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- Above all, deep liquidity of the digital secondary market is a prerequisite for any tokenization.
- We can tokenize assets on-chain or off-chain.
- Not every asset is suitable to be tokenized on-chain.
- On-chain tokenization is advisable when the asset can be freely transferred without the statutory need of a third-party, off-chain validation (such as with corporate debt — as in Case B above — or, for example, with unregistered real assets, such as objects of art, or plain digital assets, such as digital photos, music, etc.). Here, the blockchain fully performs its main functions, which are guaranteeing trust, transparency, immutability, non-corruption of data and non-duplication.
- Off-chain tokenization is advisable when there is a statutory need for a third-party, off-chain validation of the transaction (such as with private equities — as in Case A above — or with real estate, cars, boats, planes, etc.). Here, the blockchain is redundant because its main functions are already performed by the third-party validation off-chain.
- Of course, if and when those statutory registers will be on-chain themselves, then on-chain transactions will be possible also for real assets, and the smart contract will be able to close the loop and to reconcile the ownership title of a real asset off-chain with the digital token (representing the asset) on-chain.
- Of course, the above conclusions may vary depending on the jurisdiction (e.g., real estate on-chain tokenization may be advisable in the U.S. and not in Germany or Italy).
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