As the digital economy continues to grow, asset tokenization has emerged as one of the most practical and compelling applications of blockchain technology. Companies including BlackRock, Goldman Sachs, JP Morgan and more1 have all begun to explore tokenizing assets like money market funds, treasuries, deposits, securities and commodities for the purpose of leveraging real-time settlement and operational efficiency supported by distributed ledger technology.
The Stellar network was originally designed for the purpose of asset tokenization. As such, the protocol has native platform features for strong asset controls including Freeze, Clawback, Authorization Required, Asset Supply Limits, and Issuer Enforced Finality. These features enable issuers to take their assets to market with the reassurance that they’ve designed the asset according to their business and compliance needs (read in-depth about the network’s tokenization benefits here).
Not surprisingly, the largest asset class on the Stellar network, by volume, is tokenized securities. Many major financial institutions trust the network’s robust asset control features and efficiency to issue securities of their own including money market funds and bonds such as those issued by Franklin Templeton: BENJI, WisdomTree: WisdomTree Prime, ABN Amro: digital bond and the Bank of International Settlement: Asian Green Bond Fund. New and existing asset issuers building on the Stellar blockchain can enjoy the following key advantages by relying on the network for asset issuance:
For many issuers, asset tokenization on the Stellar network may provide significant operational efficiencies by allowing asset issuers to reduce the number of internal sources for record keeping. The Stellar blockchain maintains a real-time ledger that tracks the state of the network at all times, enabling asset issuers to use the blockchain to maintain a single source of truth2 for fund transactions and information processed on the network. This single source of truth is stored on a public infrastructure allowing institutions to, ideally, save on redundant servers. Further, the 24/7 liveness helps reduce the risk and cost of transaction queues and delayed reconciliations.
The nature of an open-source, public permissioned blockchain like the Stellar network means institutions and individuals can find real-time transaction specific data about assets on the network through a block explorer like Stellar Expert and/or the public, open source Hubble database. For asset issuers, this transparency offers the ability to monitor non PII data such as flow of funds, transactions and share ownership in real-time.
The Fund’s transfer agent maintains the official record of share ownership via a proprietary blockchain-integrated system that uses features of traditional book entry form and the Stellar network’s blockchain.
- Franklin Templeton Annual Report (3)
Sustainability and efficiency are integral to the Stellar network by design. The Stellar Consensus Protocol (SCP) is a low-energy consensus mechanism achieved through Proof-of-Agreement (PoA). On an annual basis, the estimated electricity generated by the SCP is equivalent to the greenhouse gas emitted by 33.7 homes in one year.4 This sustainable design, is part of why energy conscious issuers like the Bank of International Settlement select the Stellar network5 to tokenize their securities6.
The Stellar network also opens up new distribution channels for digital assets tokenized on the network. Institutions from fintech firms, building innovative decentralized applications to traditional financial institutions providing on and off-ramps to the network, can integrate tokenized assets enabling their customers to transact and store value in the digital economy while maintaining the controls set up by the issuer.
This expansive ecosystem means asset issuers can grow their addressable markets by making assets available to a variety of companies building on the Stellar network. Better yet, these ecosystem companies are accessible to asset issuers through the network’s interoperable standards for on and off-ramping, KYC and AML.
Smart contracts can unleash a range of new financial services on the Stellar network by allowing for better automation and processes. With the upcoming launch of Soroban mainnet, the smart contract protocol built on top of the Stellar network, developers can build specific protocols for a variety of use cases. Such use cases might eventually include activities like savings, lending, automatic yield calculations, delivery vs. programmable payment (DVPP) settlement without any intermediary7 and other financial transactions.
With these benefits in mind, asset issuers are encouraged to join well-known institutions in using Stellar for real-world asset tokenization. The latest suite of tools and services on the Stellar ecosystem have made it simpler than ever for institutions to create an asset of their own on Stellar.
The Stellar Asset Sandbox, for example, provides a testnet environment for issuers to practice minting, designing and burning assets of their own through a user flow that mimics the real process, without code required. Further, the Stellar ecosystem has a number of service providers with out-of-the box solutions for asset tokenization on the Stellar network.
1Khan, “Asset Tokenization A Trillion Dollar Market Opportunity: JP Morgan, Blackrock, And Goldman Sachs Think So.”
2"The main source of trust for facilitating transactions and changes in ownership structures” (BIS p7). Liberty, “Project Genesis – Report 2: A Prototype for Green Bond Tokenisation by the Liberty Consortium,” BIS Innovation Hub (BIS: Innovation Hub, November 2021), https://www.bis.org/.
3Franklin Templeton. n.d. Review of Annual Report: Franklin OnChain U.S. Government Money Fund. Franklin OnChain U.S. Government Money Fund Regulatory Documents. Franklin Templeton. Accessed October 23, 2023. https://www.franklintempleton.com/tools-and-resources/lit-preview/29386/SINGLCLASS/franklin-on-chain-u-s-government-money-fund#annual-report.
4“Stellar | Stellar,” n.d., https://www.stellar.org/foundation/sustainability.
5“The Liberty Consortium chooses the Stellar Network because of its diverse capabilities, low-fees, and energy and performance efficient consensus mechanism…Unlike proof-of-work based algorithms, like those used in the Bitcoin network, the SCP algorithm is an energy and performance efficient variant.” Liberty, “Project Genesis – Report 2: A Prototype for Green Bond Tokenisation by the Liberty Consortium,” BIS Innovation Hub (BIS: Innovation Hub, November 2021), https://www.bis.org/.
6The BIS defines ‘green bonds’ as bonds that “help finance environmentally friendly projects in areas such as renewable energy production and energy efficiency”. “BIS Launches Asian Green Bond Fund,” Press release, by Bank for International Settlements, February 25, 2022, https://www.bis.org/press/p220225.htm#:~:text=These%20bonds%20help%20finance%20environmentally,the%20Asia%20and%20Pacific%20region.
7Sandner, “Will Blockchain Replace Clearinghouses? A Case Of DVP Post-Trade Settlement.”