governance tokens represent voting power, allowing holders to vote on proposals and elect representatives.

    This method is helpful in blockchain-based systems and decentralized autonomous organizations where token holders have a voice in how the entity or a project is managed.
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  4. Utility tokenization<\/strong> is particularly useful in decentralized networks or platforms that need a native currency or payment system to facilitate seamless transactions and exchanges without the limitations of traditional payment methods. Utility tokens represent access to a particular service or product, like computing power, storage, or bandwidth. Token holders can use their tokens to pay for services or products within the network and, in some cases, can even earn tokens by contributing to the network’s ecosystem.<\/li>\n<\/ol>\n\n\n\n

    Non-blockchain tokenization uses traditional databases instead of blockchain platforms. While non-blockchain tokens are faster and simpler to create than blockchain tokens, they are usually less secure and transparent. There are three ways to create them:<\/p>\n\n\n\n

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    1. Vault tokenization<\/strong> replaces sensitive payment data (such as credit card numbers) with tokens without exposing the original data. The token values are then stored securely in a centralized vault. This approach is practical for scenarios requiring persistent token values, like processing payments across multiple transactions\/systems. Storing token values in a central vault allows for easier management, tracking, and enhanced data protection.
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    2. Vaultless tokenization<\/strong> does not require a token vault for storage. Instead, tokenization happens on a per-transaction basis, with the token values generated and used only for the duration of that transaction. This offers increased security and reduced complexity in scenarios where many small transactions need to be processed quickly, such as online retail. In these cases, using a centralized token vault can create significant overhead, slow down transaction processing, and increase the risk of data breaches.
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    3. Natural language processing tokenization<\/strong> involves breaking down information into smaller, simpler components such as words, sub-words, or characters. This allows computers to understand and process information faster, which can be useful in areas like machine learning<\/a> and artificial intelligence.<\/li>\n<\/ol>\n\n\n\n

      How do tokenized assets benefit banks and fintechs?<\/strong><\/h2>\n\n\n\n

      For financial institutions, tokenization makes it easier to safely buy, sell, transfer, and fractionalize asset ownership. Unlike private and isolated ledgers, a publicly accessible blockchain allows interoperability among market participants, so transactions are executed faster, and balances are automatically updated. And because security tokens can embed the holder’s rights and legal responsibilities, transactions have greater transparency.<\/p>\n\n\n\n

      Cost savings is another selling point, as tokenization can be 35% to 65% cheaper<\/a> than traditional securitization. What\u2019s more, it lets banks tap new markets. Highly divisible and highly liquid tokens allow smaller investment amounts and shorter investment periods. This empowers more customers to access opportunities that were once restricted to the wealthiest clients.<\/p>\n\n\n\n

      Moreover, digital tokens have the advantage of being programmable. They can be coded to automate dividend or interest payments, for example.<\/p>\n\n\n\n

      They can represent voting rights, and voting can be done via the blockchain infrastructure. Banks can even create funds that automatically invest in a range of tokens based on pre-established criteria. The possibilities are endless. <\/p>\n\n\n\n

      What assets can be tokenized?<\/strong><\/h2>\n\n\n\n

      Almost any asset class can be digitized and traded on blockchain platforms \u2014 <\/a>from traditional assets like bonds and equity to more exotic use cases like artwork and sports teams. For example:<\/p>\n\n\n\n