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Asset Tokenization For Institutional Leaders: A Complete Guide (2024)
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Asset Tokenization For Institutional Leaders: A Complete Guide (2024)

Onchain is gradually becoming the new online; this is apparent as several top traditional asset management firms, such as JPMorgan and Citi, are fast-embracing asset tokenization.

In March 2024, BlackRock — one of the most legendary global investment firms, also joined the league as it announced the launch of its tokenized fund on the Ethereum blockchain, which is currently worth over $240 million.

Why are traditional investment firms suddenly tapping into onchain asset tokenization? How can you, as an institution or organization, also do this?

This brief article will enlighten you about tokenization, its benefits, use cases, how to implement it practically, and more. 

What is asset tokenization? How It Works

Asset tokenization is the act of issuing blockchain-based units or tokens that are valuable either by virtue of an underlying object or its onchain use cases.

These same assets can be transferable and confer ownership or stake.

A friendly and general perspective on understanding tokenization is to see it as shares, units of ownership in a company or an asset. 

Virtually anything can be tokenized, including real estate, intellectual property, precious metals, and so on. Similarly, Web3 projects can also issue tokens to raise capital via Initial Coin Offerings.

Physically backed tokens derive value from their underlying assets. However, Web3 protocols’ tokens are deemed valuable based on the problem that the protocol is solving.

Having said that, tokens in Web3 can either be of two nature: fungible or non-fungible. Fungible tokens are exactly replaceable, while non-fungible tokens are not. The former are called crypto, while the latter are NFTs.

Types of Tokens

Asset tokenization takes different forms, which are often classified based on their purposes. Note that the functionalities of some of these types are not static but rather fluid in practice. Here are some types of tokens:

1. Governance Tokens

Web3 rides on a decentralized, open, and permissionless architecture. As a result, even though the founding team might be steering the affairs of a protocol, the community should be the sole determinant of the decisions.

This is the rationale behind governance tokens; they are units of tokenizing stake or participation in protocol decision-making.

Recently, the Celo blockchain community voted with $CELO—their governance token—to make Celo a layer-2 blockchain on Ethereum with the OP Stack.

That was a clear example of how governance tokens arrive at a common consensus in an onchain community.

2. Native Tokens

Blockchains and protocols are built for unique purposes. To facilitate their end goals, they often create a token peculiar to their network.

It is common for such native tokens to be used to settle gas or transaction fees. Ether, for instance, is a native Ethereum token used to settle gas fees during transactions or deployments.

3. Utility Tokens 

Utility tokens are different as they have unique protocol-specific usefulness.

$LINK, for example, is Chainlink’s utility token, which developers need to use to utilize Chainlink-powered features on their smart contracts.

Another case study is $AXIE, the token for a crypto gaming platform. Users can only buy assets to be used in the game with the $AXIE token, hence its utility.

In addition, stablecoins such as USDC are also an important type of utility tokens that provide people with an equivalent of national bench currencies on-chain.

Use Cases of Tokens

Tokenization has been pivotal to the growth of the finance and Web3 ecosystem. Here are some major use cases of tokenization in today’s world:

1. Real-World Assets (RWA)

Currently, physically tangible assets are being brought to the blockchain through tokenization. Real-world assets are tokenized both as crypto tokens and as NFTs. 

The real estate industry is tapping into this immensely. The owner of a condominium with 10 rooms can tokenize each one; whoever buys any such tokens has a stake or ownership of an apartment in the bigger investment.

Similarly, legendary works of art are also being tokenized as NFTs to represent onchain ownership. Platforms such as Ondo Finance and Centrifuge are particularly spearheading RWA tokenization.

2. In-game Assets

The gaming experience has changed. Prior, game characters and objects could be lost with the console, and players could not also make money from it.

But with blockchain, in-game characters can be tokenized onchain. Such that players can truly own their characters and game objects, and not lose it to any contingencies.

3. Tradable Commodities

In traditional finance, investors often buy shares to trade them at spot or futures. There is a similar operation in Web3; protocols can create tokens specifically for the purpose of trading.

Circle is an example of such a protocol. They built USDC, a stablecoin backed by the dollar, to be traded as the onchain dollar.

Steps to Tokenize Assets on Blockchains

As much as tokenization is great for different reasons, it should be done cautiously. Ensure you have built a product with a product-market fit and you have an active community.

Once you have passed through the prerequisites, you can go ahead with these steps:

1. Identify The  Underlying Asset 

There must be an asset to tokenize. It can be bonds, works of art, equities, real estate, or other property.

Launching a token for protocols demands a working product with active users and unique value contributions.

2. Pick a Blockchain

Every token in Web3 is deployed on one or more blockchains. How do you know the blockchain you can launch your token on?

The first criterion is to research the blockchains that align technically and philosophically with what you are building.

Blockchains like Dymension are more suitable for RollApps; Base is more suitable for publicly useful projects.

The second point to consider is the numerical strength of the active community. Deploying on a widely adopted blockchain will have a ripple effect on the tokens deployed.

3. Define Tokenomics 

Economics is at the centre of tokenization. Tokens cannot be minted without proper planning. Or else they won’t have value.

Plan the number of tokens to deploy, whether or not some will be vested, and the measures to use in cases of inflation or deflation.

4. Write The Smart Contract

Smart contracts are programs or the script of your token and how you want it to work. The language for your smart contract largely depends on the blockchain you are building on.

While writing your smart contract, it’s important to determine a token standard that aligns with your purpose; this is essential for composability.

In the Ethereum ecosystem, the most common standard for crypto tokens is the ERC-20 standard. Notably, a token smart contract should have some essential functions, such as minting and burning functions.

Here is an example of a tokenization smart contract (you can read the code and its comment for better understanding):

// SPDX-License-Identiifier : MIT
pragma solidity ^0.8.21;

  contract MyToken{
    event Transfer(address indexed _from, address indexed _to, uint _value);
    event Approval(address indexed _from, address indexed _spender, uint _value);
 
    string public name;
    string public symbol;
 
    uint public immutable decimals;
    uint public immutable totalSupply;
 
    // this mapping maps the address of the deployer to balance
    mapping(address => uint) _WalletBalances;

    // this mapping tracks how funds move from wallet A to wallet B during allowance of transfers
    mapping(address => mapping(address => uint)) _WalletAllowances;

// @dev the objects to insert into the constructor pre-deployment: name, token symbol, decimal, total supply - which is the number of tokens in the deployer's wallet
    constructor(string memory _name, string memory _symbol, uint _decimals, uint _totalSupply) {
      name = _name;
      symbol = _symbol;
      decimals = _decimals;
      totalSupply = _totalSupply;
      _WalletBalances[msg.sender] = _totalSupply;
    }

// will return the balance of the owner
    function balanceOf(address _owner) public view returns(uint){
      require(_owner != address(0), "cannot be an address zero");

      return _WalletBalances[_owner];
    }

// facilitates transfers from the owner an external wallet
    function transfer(address _to, uint _value) public returns(bool){
      require(_WalletBalances[msg.sender] >= _value && _WalletBalances[msg.sender] != 0, "must have value, and not be zero");

      _WalletBalances[msg.sender] -= _value;
      _WalletBalances[_to] += _value;

      emit Transfer(msg.sender, _to, _value);
      return true;
    }


// returns the wallet allowance
    function allowance(address _owner, address _spender) public view returns(uint){
      return _WalletAllowances[_spender][_owner];
    }

// returns whether or not the spender has the value
    function approve (address _spender, uint _value) public returns(bool){
    require(_WalletBalances[msg.sender] >= _value, "bal must be greater than the value");
    _WalletAllowances[_spender][msg.sender] = _value
    emit Approval(msg.sender, _spender, _value);
    return true;
    }

// enables the transfer of funds from one wallet to another
    function transferFrom(uint _value, address _from, address _to) public returns(bool) {
        _WalletBalances[_from] -= _value;
        _WalletBalances[_to]  += _value;
        _WalletAllowances[msg.sender][_from] = _value;
        emit Transfer(msg.sender, _to, _value);
        return true;
    }


  }

What are the benefits of tokenization?

Since a lot of traditional investment firms and Web3-native protocols are creating tokens for their assets, it is logical to wonder if there are any benefits to it.

Indeed, institutions stand to gain a lot, such as:

Raising Capital 

When startups go public, they raise capital with Initial Public Offerings (IPOs), thereby creating liquidity to better run the new company.

A similar operation is in crypto with ICOs. By offering a project’s token as an initial offering, the market can buy it based on its belief in its feasibility.

The higher the number of those who believe in the project and bag it early, the higher the token’s price; this is how projects realize their market capitalization early on.

Over time, tokenization has been the most effective way Web3 projects raise liquidity.

General Participation 

Blockchain is not only about the involvement of a few people but of everyone.

Tokenization is a good medium for institutions to allow people from diverse backgrounds to participate in their offerings.

Particularly, crypto does not have the curse of censorship, unlike with Web2.

Decentralized Administration 

In the traditional finance and investment space, firms are often the administrators of big projects and funds.

In Web3, tokenization makes it easier as the administration of an organization can be steered by the community as well.

Onchain Verifiability

For every investment people make, they should have the right to proper accountability.

Investors or community members can check out the organisation’s wallet on blockchain explorers anytime to see how the funds were spent.

Notably, the blockchain is a database that is immutable; it cannot be tampered with.

Onchain Economy 

Research has shown that attention, participation, and funds are globally moving onchain. This is due to blockchain technology’s decentralized, permissionless, and open nature.

Like the dot-com era, this is a new wave. Therefore, institutions are taking steps to be early adopters of the next phase of finance and technology.

Swift Payment

Payment is integrated into humanity’s daily affairs. At the same time, people still face the problems of slowness and censorship in payment.

Tokenization has helped enhance how people pay themselves, particularly with the advent of stablecoins—such as DAI, USDT, and USDC—which have been a game-changer as people can use them to pay in place of dollars onchain.

According to a recent development, BRICS nations are planning to tokenize a stablecoin to avoid using the United States Dollar as the bench currency. This shows how even nations are tilting toward payment with tokenized assets.

What are the challenges of tokenization?

Even though there are many benefits attached to tokenization, it is still slightly challenging from three standpoints:

Regulatory Concerns 

The regulatory waters of the Web3 industry are yet to be properly charted. 

There are ongoing battles between the Ethereum community, represented by Consensys, and the United States Securities and Exchange Commission (SEC) over whether or not Ether is a security.

The governments of many jurisdictions are still skeptical of blockchain technology, and they have banned certain applications and companies from their locations.

On this note, any institution that hopes to tokenize its assets must consider regulatory issues carefully.

Technical Understanding Gap

No one can adopt what they do not understand. In return, Web3 is a new industry that is relatively very technical.

At the moment, not all firm and organization leaders understand how Web3 protocols work or what tokenomics means.

There is a need to assimilate into the industry by digesting materials that simplify several concepts; the Utila blog is a great resource.

Security Risk

Web3 protocols run with smart contracts, which can be breached just like any other computer program.

Threat actors often exploit vulnerabilities in the smart contracts of many protocols and siphon funds.

However, this is not a challenge that is only peculiar to Web3. Getting high-quality audits regularly is a great step to fix the security gap.

Utila: A Robust Platform for Institutional Asset Tokenization

Institutions often find it challenging to navigate crypto operations, specifically tokenization. But this is very easy with Utila.

As a robust institutional crypto operations platform, we help with issuing, custody, and distributing tokens. 

We highlighted three challenges of tokenization above; let us briefly look into how Utila has solved each of them:

  • KYC/AML Compliance

Tokens have financial value and are often sold. Institutions hoping to get involved in the tokenization of assets should comply with the applicable laws in their respective jurisdictions.

They must comply with the Know-Your-Customer and Anti-Money Laundering guidelines. These legal procedures are important to ensure our customers use Utila legally and avoid regulatory issues as much as possible.

Utila has made compliance easy by integrating with the Chainalysis AML; customers can simply link their AML profile on Chainalysis with Utila; compliance with only a click!

  • Simplicity

Utila has a simple interface for interactions. Knowing that crypto operations can be complex, we deliberately invested in building a robust yet simple interface.

To use the platform’s tokenization functionalities, our customers do not need an extremely technical crypto understanding. Tokens can be minted with a single click.

  • Multi-party Computation (MPC)

Our MPC architecture is a security shield that distributes key shares of the wallet in parts, making it harder for threat actors to breach.

Notably, a wallet should be added as an Admin; this makes it possible to have accountability and easy tracing of how tokens are minted and burned.

Depending on how you define your governance quorum, you can create structures to approve token minting and burning or make it automatic.

Use Cases of Utila Tokenization for Institutions 

Based on the robust features that Utila provides, enterprise customers often utilize it for their tokenization operations for different use cases, such as:

  • Token Issuance

Utila supports the popular layer-1 blockchains—such as Solana and Ethereum—and other L2s such as Base and Optimism; thus enabling organizations to mint tokens on the blockchains of their choice.

It is noteworthy that as much as Utila enables the minting of blockchain-native assets, it also empowers organizations to mint traditional assets such as bonds and treasury bills.

For central banks, Utila does the heavy lifting in their releases of Central Bank Digital Currencies.

  • Token Disinflation

As much as token issuances are necessary for the creation of tokens, there is also a need for an avenue to reduce the supply of tokens.

This is always necessary so the supply will not be greater than the demand, which will make the value of tokens fall, according to the economic law of demand and supply.

Hence, Utila empowers organizations to burn tokens right from their Console or with an API call, thereby balancing the economics of their tokenized assets.

  • Token Distribution

The distribution of tokens post-tokenization, if not well-handled, is often chaotic. Utila has simplified this process to ensure that every liquidity provider in a tokenization round is duly compensated without any complication.

You can easily distribute your tokens to liquidity providers and qualified community members by sending their due amount of tokens to their addresses.

Utila even has an Address Book Group where you can upload the whitelisted addresses and send them once and for all, which saves you the time of manually verifying and crediting addresses.

  • Token Management 

Notably, there is an administrative side to the entire process of tokenization because many people [who hold different offices] are involved.

Utila has a governance structure to ensure that token minting, burning, and distribution are done with regards to authority.

You can create policies on how many admins are required to approve tokenization initiatives; this brings order to your organization.

Recommendation

If you would like to check out how Utila’s Tokenization Solution works, go ahead and book a demo now.

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