What is tokenization? Explained

What is tokenization? Explained originally appeared on TheStreet.

Tokenization converts real‑world assets like cash or treasuries into blockchain tokens, enabling global, 24‑7 access and automated financial services.

Tokenization may sound technical, but it follows a simple three‑step process.

First, the real‑world asset is placed with a custodian — such as cash in a bank account or a fund of the U.S. Treasuries — and is immobilized so it cannot move in its traditional form.

Second, a smart‑contract–driven token is issued on blockchain rails to represent the locked asset.

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Third, that token circulates freely on a blockchain network, giving holders digital claims on the underlying reserve.

For cash, this process creates a stablecoin: each token is redeemable for $1, backed by an equal amount of cash held in reserve.

“You take cash in the real world, you put it into a bank account or a custodian, you make sure that it is immobilized then you issue a token on blockchain rails that represents or is backed by that cash,” said Ian De Bode, chief strategy officer at Ondo Finance, in an interview with TheStreet Roundtable.

This same approach can apply to many asset classes. Tokenized treasuries function like stablecoins but reflect short‑term government debt. Tokenized public and private equities can offer fractional ownership.

Even art, fine liquor or real estate can be represented as tokens — each one tied to a specific share of the underlying asset.

How tokens enhance access and liquidity

Once on‑chain, tokens gain powerful new attributes. They settle atomically — every transaction finalizes instantly — and operate 24‑7, unlike traditional financial markets that often shut down outside business hours.

“Blockchain rails operate 24‑7, every single transaction settles atomically,” De Bode explained.

Because tokens travel globally, they open assets to a much wider audience. Many investors outside the U.S. have struggled to access the dollar or Treasuries; tokenization simplifies that process.

Investors can send tokens anywhere in the world, at any time, without waiting for banking hours or dealing with cross‑border payment delays.

Programmable finance with smart contracts

A defining feature of tokens is programmability. Tokens can plug into smart contracts — self‑executing code that carries out predefined actions without human intervention.

In decentralized finance (DeFi), stablecoins power liquidity pools, while tokenized collateral can automatically secure loans at preset loan‑to‑value ratios.

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For example, a tokenized Treasury fund might deposit tokens into a smart contract that provides margin lending. When the contract’s conditions are met, it immediately disburses liquidity.

Story Continues“To tap into that 24‑7 DeFi ecosystem, you need an asset that’s tokenized and can actually engage with these smart contracts,” De Bode said.

Key risks for investors

Despite its benefits, tokenization carries risks. First, investors must ensure tokens are truly backed by underlying assets held in a regulated custodian account.

There have been instances where on‑chain tokens represented only synthetic exposure, not actual reserves — creating significant counterparty risk.

Second, holding a token does not always confer direct legal rights to the underlying asset. Many stablecoins today grant only a claim against the issuer, not a binding right to redeem the actual reserve.

Ondo Finance addresses this by issuing tokens as debt instruments, giving holders a “senior secured claim against the underlying,” De Bode noted.

Investors should carefully review disclosures on reserve audits, custody arrangements and legal rights before buying tokenized assets. Proper transparency can make token holding “as good as or close to holding the underlying,” De Bode said.

Ondo Finance’s innovation

Ondo has led several industry firsts. It launched the first peer‑to‑peer transferable tokenized treasury fund — later emulated by larger firms — and introduced USDY, a quasi‑permissionless fund that pays yield while offering enhanced protections.

De Bode said Ondo’s next move is an upcoming global markets platform for tokenized stocks and ETFs.

By understanding tokenization’s mechanics, benefits and pitfalls, investors can better navigate this emerging financial frontier.

As De Bode emphasizes, the technology itself is straightforward — but proper backing, legal clarity and smart‑contract safeguards are essential for unlocking its full potential.

What is tokenization? Explained first appeared on TheStreet on Jul 23, 2025

This story was originally reported by TheStreet on Jul 23, 2025, where it first appeared.

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