Asset Liquidity

An asset is liquid if it can be bought and sold quickly, at low cost and with little price impact, and illiquid in the opposite case, such as real estate, private equity or art. For a tokenized asset, liquidity depends on the existence of a secondary market, the number of buyers and sellers, the spread and settlement. Tokenization enables atomic delivery-versus-payment settlement in a single step, reducing counterparty risk compared with the traditional multi-day cycle.

Unlocking liquidity for historically illiquid assets, such as real estate, private debt or funds, is the leading commercial argument for tokenization. Higher liquidity is usually associated with a lower illiquidity premium and therefore a potentially higher valuation. One honest caveat matters: liquidity is not automatic from tokenizing. Tokenization creates the preconditions, namely a divisible, transferable asset with programmable settlement, but effective liquidity requires real demand, market makers and a venue to trade on under securities rules. Security tokens typically require an authorized alternative trading system or multilateral trading facility rather than an open spot exchange.

A real example is the tZERO trading system in the United States, where digital securities such as those of the St. Regis Aspen trade, providing the secondary market that turns divisibility into liquidity. Tokenized money-market funds, with programmable subscription and redemption, are the case where tokenized liquidity is most developed, owing to the homogeneity and quality of the underlying asset.