What is tokenization and how does it work?

What is tokenization?

Tokenization is the process of converting rights to an asset or piece of value into a digital token recorded on a blockchain. These tokens act as on-chain representations of ownership, access or entitlement.

Unlike simple digitization, which turns physical information into digital data, tokenization creates blockchain-native representations that can be transferred, tracked and managed using smart contracts.

Tokenization matters because it enables assets to be managed digitally in a transparent and programmable way. This can apply to financial instruments, real-world assets and digital items, depending on legal and technical design.

How does tokenization work?

Tokenization follows a structured process that connects real-world or digital assets with blockchain-based systems.

Asset identification and valuation

The process begins by identifying the asset being tokenized. This could be a physical asset, a financial instrument or a digital item. The asset is typically valued and legally defined before token creation.

Token creation on a blockchain

Once defined, tokens are created on a blockchain using a specific token standard. Each token represents a defined portion of ownership, access or rights associated with the asset.

Smart contracts defining rules and ownership

Smart contracts are used to encode the rules governing the token. These rules may include transfer conditions, supply limits or access permissions, depending on the use case.

On-chain vs off-chain data handling

Not all asset data is stored on-chain. In many cases, only ownership records and references are recorded on the blockchain, while supporting documentation is stored off-chain and linked securely.

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Smart tokens and token standards explained

Smart tokens are blockchain-based tokens whose behavior is governed by smart contracts. Instead of being static digital units, smart tokens can follow programmable rules that control how they’re issued, transferred or interacted with across applications.

Token standards define how these smart tokens behave on a blockchain. They ensure compatibility across wallets, applications and platforms, allowing tokens to function consistently within the ecosystem.

What token standards are

A token standard is a set of technical rules that defines how a token is created, transferred and interacted with. Standards make smart tokens interoperable across blockchains, wallets and decentralized applications (dApps).

ERC-20 tokens (fungible assets)

ERC-20 tokens are interchangeable and identical to one another. They’re commonly used for utility tokens and tokenized financial assets, where each unit represents the same value and follows the same rules.

ERC-721 tokens (NFTs)

ERC-721 tokens are non-fungible tokens (NFTs), meaning each token is unique. They are often used to represent distinct items such as digital art, collectibles or unique ownership records.

ERC-1155 (hybrid standard)

ERC-1155 allows both fungible and non-fungible tokens to exist within a single smart contract. This can improve efficiency for applications that need to manage multiple token types at once.

Why standards matter for interoperability

Without common standards, smart tokens wouldn’t work consistently across platforms. Standards enable wallets, marketplaces and applications to support tokens without requiring custom integrations.

Tokenization example

A simple way to understand tokenization is to look at how a physical asset might be represented on a blockchain.

Imagine a real estate property that’s legally structured so it can be divided into digital tokens. Each token represents a defined share of the property. Instead of transferring ownership through paperwork, ownership of those shares can be recorded and transferred using blockchain-based tokens.

The same concept can apply to other assets:

• Tokenized commodities such as gold ETFs can use tokens to represent ownership of metal held in custody.
• Tokenized digital art uses NFTs to represent ownership or authenticity of a specific digital work.

In each case, the underlying asset remains the same, but blockchain tokens are used to track ownership and transfer rights in a more digital, programmable way.

Strengths and weaknesses of tokenization

Strengths 

Tokenization introduces structural characteristics that can change how assets are represented and managed compared with traditional systems.

• Fractional ownership: Assets can be divided into smaller digital units, which may allow more flexible ownership structures.
• Liquidity potential: Tokenized assets may be transferred more easily than traditional assets, depending on platform support and market conditions.
• Settlement efficiency: Blockchain-based transfers can reduce reliance on manual reconciliation and multi-day settlement processes.
• Transparency: Ownership records and transaction history can be recorded on a public or permissioned blockchain.
• Broader accessibility: Tokenization can enable access across borders, subject to platform availability and regulatory requirements.

Weaknesses 

Tokenization also introduces limitations that are important to understand.

• Regulatory complexity: Legal treatment of tokenized assets can vary by jurisdiction and may change over time.
• Operational dependency: Tokenization relies on technical infrastructure such as blockchains, smart contracts and custodians.
• Liquidity variability: Not all tokenized assets have active secondary markets, which can limit transferability.
• Custody considerations: Managing private keys or relying on custodial providers introduces different tradeoffs than traditional asset holding.
• Market sensitivity: Tokenized assets can be affected by broader crypto market conditions, even when linked to real-world assets.

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What assets can be tokenized?

Many asset categories can be tokenized depending on legal and technical design.

Financial assets: Stocks, bonds, funds and other financial instruments can be represented as tokens under compliant structures.

Real assets: Physical assets such as real estate, commodities and infrastructure can be tokenized using custodial or trust-based models.

Digital assets and IP: Digital media, intellectual property and usage rights can be tokenized to manage access and ownership.

Collectibles and art: Physical and digital collectibles are commonly tokenized using NFT standards.

What is real-world asset tokenization?

Real-world asset (RWA) tokenization refers to representing physical or off-chain assets on a blockchain. RWAs include assets like property, commodities or financial contracts. On-chain tokens represent legal or economic rights tied to these assets.

Custodians and legal wrappers often play a role, ensuring the underlying asset exists and that token holders’ rights are enforceable.

How to tokenize a real-world asset

Tokenizing a real-world asset typically involves multiple stages. This process is usually managed by specialized platforms rather than individuals.

1. Legal structuring to define ownership and rights
2. Asset custody or verification through trusted parties
3. Token design using appropriate standards
4. Smart contract deployment on a blockchain
5. Distribution and lifecycle management

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Tokenization vs. cryptocurrency

Cryptocurrency refers to blockchain-native assets that are designed to support a network, such as enabling transactions or paying fees. Tokenization, by contrast, is a process used to represent ownership, access or rights to an asset using blockchain-based tokens.

Because tokenized assets represent something outside the blockchain, they often rely on additional legal, custodial or operational structures. Cryptocurrencies typically don’t, which means the two can differ in how they’re used, governed and regulated.

Tokenization vs. encryption

Tokenization and encryption are often mentioned together, but they solve different problems. Encryption protects information by restricting who can read it, while tokenization changes how value or data is represented within a system.

In blockchain-based systems, tokenization is used to represent ownership or rights in a transferable format, whereas encryption is typically used behind the scenes to secure access, identities or sensitive information. This is why the two approaches are often complementary rather than interchangeable.

Understanding the difference matters because tokenization affects how assets are issued, transferred and governed, while encryption affects how information is protected during storage and transmission.

Tokenization benefits for institutions and individuals

Tokenization can influence institutions and individuals in different ways, depending on how it is implemented and where it is used.

For institutions, tokenization may streamline processes such as record-keeping, settlement and compliance by using programmable rules and shared ledgers. This can improve transparency across complex systems, but often requires new operational and regulatory frameworks.

For individuals, tokenization may expand access to certain asset structures or digital ownership models. However, availability depends on jurisdiction, platform design and regulatory approval, and participation can involve additional technical and market considerations.

Tokenization blockchains

Tokenization can be implemented on different types of blockchains, and the choice of blockchain can influence how tokens are issued, transferred and governed.

Public blockchains such as Ethereum, Polygon and Solana support open token ecosystems where assets can interact with a wide range of wallets, applications and marketplaces. These networks are often used when interoperability, transparency and broad accessibility are priorities.

Private and permissioned blockchains are commonly used in institutional or enterprise tokenization. These systems may offer more control over participation, data access and compliance, but typically involve more limited interoperability compared with public networks.

Because each blockchain design involves tradeoffs around openness, scalability and control, tokenized assets can behave differently depending on where they are issued. Crypto.com supports a broad crypto ecosystem, allowing users to explore and manage many types of tokenized digital assets across supported networks in one place.

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Tokenization platforms and ecosystems

Tokenization ecosystems are made up of multiple components that work together to issue, manage and interact with tokenized assets. These typically include issuance platforms, marketplaces, wallet infrastructure and custody providers.

Some platforms use custodial models, where a service provider manages assets on behalf of users. Others support non-custodial access, allowing users to retain control through their own wallets. Each approach involves different tradeoffs around convenience, control and responsibility.

Compliant crypto platforms often act as access points to these ecosystems by combining asset discovery, education and management tools in one place. This can help users interact with tokenized assets without needing to navigate each layer of the ecosystem independently.

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FAQs about tokenization

What exactly is tokenization?
Tokenization is the process of representing value, ownership or rights as digital tokens recorded on a blockchain, allowing assets to be tracked, transferred and managed using programmable systems.

Is tokenization the same as crypto?
No. Tokenization is a method for creating blockchain-based representations of assets, while crypto refers to digital assets such as coins or tokens that are native to a blockchain.

What is an example of a tokenized asset?
A common example is tokenized real estate, where blockchain tokens represent fractional ownership in a property. Commodities and digital art can also be represented using tokens.

Can real-world assets really be tokenized?
Yes. Real-world assets can be tokenized when supported by legal structures, custody arrangements and technical systems that link blockchain tokens to the underlying asset.

What blockchains support tokenization?
Both public and private blockchains can support tokenization. The choice depends on factors such as accessibility, governance, compliance requirements and how the tokenized asset is intended to be used.

What are the risks of tokenized assets?
Tokenized assets may involve regulatory uncertainty, limited liquidity, smart contract vulnerabilities, custody challenges and exposure to broader crypto market conditions.

Important information: This is informational content sponsored by Crypto.com and should not be considered as investment advice. Trading cryptocurrencies carries risks, such as price volatility and market risks. Past performance may not indicate future results. There’s no assurance of future profitability. Before deciding to trade cryptocurrencies, consider your risk appetite.