Concept

Tokenized loan is a type of tokenized debt that involves the conversion of a loan into a digital representation (token) on a network (blockchain). The token is registered and documented on-chain by means of a smart contract. It represents a creditor’s claim in the loan, including rights to future cash flows from the receivables. By origin, it belongs to the broader category of security tokens that are generally linked to a real life asset (real world asset, RWA) such as a real estate or a share or debt of a company. In the specific case of a loan, it can also be the representation of a financial instrument/ financial assets (the loan).

Tokenization

Tokenization of real-world assets enables holders of such assets to have them in a digital format and trade them on decentralized platforms. This technique bridges the gap between the traditional financial system and the expanding world of decentralized finance (DeFi) platforms, a mixture that provides increased liquidity, transparency, and accessibility. The tokenized assets have significant value and can be used as a form of collateral or investment in both traditional financial markets and the newly emerging blockchain-based markets. Backed by traditional assets, real-world assets can form sustainable and reliable digital asset classes that capitalizes on decentralized finance as a direct competitor to traditional finance. Moreover, real-world assets are recognized and valued in the real-world economy, and their integration into blockchain networks opens up new avenues for value creation in areas such as finance, investment and trading.

Broader category

Tokenized loans belong to the category of tokenized debts. The underlying debt may represent standardized units of debt (debt securities) or non-standardized arrangements (loans, mortgages, etc.) Debt tokenization refers to the process of representing debt instruments, such as bonds or loans, as digital tokens on a network. The creation of digital representation (on-chain presence) allows for fractional ownership, better tradability/ transferability, and enhanced liquidity against off-chain debt instruments. By converting debt into tokens, the public can buy and sell chunks of the debt, bypassing the services of intermediaries (financial institutions). Each token represents a holding in the underlying debt obligation, that trades on-chain, virtually without the traditional barriers or limitations for trading. Debt tokenization can facilitate the issuance process with smart contracts, streamlining certain functions such as payment on schedule and reducing issuance and trading costs. All transactions are recorded on the network ledger, enhancing security and record keeping.