The 4 Quadrants of Asset Tokenization – and Where the Magic Happens
This is a preview of my upcoming book – QUADRILLION, The Playbook for Humankind’s Largest Market Opportunity: Asset Tokenization
Prepariamoci (Let's get ready)
Imagine a world where every asset, from your house to your car, from stocks to commodities, can be represented by digital tokens and traded 24x7 on a global marketplace. Asset tokenization will revolutionize the way traditional assets are acquired, financed, and traded, creating game-changing opportunities for investors and asset owners alike.
To understand what, where, when, why, and how to tokenize, the following framework categorizes the process of creating and verifying real world asset tokens into four quadrants. Each quadrant has unique processes, benefits, and challenges.
Two of these quadrants are where the current activity has been to date, with limited uptake. Another two of these quadrants are where the magic will really happen. Let's define them first.
Digital vs Physical
Digital means that the asset can be wholly represented on-chain and/or online.
Physical refers to not only tangible assets, but also processes related to creating and verifying assets. A carbon credit is classified as physical – even though the credit itself is digital.
Genetic vs Collateralized
Genetic tokens are 100% verifiable on-chain. A single genetic token contains all data and linkages required to prove that it represents ownership of the asset – like how a DNA test can prove a child’s biological parents. No paperwork is needed or even supersedes it if found.
Collateralized asset tokens require proof of collateral off-chain. This collateral includes documentation, like new parents proving a child was properly adopted. Genetic tokens do not need these.
To move across the spectrum from being collateralized to being genetic, issuers can:
Store digital proof on-chain
Gain recognition or certification as the genetic issuer of an asset
Quadrant 1: Atomic Tokens
An atom is the smallest unit of matter that retains the properties of an element.
In the same way, an atomic token is composed of the minimum elements that enable it to represent a fully compliant asset. An atomic token is the asset; it has always been the sole representation of the asset from birth. This cannot be said of assets in the other quadrants.
Compliance is built in. If know-your-customer (KYC) is required, links are embedded. If the token is traded, smart contracts ensure the buyer is in compliance.
CBDCs are atomic. Countries issue CBDCs without specific collateral backing. A holder of a CBDC token needs no further proof of its validity. Tokenholders trust the full faith and credit of the issuer, not the backing.
Atomic securities are tokens that have been issued by the original issuer of a security.
An atomic derivative is composed of genetic tokens. 100% of its collateral and compliance can be verified on-chain.
Quadrant 2: Provenant Tokens
For provenant tokens, origin and history matter.
Provenant assets are physical and discrete units – like property, vehicles, and equipment. Since these assets are unique, NFTs are appropriate for tokenization.
Real estate tokens will be issued by the official government recorder. This issuer should be certified according to a common global process, similar to .gov websites. (A chapter of my upcoming book proposes such a process and standards body.)
Provenance is critical to tracking, validating, and assessing physical assets. Imagine Honda issues an NFT for each car it produces, including the make, model, and vehicle identification number (VIN) that is inscribed on each chassis. When each car is distributed, retailed, and resold, the NFT is transferred to each ensuing owner.
This chain of custody is recorded on a dynamic NFT — a writable NFT. This serves as a decentralized, universal ownership registry. Future buyers see the origin, current owner, certified service records and tokenized OEM parts used, and even whether the car has been in a crash or stolen.
Quadrant 3: Rebirthed Tokens
Rebirthed tokens are for assets that are digital but collateralized. They have been rebirthed as tokens, but still rely on underlying collateral and supporting legal and regulatory frameworks.
Such tokens require verification and audit. Since these assets are digital, e-audits are sufficient. Proof can include validations of proper securities registrations and compliance, custodial agreements, insurance contracts.
Oracles can provide continuous updates from web2 sources, e.g. API connections to brokerage accounts.
Stablecoins are rebirthed.
Quadrant 4: Inspected Tokens
Commodities, supplies, and other fungible, non-unique assets are tokenized as inspected tokens.
Inspected tokens require physical verification, e.g. walk-through videos, inventory photos, third party monitoring records of carbon credit issuers, GPS-path of geo-tagged sea bass caught off Chile and sold in New York.
Physical gold backing gold tokens should be verified by purity tests and onsite monitoring. Without these physical processes, an issuer can fraudulently overissue tokens and only be caught when insolvent. Continuous testing and monitoring is needed. A single heist can empty the vault. A few stolen ounces per day can drain the reserves over time.
Investors in inspected tokens must trust purity and security, not just sincerity.
Where the magic happens
In the long run, genetic tokens are superior to collateralized tokens.
Where genetic token holders trust code, collateralized token holders trust human processes.
Genetic tokens are ordained, not verified. Genetic tokens directly manage compliance.
That said, activity to date has been with collateralized tokens. Security token offerings – or STOs, stocks and bonds that have been tokenized – were abuzz in 2018. With rare exception, such STOs were rebirthed, not atomic. But this boom quickly deflated. This is not surprising. Their value proposition was weak.
There are pockets of revival with STOs, but true 100x potential lies in genetic tokens and atomic securities. But these are more complex, especially since compliance is embedded but regulations have yet to settle. In upcoming articles, we’ll give further glimpses of the roadmap ahead.
Andiamo
Picture all the pieces of this jigsaw needing to be stitched together globally on a cohesive distributed ledger. We’ll need to coordinate thousands of issuers, millions of attesters, and billions of users into a quadrillion dollar market.
There’s a lot to build… Andiamo!
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