Unveiling the Growing World of Tokenized Assets: A Market Overview

7 min readOct 17, 2023

Imagine a world where you can own a fraction of a luxury apartment in New York, a piece of a famous artwork, or even a share of gold, all at the tip of your fingers. This is the essence of the tokenization revolution — which is reshaping finance and providing exciting opportunities for investors.

The Current State of Tokenized Assets

Tokenization represents the process of creating digital tokens that are linked to real-world reference assets. The key feature of tokenization is the potential for a legally enforceable ownership claim over the reference asset. As we’ve seen, this concept extends to various asset classes, from real estate to precious metals, and even traditional financial securities.

Let’s dive into this fascinating world and explore the potential costs and benefits of tokenization and gain an understanding of the market’s landscape.

The burgeoning tokenized market of RWA’s (real world assets) includes tokens issued by both decentralized protocols and traditional companies like Centrifuge and J.P. Morgan but with the majority of emerging applications being built on permissionless blockchain networks.

At LiquidProp, with our real estate marketplace being a first-to-market decentralized application for the everyday investor — allowing users of our platform to invest in fractional shares of rental properties in the U.S. that can be traded on a permissionless marketplace without affecting the underlying real-world asset — it’s important for us to stay informed about the latest happenings and keep our users up to date.

Potential Benefits of Tokenizing Diverse Reference Assets

First, let’s talk about how tokenization enables the creation of our own fractional real estate market.

Tokenization brings several advantages to real estate investors, primarily by introducing smart contracts. LiquidProp’s primary marketplace sells shares of properties at $100 that are issued as tokens to users who invest in the initial sale of a property. Tokens are digital representations of shares of property used to facilitate blockchain transactions, such as trading, through the execution of smart contracts.

Okay, wait. What is a smart contract?

A smart contract is a contract that is written into the code of a blockchain and executes automatically when terms are met. Solana and a few other protocols can execute smart contracts, but some blockchains — notably Bitcoin — cannot.
Think of a regular contract, such as a housing lease agreement. You pay rent in exchange for a place to live. If you don’t pay rent, you’ll be kicked out. If your lease is up and you no longer have a place to live, you stop paying rent. Regular contracts depend on humans to enforce the terms of the contract. Tenants and landlords monitor each other to be sure the other party fulfills their obligations of the lease.
With a smart contract, however, that execution is hardcoded in software, and software determines when conditions are met. This allows people to build some really cool, efficient functionalities within decentralized applications, or dApps — like the LiquidProp platform.

Here is a brief list explaining the benefits of tokenization for LiquidProp’s users:

Marketplace Creation: Sets the stage for our digital marketplace where shares of properties can be bought, sold, or traded
Intermediary Reduction: Reduces the number of middlemen involved in real estate transactions
Increased Liquidity: Enhances the liquidity of assets that are traditionally hard to sell quickly
Lower Entry Barriers: Enables fractional ownership, allowing more people to invest with less capital
Trust and Security: All transactions, documents, and contracts are stored on a public and digital, tamper-resistant distributed ledger
Peer-to-Peer Efficiency: Transactions can occur directly between individuals — instantly
Risk Diversification: Spread risk across multiple properties and reallocate on your terms
Micro-payments for Rent: Cost-effective micro-payments for rental income distribution

Tokenization is not limited to a specific asset class. It encompasses a wide range of reference assets, including:

Agricultural Commodities:

SOYA, CORA, and WHEA tokens represent soybeans, corn, and wheat, respectively, in a pilot project by Santander and Agrotoken in Argentina. These tokens are designed to be robust enough for collateral uses.

2. Precious Metals:

Tokenized gold boasts a market capitalization of approximately $1 billion as of May 2023, with Pax Gold (PAXG) and Tether Gold (XAUt) dominating this market. These tokens are redeemable for underlying gold, albeit subject to specific restrictions and fees.

3. Real Estate:

LiquidProp tokenizes residential properties, allowing fractional ownership through membership interests in LLCs. This innovation is aimed at domestic and international investors looking to invest in US real estate.

4. Financial Securities:

Tokenized stocks, bonds, and ETFs provide investors with exposure to traditional financial assets. These tokens trade 24/7 and offer unique features, such as programmability and composability.

Governments worldwide are closely monitoring this transformative trend, and aim to strike a balance between encouraging innovation and safeguarding investor interests.

Below we will summarize the Federal Reserve Board’s current perspective on the tokenized market and touch on J.P. Morgan’s recent achievements with their Tokenized Collateral Network.

Financial Stability Implications of Tokenization

The Federal Reserve’s research paper explores the interconnections between traditional finance and tokenization. It discusses the potential for volatility from crypto asset markets to transmit to the markets for the crypto token’s reference assets. The Fed believes that at sufficient scale, a fire-sale of tokenized assets could trigger ripple effects in traditional financial markets, leading to price dislocations and increased volatility.

Another concern raised in the research paper is the risk of runs on the issuer of tokenized assets, which could mirror the challenges faced by collateralized stablecoins.

Timing mismatches in trading hours between crypto and traditional markets are also highlighted as a potential source of unpredictability during stress events. The research paper suggests that greater liquidity in crypto markets might improve liquidity in the markets for the underlying reference assets, but it could also transmit volatility from crypto markets to traditional financial markets.

Furthermore, as tokenizations grow in size and scale, traditional financial institutions may become more exposed to crypto asset markets, either through direct ownership of tokenized assets or by using tokens as collateral for other financial instruments. This increased exposure may introduce new interconnections between the digital and traditional financial systems.

J.P. Morgan Achieves Milestone with Tokenized Collateral Network

J.P. Morgan Chase recently announced a significant milestone achieved through its Tokenized Collateral Network (TCN). The network successfully facilitated its first collateral settlement for an over-the-counter derivative transaction for a live client. This development signals a significant step in the world of tokenized assets and blockchain technology.

BlackRock and Barclays are the pioneering clients to go live on TCN, operating on J.P. Morgan’s Onyx Digital Assets platform, a private blockchain tailored for tokenized asset movements and collateral settlements.

Ed Bond, J.P. Morgan’s Head of Trading Services, commended this groundbreaking development, stating, “The Tokenized Collateral Network is a significant investment in the future of collateral markets. This first transaction with BlackRock and Barclays demonstrates the power of tokenized assets, particularly in a collateral setting. MMFs can now be mobilized and utilized in a more efficient way, unlocking new pools of liquidity to be used for margining.”

This achievement underscores J.P. Morgan’s commitment to embracing blockchain and tokenization in the realm of traditional finance. As of April, the bank had already processed nearly $700 billion in short-term loan transactions via the Onyx platform, a permissioned version of the Ethereum blockchain.

Tyrone Lobban, Onyx Program Head, shared a compelling insight, “We think that tokenization is a killer app for traditional finance. If you think about private markets — private credit, private equity, and private real estate — they are pretty much double the size of public markets, but many orders of magnitude less liquid, so there’s this huge disparity.”

In the broader context of the financial industry, this achievement by J.P. Morgan reflects the growing recognition of the transformative potential of blockchain technology and tokenization, as the sector continues to explore the possibilities offered by distributed ledger technology.

With the financial industry moving closer to unlocking the full potential of blockchain technology, Daniel Field, Global Head of Blockchain at UST, expressed, “There’s a huge global trend going on right now into exploring the intricacies, complexities, difficulties, and benefits of leveraging blockchain technology for the financial system.”

On a similar note, Mastercard Chief Digital Officer Jorn Lambert emphasized, “The true intrinsic value of blockchain, which is around programmability of transactions, immutability of transactions, and the ability to do delivery versus payment and always-on types of payments, has yet to be unlocked.” This suggests that the financial world is on the cusp of a significant transformation in how transactions are conducted and assets are managed.

In conclusion, it’s essential to acknowledge that the tokenization landscape is still in its early stages. As the market continues to evolve — regulators, financial institutions, and investors will need to carefully navigate the risks and benefits of this transformative financial innovation.

J.P. Morgan’s recent achievement underscores the increasing adoption and utilization of blockchain and tokenization in the world of traditional finance, signaling an evolving landscape where new forms of assets are created and financial processes become more efficient.

Stay tuned for more updates on the exciting world of tokenization!

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