Understanding the Differences: Tokenized Asset vs. Native On-chain Assets

In blockchain terms, a digital twin refers to a real-world asset that is represented on a blockchain network as a token. This can include real estate, artwork, financial products, securities, or other tangible goods. You'll also hear these called tokenized assets. Tokenized assets are becoming increasingly popular for financial institutions that want to realize some of the benefits uncovered in DeFi markets.

By creating a digital twin on a blockchain, an asset can be easily traded, bought, or sold, and ownership can be transferred through smart contracts. The token can also be fractionalized, or broken up, enabling investors to own a portion of the asset.

Using a blockchain-based digital twins can increase transparency and reduce the potential for fraud, as ownership and transaction data is stored immutably on a ledger. Additionally, it can facilitate more efficient and cost-effective management of the asset, as data related to maintenance, performance, and utilization is recorded and available in real-time.

How does a digital twin differ from native on-chain assets?

A tokenized real-world asset represents a physical thing that already exists in the world. That's why digital twin is an intuitive term. The on-chain token has a twin in another place. These assets can be informed by outside data sources. For example, the value of a token tied to a home can go up with the market. But the physical item needs to exist and be tied to the token for the token to have value.  

This “digital twin” is different from native on-chain assets.

Native on-chain assets are purely digital assets that exist only on the blockchain network. These assets can be created and transferred on the blockchain network without the need for a physical counterpart, as they derive their value from supply and demand or conditions inside the token economy. We've written about token standards. You can think of a token created solely for use on a blockchain, not as a placeholder for something in the real world, as a native asset.

Examples of native on-chain assets include cryptocurrencies, digital tokens, and other blockchain-based assets that are not tied to a real-world item.

Why are digital twins popular in the financial industry?

Digital twins of real-world assets are becoming popular in the financial industry because they can increase transparency, reduce the potential for fraud, and make it easier to trade and transfer ownership of an asset.

For banks, digital representations can be made for real estate holdings, artwork, and other tangible goods. By creating a digital twin of a physical asset, the asset can be divided into smaller fractions, which can make it more accessible to investors who may not be able to purchase the entire asset outright. This can increase liquidity in the market and open up new investment opportunities.

Digital twins can also facilitate more efficient and cost-effective management of assets. Real-time data related to the asset's performance, utilization, and maintenance can be recorded and tracked on the blockchain network, making it easier to optimize the asset's performance and reduce costs. Platforms like ours are making it easier to tokenize assets and also easier to monitor these assets, as our console allows visibility across multiple chains and applications.

What is the future of digital twins on blockchain?

Institutions will continue to find ways to represent real things online. Be it to build the metaverse or simply for efficient management of a portfolio, we expect digital twins will pop up across industries.

For digital twins to truly take hold and empower financial institutions to do better business in web3, a few things need to happen:

• We want to see adoption across industries: Traditionally, digital twins  had a home in manufacturing and business, especially as it relates to virtualization of processes for review. But now they can help us in healthcare and energy. As the benefits of digital representation of real world assets become more widely recognized, we expect innovation and learnings to come from across industries.  
• Popularity will increase as we digitize legacy systems: The adoption of blockchain technology is expected to continue to grow, and new networks and protocols are being developed to support the creation and management of digital twins. We think as new networks connect to legacy systems more easily, more businesses will work to represent traditional holdings on-chain.
• Standardization of digital twin formats: To enable interoperability between digital twins created by different parties, there is a need for standardization of digital twin formats. Standardization efforts are underway, and it is expected that this will help to increase the adoption of digital twins. Right now there are no clear standards for what type of token should be used for a certain type of asset.  
• Emergence of new business models: Digital twins on blockchain are expected to create new business models and revenue streams. For example, fractional ownership of digital twins can be used to democratize access to high-value assets and create new investment opportunities. We've seen web3 drive product innovation in royalty and reward space with NFTs. We expect similar innovation with digital twins.

The future of digital twins on blockchain is expected to be characterized by increased adoption across different industries, grow in popularity as we make it easier to connect blockchain networks to legacy systems, and new business models. Kaleido makes it easy to experiment, get solutions live, and monitor business value.

If you're interested in adding digital twins to your portfolio, connect with one of our solution architects.