SoK: Tokenization on Blockchain

Gang Wang Mark Nixon

Emerson Automation Solutions, USA Emerson Automation Solutions, USA
University of Connecticut, USA 1100 W. Louis Henna Blvd.
email.gang.wang@gmail.com Round Rock, Texas, USA

ABSTRACT 1 INTRODUCTION
Blockchain, a potentially disruptive technology, advances many dif- Blockchain technology has emerged as a critical facilitator for the
ferent applications, e.g., crypto-currencies, supply chains, and the implementation and advancement of distributed ledgers. It enables
Internet of Things. Under the hood of blockchain, it is required to a group of participating nodes (or parties) that do not trust each
handle different kinds of digital assets and data. The next-generation other to deliver trustworthy and immutable services [57]. Initially,
blockchain ecosystem is expected to consist of numerous applica- distributed ledgers were designed as tamper-evident logs to record
tions, and each application may have a distinct representation of data and share information. Independent parties typically maintain
digital assets. However, digital assets cannot be directly recorded them without resorting to some centralized authorities [24]. Block-
on the blockchain, and a tokenization process is required to format chain became popular because of its success in crypto-currencies,
these assets. Tokenization on blockchain will inevitably require a e.g., Bitcoin [40]. The technological advances and extending ap-
certain level of proper standards to enrich advanced functionalities plication domain of blockchain technology have publicly received
and enhance interoperable capabilities for future applications. How- tremendous attention from academia and industry, promising to
ever, due to specific features of digital assets, it is hard to obtain a change all aspects of digital business in the industry. It is believed
standard token form to represent all kinds of assets. For example, that blockchain will have a profound impact and influence on ex-
when considering fungibility, some assets are divisible and iden- isting Internet infrastructures and will promote the development
tical, commonly referred to as fungible assets. In contrast, others of a decentralized Internet [57]. This is because all the information
that are not fungible are widely referred to as non-fungible assets. recorded on the blockchain can be considered as digital assets, and
When tokenizing these assets, we are required to follow different these assets with guarantees of authenticity in the blockchain are
tokenization processes. The way to effectively tokenize assets is tamper-proof and cannot be changed.
thus essential and expecting to confront various unprecedented Smart contracts deployed on blockchains enable the creation of
challenges. This paper provides a systematic and comprehensive new types of digital assets, called tokens, that can interact with
study of the current progress of tokenization on blockchain. First, each other [16]. In general, all kinds of digital information or assets
we explore general principles and practical schemes to tokenize can be customized in the form of tokens, whose process refers to to-
digital assets for blockchain and classify digitized tokens into three kenization. After digital assets are tokenized, they can be recorded
categories: fungible, non-fungible, and semi-fungible. We then focus on the blockchain. Different blockchains may have different to-
on discussing the well-known Ethereum standards on non-fungible kenization processes. Currently, the most well-known guideline
tokens. Finally, we discuss several critical challenges and some to create a token is a series of Ethereum Request for Comments
potential research directions to advance the research on explor- (ERCs) [21], which describe the fundamental functionalities and
ing the tokenization process on the blockchain. To the best of our provide guidelines that a token should comply with working cor-
knowledge, this is the first systematic study for tokenization on rectly on the Ethereum network. Within ERCs, various types of
blockchain. tokens are defined regarding the features of assets, e.g., ERC-20 [20]
for divisible assets and ERC-721 [19] for indivisible assets. Once a
CCS CONCEPTS token representation of a digital asset is created on a blockchain,
it can be traded via a process known as an Initial Coin Offering
• General and reference → Computing standards, RFCs and (ICO) [33], the online sale of created tokens [10]. From an economic
guidelines; • Information systems → Information systems appli- perspective, this is one motivation to promote the rapid develop-
cations; • Applied computing; ment of tokenization on blockchain in recent years.
Tokens can represent assets on the blockchain to facilitate trans-
KEYWORDS actions, whose representations, tokens, are roughly categorized
Blockchain, Tokenization, Fungible Token, Non-fungible Token into fungible tokens (FT) and non-fungible tokens (NFT), based on
(NFT) the fungibility of assets. Fungible tokens are exchangeable and
identical in all aspects and generally divisible, while non-fungible
tokens cannot be substituted for other tokens even with the same
type and are indivisible [30]. One classic example of fungible to-
Preprint online version of paper published in the proceeding of 2021 IEEE/ACM 14th kens is crypto-currencies [12], in which all the coins generated
International Conference on Utility and Cloud Computing(UCC ’21) Companion. for crypto-currencies are equivalent and indistinguishable. On the
Gang Wang and Mark Nixon. 2021. SoK: Tokenization on Blockchain. In 2021
IEEE/ACM 14th International Conference on Utility and Cloud Computing(UCC ’21) other hand, non-fungible tokens are typically unique and specially
Companion (UCC ’21 Companion), December 6–9, 2021, Leicester, United Kingdom. identified, which cannot be exchanged in a fungible way, making
ACM, New York, NY, USA, 9 pages. https://doi.org/10.1145/3492323.3495577.
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 Gang Wang and Mark Nixon

them suitable for identifying unique assets. Furthermore, with the know these potential issues and challenges. Even though some
help of smart contracts on the blockchain, one can easily prove media reports on some special blockchain use cases (e.g., NFTs
the existence and ownership of digital assets, and the full-history for Ethereum), there are no systematic level studies on a general
tradability and interoperability of blockchain assets make NFTs tokenization process. As such, a systematical-level study of tok-
become a promising intellectual property protection solution [59]. enization on the blockchain is required. This paper presents a com-
Also, NFTs have gained remarkable attention from academia and prehensive and systematic study of tokenization on the blockchain,
industry communities to embody unique real-world assets. mainly from the perspectives of functional and conceptual compo-
Digital assets vary in terms of fungibility, which is a charac- nents. According to current works of literature, we classify tokens
teristic of a token that indicates whether assets can be entirely into different categories regarding these fungibility of represented
interchangeable during an exchange process. Fungible tokens of digital assets, namely, fungible tokens, non-fungible tokens, and semi-
the same type are identical (like coins are identical), being divisible fungible tokens. For each category, we present the state-of-the-art
into smaller units (like coins of different values). And, non-fungible literature works in that category and provide some discussions. As
tokens have been employed to represent unique assets (e.g., col- a systematization of knowledge on tokenization, we also provide
lectables, certificates of any kind, any type of access rights, objects, some research challenges and research directions, which may help
etc.) [3] [22]. Thus, an NFT is unique, indivisible, and different interested readers explore more in this area.
from other tokens even with the same type. In literature, there The rest of the paper is organized as follows. Section 2 introduces
exist several well-known crypto-tokens: crypto-coins, asset-tokens, some preliminary information on the blockchain, transactions, and
and utility-tokens. From the perspective of fungibility, crypto coins general tokenization on blockchain. Section 3 discusses the classifi-
typically belong to fungible tokens, and both asset-tokens and cation on blockchains’ tokens. Section 4 details existing solutions
utility-tokens are non-fungible tokens. Crypto coins are commonly on crypto-tokens and provides a detailed discussion on opportu-
referred to as crypto-currencies, with the help of blockchain, which nities and risks on NFTs. Section 5 shows some potential research
can be used as a medium of exchange of currencies without resort- directions, and section 6 concludes this paper.
ing to any centralized banks. Asset-tokens typically can be used
to represent a wide range of assets beyond crypto-currencies, e.g., 2 PRELIMINARIES
assets with physical existence (i.e., real properties) or without phys-
This section provides some preliminary information for tokeniza-
ical existence (i.e., stock shares). Utility-tokens are typically used to
tion on blockchain.
represent a unit of product or service, or tokens that enable future
access to a product of service [31] [34].
In general, a token is affected by four operations in its life- 2.1 Blockchain and Transaction
cycle [30]. The issuer (often as a seller) first creates the token (e.g., Blockchain is a publicly known distributed ledger technology un-
via smart contracts). If traded on a trading market, the buyer then derlying many digital crypto-currencies, such as Bitcoin [40]. In a
bids upon the token, at which point agreement, the seller transfers broad sense, blockchain can be roughly explained as an immutable,
the token’s value to the buyer. Finally, the new owner (e.g., the decentralized, trusted, and distributed ledger based on decentralized
buyer) of a token can redeem the value of the token [30]. This de- (e.g., peer-to-peer (P2P)) networks [50]. Essentially, blockchain is a
scription describes a general model of a token life-cycle. However, distributed data structure and is labelled as a “distributed ledger" in
within this cycle, it may have some challenges and risks to over- its applications, functioning to record transactions generated within
come, e.g., legal disputes or limitations on smart contract [9]. When a network [53]. In general, crypto-currency is only one application
a token is created on a blockchain, e.g., public blockchain, everyone of record-keeping functions, and distributed ledger technology has
can see how it was developed and linked to the underlying right or great potential to be adapted to other application scenarios as long
asset. Due to the anonymity or pseudonymity of blockchain, when as data exchanges exist. The key idea behind blockchain technology
legal disputes arise from the creation and use of digital assets, it is is decentralization, which means blockchain technology does not
not enough to match these assets with the real-life owner or creator require any trusted central point or party to control or manage the
of the token, which makes the verification process of assets difficult. participating nodes.
Most existing tokens are required to operate with smart contracts to As a distributed and decentralized ledger, the essential compo-
verify their ownership and manage their transferability. Fulfilling nent of blockchain is data, alternatively called transaction. The
the requirements of smart contracts may be a potential issue, e.g., transaction information can be considered a token transferring
a transaction be carried out in a written form requires to include process occurring in a network or any data exchange. Atomicity
signatures of the parties. And, not everything about the token can Consistency Isolation Durability (ACID) provides general princi-
be coded in a smart contract. For instance, if the seller of a token ples for transaction processing systems, e.g., blockchain. A trans-
wants to introduce some contractual terms (e.g., prohibiting buyers action in an ACID system should have the following features for
from using the represented token for commercial purposes), such a a blockchain system [51]: (a) a transaction (or a transaction block
term typically cannot be enforced by smart contracts. consisting of multiple transactions) is executed as a whole or not
Tokenization creates many opportunities to apply and adapt at all (e.g., enabling the feature of “all or nothing"); (b) each trans-
blockchain to real-world applications. By tokenizing digital assets, action transforms the system from one consistent and valid state
assets can be easily represented and recorded on blockchains. Al- to another, without compromising any validation rules and data
though tokenization on a blockchain is promising, it still faces integrity constraints; (c) concurrent transactions are executed se-
many challenges, and it would be better for system designers to curely and independently, preventing them from being affected by
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SoK: Tokenization on Blockchain

other transactions; and (d) once a transaction has been successfully the potential of tokenization on blockchains[55]. For example, the
executed, all changes generated by it become permanent even in the lack of regulatory clarity for tokenized assets becomes a signifi-
case of subsequent failures. Thus, ACID is crucial to a blockchain cant obstacle for the wider implementation. And, from a technical
transaction. However, different applications may require different perspective, there lacks a trusted way to ensure consistency be-
transaction structures to represent the represented information or tween the on-chain assets and the underlying off-chain assets. In
assets. For instance, some indivisible assets would require strong this paper, we focus on representing the physical/virtual off-chain
atomicity on the contained information, e.g., as one piece, while assets and digital on-chain assets from the features of fungibility.
others (e.g., most crypto-currencies) can be dividable. Thus, we Specially, we roughly classify tokens into three categories: fungible
need some schemes to digitally denote the states of these assets tokens (FT), non-fungible tokens (NFT), and semi-fungible tokens
so that they can be processed more efficiently on blockchain, and (SFT).
tokenization is an ideal candidate to signify these different kinds
of transactions. And, smart contracts will assist the tokenization 3 CLASSIFICATION ON BLOCKCHAIN
process on blockchain. TOKENS
In the tokenization process for blockchains, there indeed exist many
2.2 Tokenization for Blockchain types of tokens for various applications. Instead of discussing these
A token is typically a digital representation of an asset available specific application-based tokens, according to the fungibility of
in the physical or virtual worlds [36]. In the blockchain domain, assets on blockchains, we roughly classify them into three well-
a token can be used to represent some crypto-currencies, such known tokens: fungible tokens (FT), non-fungible tokens (NFT),
as Bitcoin or Ether [32]. Technically, a token is implemented by and semi-fungible tokens (SFT).
an algorithm defined in a smart contract on a blockchain. And
smart contracts are essentially computer programs that verify or 3.1 Tokens
implement a contract by automatically carrying out a pre-defined In the blockchain domain, tokens can be used to represent digi-
set of terms in a trackable and irreversible manner without the tal assets. However, the concept of a token is not exclusive to the
involvement of a third party [56]. The output of a smart contract blockchain. Historically, tokens were used to secure digital transac-
can be literally considered as a token. For instance, the Ethereum tions, e.g., banking transactions [9]. Nowadays, tokens are regarded
platform can be used to create arbitrary smart contracts, whose as one of the critical uses of blockchain technology, and tokens
tokens (aka. Ethereum tokens) can be used to represent various are described as “central to most social and economic innovations
digital assets [15]. These tokens can represent anything from both developed with blockchain technology" [26]. From a technical per-
physical objects and virtual objects. They can use them for a variety spective, tokens are a piece of digital information, e.g., lines of
of purposes, e.g., recording transactional data information or paying computer code, which details what the token represents. While,
to access a network. The mapping process between a token and its from a legal perspective, tokens can represent digital assets that can
representative asset is initially purely fictitious. The token contains virtually specify any value that has been agreed on and secured by
the asset model that is certified by a smart contract to guarantee the cryptographic protocols, e.g., crypto-currencies. Also, some rights,
uniqueness of data. In general, tokens will not depend on operating such as access rights, can be represented in the form of tokens.
systems and do not include physical content within, and via the And assets from both the real world (e.g., real estate, collectables,
smart contract, it is easy to verify the validity of a token. commodities, and even company shares) and the virtual world (e.g.,
Tokenization is the transformation process of data/assets into crypto-currencies, lottery tickets, or even character skills in online
a random digitized sequence of characters (aka. a token) [39]. It games) can all be tokenized for further processing.
simplifies the process of representing physical/virtual assets and In literature, there exist different kinds of classifications for digi-
provides some protection on sensitive data, e.g., by substituting tal objects. These digital objects typically carry a state of informa-
non-sensitive data into a token. The token serves merely as a ref- tion that helps to bridge the gap between the physical and digital
erence to the original data or assets for blockchain applications world [28]. Following the ways on how to represent digital objects
but cannot be utilized to determine those values. A token itself or the tangibility [43], digital objects can be roughly categorized as
does not include some economic value information in it, and the tangible and intangible objects. Tangible objects refer to the assets
“monetary" value of a token typically is assigned by the market. with physical existence, and they are typically unique. For example,
Thus, we can consider a token as a symbol that is validated by smart a tangible object in a blockchain represents an asset with both phys-
contracts of the target blockchain system. As long as validated by ical existence and its digital form. On the other hand, intangible
the smart contract, the token can be used in numerous applications objects refer to the assets that do not have a physical nature, such
or be traded in the market. Tokenization of real-world assets is as services or virtual objects, which can be represented as abstract
a trend that generates much interest in blockchain research [47]. objects within its targeting system. Also, from the fungibility of as-
Tokenization on the blockchain provides many advantages. For sets, digital objects can be classified into fungible and non-fungible
instance, tokenization eliminates most financial, legal, and regu- objects. Table 1 shows a classification of digital objects with their
latory intermediaries, resulting in significantly lower transaction key features.
costs. However, the tokenization process on the blockchain is still From an application perspective, there is little internationally
in its early stage, and there are many challenges and risks to over- recognized categorization for tokens, and different countries may
come, including regulatory and technical challenges, to fully realize endorse different types of tokens. In literature, there are indeed
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 Gang Wang and Mark Nixon

Table 1: Classification of Digital Objects of methods used to manipulate that list, such as ‘transfer 𝑛 tokens
from address 𝑎 to address 𝑏’, and (2) rules to determine who can ma-
Object Class Key Features nipulate that list in which way." Under applications of the Ethereum
Tangible Physical existence blockchain, ERC-20 (or Ethereum Request for Comments #20) is an
Tangibility
Intangible Virtual existence or service example of fungible tokens. It is a specification established upon
Fungible Exchangeability by the Ethereum community (a community that endorses ERCs)
Fungibility
Non-fungible Uniqueness that specifies certain fundamental functionalities and provides cri-
teria for a token to comply with performing correctly on Ethereum
blockchains [10]. An ERC-20 token is a token that follows ERC-20
having some classifications based on their functionalities: payment guidelines. They have some inherent feature that makes one token
tokens, utility tokens, and alternative tokens (e.g., asset, security, identical to another token in terms of type and value. For exam-
equity, or investment tokens) [9]. The most evident example for ple, an ERC-20 token functions similarly to ETH on the Ethereum
payment tokens lies in the digital payment domain, e.g., in the form blockchain, in that one token always have an equal value to all
of crypto-currencies. Utility tokens typically are used to provide other tokens [20]. Besides, the ERC-20 standard specifies a common
digital access to some applications or services, and this type of interface for fungible tokens that are divisible and not distinguish-
token typically requires some supporting infrastructures to function able, which further ensures interoperability among the Ethereum
fully. Alternative tokens have different purposes, e.g., asset tokens blockchain community [57]. However, applying the ERC-20 token
digitally represent assets, and security tokens grant their holders type to other blockchain scenarios still has a long way to go.
some rights as certificates. Even though various names are attached One limitation to fungible tokens is that many valuable assets,
to tokens, from its essential perspective, they are used to digitalize such as artwork, real estate, cannot be effectively divided and re-
the information of represented assets (e.g., goods, services, rights, placed from the nature of these assets. And, these assets are typi-
etc.). And, from the fungibility perspective, these tokens can be cally unique assets that are required to keep track of the ownership,
classified into three types: fungible tokens, non-fungible tokens, which needs non-fungible tokens to represent.
and semi-fungible tokens.
Before introducing these tokens, we first need to know the con-
cept of fungibility. A fungible asset can be interchangeable with 3.3 Non-fungible Tokens
other assets of the same category or type [41]. Fungibility refers A non-fungible token (NFT) is a cryptographically unique, non-
to an asset’s capacity to be interchanged with other assets of the replicable token, which can be used to keep track of the ownership
same or similar types. In other words, fungibility is one kind of of individual assets. Non-fungible tokens differ from fungible to-
property of a token that specifies whether objects or quantities of a kens in terms of interchangeability, uniformity, and divisibility. A
similar type can be freely interchangeable during a trade or utiliza- non-fungible token cannot be divided in nature, in which each one
tion [5]. In general, in the finance domain, fungible assets simplify contains some distinctive information and attributes to identify
the exchange and trade processes, as fungibility implies equal value itself from others uniquely. This feature makes NFTs impossible
among the involved assets. Currency (or crypto-currency) is an to interchange with each other [5]. In general, each non-fungible
excellent example of fungible property, e.g., $1 bill can be easily token is unique and differs from others. The ERC-20 standard pro-
and equally convertible into four quarters or ten dimes with the vides the technological framework and best practices for fungible
same value [25]. In the token domain, some of them are purely token creation under Ethereum blockchains. Similarly, the ERC-721
equal (aka. perfectly fungible tokens), while others possess distinct standard [19] did the same for non-fungible tokens, which allows
characteristics which ensure their uniqueness (aka. non-fungible the developers to create a digital asset representation that can be
tokens) [52]. For example, if we consider physical assets, such as exchanged and tracked on the blockchain. The establishment of
uniquely identified real estate or collectables, as tokens, they are this new standard was prompted by the fact that there exists a
non-fungible. significant difference between fungible and non-fungible tokens
in nature. For example, the notion of fungible commonly describes
3.2 Fungible Tokens the capacity of each piece of a commodity to be interchanged with
The fungibility of a token refers to the fact that the token has the other pieces of the same or similar commodity. For example, two
same or similar content compared to other fungible tokens. Thus, individuals could swap the same amount of assets without any gain
fungible tokens are interchangeable/replaceable with, or equal to, or loss, and even if these assets are in different forms, the values
another asset of the same category. For example, A fungible token should be the same. While the non-fungibility is opposite as each
can be readily substituted by other assets of the same or equiva- token is unique and cannot be divided into small pieces or merged
lent value that may be divided or exchanged. They are identical with other pieces into a large piece. For example, the ERC-721 de-
to one another and can be divided into smaller units, which does fines that each NFT token must have a universally unique identifier,
not affect their values [5]. Furthermore, fungible tokens typically whose ownership can be identified and transferred with the help
are not unique. For example, a payment token is always fungible, of metadata [45]. In general, the ERC-721 standard specifies an
which is exchangeable, divisible, and not unique in nature. As Glatz interface that each smart contract on Ethereum that wants to create
stated [26], “From a technical perspective, a fungible token is imple- ERC-721 tokens has to implement.
mented as a list of blockchain addresses (user accounts) that have Essentially, an NFT can be seen as a piece of digital information
a number (quantity) associated with them, together with (1) a set (token) that is stored on a ledger system and, due to uniqueness, it
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SoK: Tokenization on Blockchain

can be interchangeable with other digital assets in nature, even with And the exploration and use cases of semi-fungible tokens are still in
the similar digital assets [11]. Practically, real-world assets may be the concept stage. This section presents some existing solutions and
tokenized with the aid of NFTs. However, NFTs, unlike standard uses cases on some commonly referred crypto-tokens. Specially,
crypto-currencies or ledger-based tokens, are not interchangeable we discuss three well-known crypto-tokens: crypto-coin, asset-
and replaceable, as they include their own information or other token, and utility-token [43]. The crypto coins typically belong to
characteristics that make them unique and irreplaceable [54]. The fungible tokens, and both the asset-tokens and the utility-tokens
key characteristic of NFTs is that they symbolize ownership of are non-fungible tokens.
digital or physical assets, which can encompass a wide range of Crypto coins are commonly referred to as crypto-currencies;
assets. This distinguishes NFTs and allows for individual tracking with the help of blockchain, they can be used as a medium of ex-
of their ownership [49]. Furthermore, with the help of blockchain, change of currencies without resorting to any centralized banks.
the NFT, as a token, provides the essential verifiable immutability They are typically used as payment currency or trading currency
and authenticity, as well as other characteristics like delegation, where payments or trades can be made for goods, services, and
transfer of ownership, and revocation [42]. Also, the NFT plays a fiat currencies. However, crypto-coins highly rely on their under-
key role in scaling the ability of Ethereum to process a high number lying blockchain systems and protocols. For example, Bitcoin and
of transactions using stable channels [13]. Ethereum, as crypto-coins, are based on different blockchain sys-
tems, and each system runs its own independent ledger. Therefore,
3.4 Semi-fungible Tokens they are not directly exchangeable between other systems, but
Tokens standards on fungible and non-fungible assets typically fa- they can be traded via some trading platforms. In general, crypto
cility distinct contracts for each token type, which may place some coins are modelled to represent some intangible and divisible assets.
redundant bytecodes on blockchain and limit certain functional- However, they also can be designed for some special purpose, e.g.,
ity by the nature of separating each token contract. Semi-fungible assigning a unique number or value for each coin.
tokens are a new class of tokens, which have the features of both Asset-tokens typically can be used to represent a wide range
fungible tokens and non-fungible tokens. SFTs provide more flexible of assets beyond crypto-currencies, e.g., assets with physical exis-
interfaces to represent some complex assets or processes. In litera- tence (i.e., real properties) or without physical existence (i.e., stock
ture, ERC-721 is not the only token standard that exists for NFTs. shares). These kinds of tokens are commonly implemented and ver-
The Ethereum ERC-1155 standard (Multi Token Standard) [18] is ified via smart contracts. With the help of blockchain, it makes ac-
another notable Ethereum variant that offers “semi-fungible" op- cessing and managing digital assets more efficient. Typically, asset-
tions and the potential to represent both fungible and non-fungible tokens are implemented as non-fungible tokens that are digitally
assets. This offers an interface to denote an NFT in a fungible way. unique to each other. There exist some well-known non-fungible
For instance, an ERC-1155 token extends the functionality of token use cases, such as CryptoKitties [22], copyright protection, supply
identification (aka. tokenId), which can offer configurable token chain tracking, software licenses distribution, to name a few. While
types. This type of token may contain customized information, e.g., asset-tokens can also be in the form of fungible tokens, they require
metadata, timestamp information, supply, and other attributes [59]. that each unit of the asset be uniquely identified and hold the same
In general, the ERC-1155 token is a new token proposal standard characteristics within their representative systems. For example,
to create fungible and non-fungible tokens in the same contract. Colored Coin [46], as a fungible token, describes a class of methods
Currently, there is neither too much information on the standard of on how to represent and manage some specific types of real-world
ERC-1155 tokens nor much information on semi-fungible tokens. and physical assets, which enable them to be exchanged on top of
In general, semi-fungible tokens can hold and represent the fea- a Bitcoin network. These kinds of asset-tokens would require some
tures of both fungible and non-fungible assets. Thus, semi-fungible verification schemes (e.g., in the form of smart contracts) to verify
tokens may be more efficient to create and bundle token trans- the validity of fungibility.
actions (without requiring a mandate unique token contract for Utility-tokens are typically used to represent a unit of prod-
each token created). For example, the ERC-1155 token offers some uct or service or tokens that enable future access to a product of
level of flexibility over the ERC-721 token, e.g., creating flexible, service [31]. Utility-tokens are not like crypto-currencies that are
re-configurable, or exchangeable tokens with non-fungible fea- designed for investment or made for exchange purposes, and they
tures [54]. Accordingly, the token structures and interfaces of SFTs are designed as a service that can be purchased. However, in prac-
will also be more complex. tice, some situations may exist in which the same product or service
can be distributed to multiple users and allow them to exchange
4 EXISTING SOLUTIONS ON CRYPTO-TOKENS utility information with each other [43]. Typically, utility tokens
belong to fungible tokens. For example, ERC-20 compatible tokens
4.1 Crypto-tokens on the Ethereum platform are considered utility tokens. The util-
Blockchain technologies give birth to a new cryptographic form of ity tokens are generally valid between users within a network or
assets, crypto-assets, or crypto-tokens, which can be represented community.
in different forms and used in different application domains. In In general, different digital objects can be mapped into different
general, the concept of fungible tokens can be directly adapted types of tokens, such as crypto coins, asset-tokens, or utility tokens.
to blockchain-powered financial systems. When integrating FTs These types are not exclusive, and according to practical use cases
into the blockchain, one of the important applications is crypto- and actual characteristics, one kind of digital asset can be classified
currencies, which are typically considered divisible crypto-assets. into different categories. The above discussed three crypto-assets
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serve as some baseline for current or future emerging digital crypt- readily verify the authenticity and ownership of corresponding
assets. assets with the meta-data included in the token, which protects an
artist’s work from being copied or misused. Also, NFTs are typically
4.2 Opportunities of NFT encoded with a unique collection of information on the represented
Most existing fungible tokens target crypto-currencies use cases assets. As such, NFTs are ideal for granting certificates, identities,
that take advantage of divisibility, like fiat currency. And NFTs con- credentials, and licenses. With the help of blockchain, the owner-
sist of unique features that make them easily accessible to other real- ship information is appended in the blockchain in a decentralized
world use cases (besides crypto-currencies). This section presents manner, which makes NFTs traceable [7].
some opportunities provided by NFTs on the blockchain, e.g., au- The tokenization process provides many benefits to existing
thenticity, ownership, and transferability [37]. blockchain systems [45]. A key benefit of NFTs is that their unique-
ness is better than existing blockchain-based use cases, and via
4.2.1 Authenticity. The standardization of NFT, with the help of smart contracts, it makes digital assets programmable. Even for
blockchain and smart contracts, makes each token uniquely identi- some assets with certain fungible features, we can still use NFTs to
fiable and authentic, and the token information can be recorded in differentiate between assets. NFTs enable new use cases and have
a blockchain which makes them immutable and trustworthy. The- the potential to improve existing blockchain systems by providing
oretically, there is no efficient way to copy or duplicate a unique unique and exchangeable assets. For individual assets (other than
token once the token is recorded in the blockchain, which helps fungible assets), NFTs provide two distinguishable properties: 1)
prevent fraudulent items and protect intellectual property. Also, the NFTs can guarantee authenticity and uniqueness when tokeniza-
transparency of blockchain makes it possible to verify and prove the tion of these assets; 2) NFTs ideally represent physical assets in the
authenticity of each NFT. Therefore, when NFT is equipping with digital sphere. With the help of blockchain, tokenization increases
blockchain, it can effectively prevent the counterfeiting and fraud the transparency of ownership benefits regulators, which bridges
problems in many industrial use cases, such as art and collectables. the gap between the physical and digital worlds.
4.2.2 Ownership. At the heart of NFT is uniqueness and owner-
ship, and a token is required to prove its ownership of an asset. 4.3 Risks Associated with NFT
Ownership means that an NFT can only be transacted and trans-
Although NFTs provide many opportunities to digitalize assets,
ferred by the owner of the asset (not the owner of the issuer) due
NFTs, as digital objects over the Internet, do have some risks to
to the smart contracts and associated rights. Even the issuer of an
consider [2]. Most existing NFTs in literature are still in the form
NFT cannot replicate or transfer the NFT without permission from
of software codes following predefined and standardized rules, like
its owner. An NFT token on a blockchain can track ownership and,
smart contracts, deployed and executed on the blockchain network.
therefore, authenticity, undeniably proving ownership. For example,
Thus, the integrity and security of NFTs are highly reliant on their
the ERC-721 standard defines the minimum interfaces, including
underlying blockchain systems [45]. For example, most NFT-related
ownership details, security, and metadata, and the ownership is
projects are currently enabled by the Ethereum blockchain. And the
assigned to the owner of the asset.
Ethereum blockchain has its own limitations, e.g., scalability and de-
4.2.3 Transferability. NFTs recorded on a blockchain must be de- centralized autonomous organization (DAO) attacks on Ethereum.
centralized, and no centralized authority can regulate the move- Another challenge is the privacy issues on permissionless block-
ments of these tokens over the blockchain systems. In general, one chain, e.g., the mechanisms to preserve some sensitive information
NFT only belongs to one owner at any time, whose unique data of digital assets locally.
structure offers a simple way to verify its ownership and to transfer Even though many ICO (Initial Coin Offering) projects are avail-
the token among owners [14]. The owner of the creator can also able, it is still a challenging proposition to purchase an NFT. In
store specific information inside them to clarify the ownership, general, NFTs offer a new marketplace for customizing blockchain
making NFTs transferable. Also, the help of blockchain enables applications and are even different from the new crypto-currencies
millions of people to have ready access to NFTs, and they can trade market. However, there is no guarantee that demand for digital
these NFT tokens for other cryptocurrencies. assets will be comparable for distinct applications. If there is no
Besides the above-mentioned features and inner natures (such market for trading NFTs, the customer may pay an exorbitant price
as indivisibility and uniqueness), NFTs have other features, such for some digital assets that depreciate or is just unsaleable. The cre-
as scarcity and indestructibility. For example, for scarcity, the total ators can even create their own NFTs. Again, however, there is no
number of NFTs is currently pretty low, and they are quite rare, guarantee to find a customer respective to the digitized asset. Thus,
which makes them not only uncommon but also increases their val- market research is necessary before engaging in creating, issue and
ues. For indestructibility, NFTs are typically managed and operated investing NFT tokens. Also, NFTs typically lack easy accessibility
via blockchain, which increases assets’ security. And this ensures for users due to the nature of backend components and the lack of
that these NFTs cannot be removed or destroyed. user-friendly interfaces.
Due to easy transfer and proof of ownership, NFTs open a wide With the help of blockchain technology, NFTs can be recorded in
range of potential applications for real-world and virtual assets, the blockchain, which establishes ownership. However, the market-
e.g., the gaming industry, digital assets, identities, collectables, and places and platforms for creating genuine NFTs are still in some cen-
certificates. Taking digital collectables as examples, NFTs are scarce, tralized authorities. If these centralized authorities and platforms
which fits the use cases in collectables and art. The collectors may stop working in any way, there is no promise that the end-user
6
SoK: Tokenization on Blockchain

can still access the assets represented by NFTs [2]. This fact makes token transferring must take place in an autonomous and syn-
it less secure than real marketplaces. Also, current NFTs are not chronized manner among the involved blockchains (mostly on
well regulated, and a high level of trust is necessary. For example, crypto-currencies related blockchains). However, there is no uni-
the represented assets must not have been duplicated elsewhere. versal interoperable protocol that works for any type of blockchain.
Otherwise, it may risk a copyright issue. Furthermore, unlike fun- Also, there is no efficient mechanism to fully replicate or duplicate
gible tokens, NFTs are not possible to create many tokens the right the state and information of one blockchain to another, as different
way, in which minting NFTs one by one is cumbersome and ineffi- blockchains may have distinct meta-data [8]. An atomic swap is one
cient [45]. There also exist some risks in the process of approving technique that enables users of different blockchains to exchange
transactions before the actual transactions can happen [17]. For ex- their assets in an atomic and trustless manner [27] [58]. One of
ample, suppose the ownership of a token is temporarily transferred the most popular scenarios is the atomic token swap. However,
out from its owner. In that case, this may pose some unexpected atomic token swapping protocols [38] are not self-inclusive enough
issues (e.g., modification on the token asset), and the security and to complete tasks of cross-chain decentralized applications (dApps)
the consistent status of blockchain may get compromised. In gen- because the “executable" components in those dApps may involve
eral, smart contracts can make token ownership transferring easy more complex activities (e.g., verifying against historical informa-
and efficient. However, different tokens on blockchain may adopt a tion) than pure token transfers. For example, the atomic swapping
different version of smart contracts, e.g., some earlier issued tokens process typically cannot destroy a certain amount of assets (e.g.,
may adopt an earlier version, and upgrading and updating existing in the form of tokens) in the source blockchain and re-create the
smart contracts still bears many technical and operational risks. same amount of transferred tokens on the target blockchain [57].
Even the tokenization process enables new features to repre- In general, as its name implies, an atomic token swap offers only
sent digital and physical assets digitally, there still exist many token exchanges rather than transfers. On the other hand, NFTs
challenges and risks. Many of these risks can be enhanced by the can help this atomic token swapping process change the ownership
terms/standardization of tokenization licenses and the platform’s of assets since NFTs are a unique representation of digital assets.
terms of service. However, the research of tokenization on the Thus, it suits well the token transferring process. Besides, this pro-
blockchain is still a developing area, and new issues and risks will cess always requires a counterparty (of another blockchain) who is
continue to come up. Also, tokenization-based blockchain systems willing to exchange these tokens [48].
are not yet ready for a mass market for general use cases, demanding
simplicity, user-friendly interfaces, and legal clarity. Furthermore,
public knowledge about the tokenization process is still scarce. 5.2 Security and Privacy-preserving
Nonetheless, tokenization on blockchain still has great potential to When multiple blockchains work together, security and privacy
enable many more practical use cases. are necessary considerations. In general, different blockchains may
adopt different security primitives and token schemes to tokenize
their digital assets, in which one security primitive is secure in
5 POTENTIAL RESEARCH ON TOKENIZATION one system but is not secure in another system. Security is still a
The research for tokenization on the blockchain is still in its early major concern for the willingness to adopt token schemes among
stage, and there exist many challenges to facilitate the full tokeniza- stakeholders. Therefore, it is highly recommended to develop se-
tion on blockchain. By tokenization on the blockchain, we aim to curity standards for scripting smart contracts and other block-
achieve interoperable blockchain systems in which digital assets chain primitives. Also, the privacy-preserving technologies in cur-
can be freely exchanged. This section presents some potential re- rent blockchain systems are not robust enough. Ideally, privacy-
search efforts (rather than legal or market efforts) for tokenization preserving among distinct blockchain systems should be fully de-
on blockchain. centralized with the properties of obfuscation and anonymity by
design [1]. Such solutions may need to consider different choices
of blockchains, such as public blockchains or private blockchains.
5.1 Interoperability Also, most existing token schemes store data or assets off-chain and
With the maturity of blockchain, more and more independent provide on-chain tags to link these assets. When storing data/assets
blockchains will come out for different applications (e.g., differ- into tokens, it requires to prevent the tokens from inaccessibility.
ent digital assets), and both blockchain and tokens interoperability For example, many NFT projects store a cryptographic hash as
would become a fundamental issue that needs to be addressed. the identifier, instead of a copy of assets, into the tokens, which
In general, tokenization will simplify the exchanging process of further are recorded on the blockchain. This may make the users
digital assets in the form of tokens. Blockchain interoperability suspect that NFTs might be lost, damaged, or even tampered with as
would enable secure state information transitions across different the original asset. Even some distributed and decentralized storage
blockchains, either homogeneous or heterogeneous, and create schemes, such as IPFS [6] and StorJ [60], may help, however, relying
invaluable channels for connecting the decentralized Internet. Cur- on external storage is still vulnerable [59].
rent researches on blockchain interoperability still concentrate on Privacy is crucial in any sensitive interaction (e.g., financial as-
guaranteeing the ACID properties of atomic token exchanging pro- sets or health records) and thus in cross-chain communication.
cess between blockchains (e.g., tokens from a source blockchain Practically, the data owner should have the ability to determine and
system to a target blockchain system) to remove the need for cen- observe what information and activities have been synchronized
tralized exchanges [4] [35]. To establish an atomic process, the across blockchain networks [61]. However, in practice, different
7
 Gang Wang and Mark Nixon

applications have different security primitives to guarantee secure available standardization to regulate distinct digital assets, it is
operations, and it is hard, if not impossible, to make all applications difficult or impossible to achieve a service agreement and thus an
adopt the same security primitive. When integrating them together, interoperable system on the integrated processes of blockchains.
new data from an arbitrary process may go far beyond the outreach Moreover, each organization may develop incompatible standards
of any common security safeguard. This may make the data and among these partners. This further blocks the progress of tokeniza-
services vulnerable. In the current stage, the research on anonymity tion on blockchain.
and privacy of tokens is still understudied. And existing privacy- The current progress on digital assets tokenization is still in an
preserving technologies, such as zero-knowledge proof [23] and early stage, and there is no simple agreements on what kinds of
multi-party computation [44], have not been adopted to the tok- features or procedures should be included in tokens to formalize a
enization schemes due to the complexity of these cryptographic de facto tokenization process on the blockchain, nor is there wide
primitives [59]. It requires a certain level of trade-off between pri- accepted agreement on how to create a reference architecture for
vacy and public blockchains. For example, many researchers have tokenization on blockchain. Without it, independent developments
demonstrated that privacy is not guaranteed. It is possible to make would highly impact achieving the standardization process of tok-
sure out of pseudonymous data on blockchains, as transparency enization on blockchain in the future. Two directions are possible to
and public access are key features of blockchains. Thus, security achieve standardization. The first is to publicly adhere to practices
and privacy-assisted technologies are required to succeed in the that have already gained widespread acceptance, known as industry
tokenization on blockchain. or de facto standards [29]. The other direction is to create a plat-
form (e.g., by international standards development organizations)
5.3 Usability to allow competing interests to interoperate in various jurisdictions.
As these developments and implementations may have similar or
In general, usability is used to measure the users’ effectiveness, ef-
overlapping functionalities by different organizations (or vendors),
ficiency, and satisfaction of designed schemes [59]. Current digital
it is highly recommended to have some international organizations
assets tokenization processes are closely coupled with their under-
control these processes.
lying blockchain platforms. As discussed earlier, many blockchain
Tokenization on the blockchain is currently in its early stage, and
application scenarios require tokenizing their digital assets from
many research efforts need to be done. It is no doubt that relying
finance to industry and economics. However, most existing assets
on a single party cannot resolve all the tokenization issues. Coordi-
tokenization solutions on the blockchain are still in theory (or some
nation between industry organizations and academic researchers
with prototype demonstration), and few have a real implementation.
is required to specify viable commercial solutions. Although many
Even some of them have launched the ICO coin offering process;
promising examples of tokenization efforts on blockchain systems
essentially, they are still crypto-coins, like Bitcoin. One reason for
are being achieved, most of these solutions are being carried out
this is that the theoretical advances on blockchain tokenization
on and with specific blockchain platforms.
have still not been agreed upon. Each organization may develop
and deploy interoperable blockchain solutions based on its own
requirements. For example, the most well-known ERC-20, ERC-721,
6 CONCLUSION
and ERC-1155 are based on Ethereum, which does not fit other The research and progress of tokenization on the blockchain are
industrial use cases very well. This creates an isolated island and still in their infancy stage. This paper presents a Systematization
thus limits the achievement of theoretical efforts. Also, most exist- of Knowledge for existing efforts on these tokenization processes.
ing token schemes are built on the Ethereum blockchain, which According to fungibility, we classify existing tokens into three key
inevitably inherits the drawbacks of Ethereum. When considering categories: fungible tokens, non-fungible tokens, and semi-fungible
tokenization on Ethereum blockchain, there exist two main chal- tokens. For each type of token, we review and study the state-
lenges for usability, namely, slow confirmation and high transaction of-the-art solutions with detailed analysis. This paper serves as a
fee [59]. The underlying blockchain platforms typically have an starting point for exploring tokenization on blockchain. We discuss
extremely slow confirmation on the transactions (tokens if inte- opportunities and challenges when tokenizing digital assets on
grating tokenization system). Also, a high transaction fee involved the blockchain based on what we observed and learned. Finally,
by complex operations of blockchain will, in turn, limit the wide we present several potential research directions that can advance
adoption of less valued tokens. A practical implementation needs tokenization on blockchain.
to consider and evaluate different evaluation metrics, e.g., efforts
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