The Shortcomings of Layer One Asset Tokenization and Why We Need Asset Tokenization 2.0

As the blockchain ecosystem continues to evolve, tokenization of real-world assets (RWAs) has emerged as a key area of focus. However, the current models, primarily built on layer one blockchains, are fundamentally limited in their ability to represent the complex legal and practical realities of real world asset ownership and use. Today I explore the shortcomings of current layer one tokenization efforts and explains why a new approach—Asset Tokenization 2.0, as enabled by Conduit Network—is necessary to meet institutional and regulatory requirements.

The Limitations of Layer One Tokenization

Layer one blockchains, such as Ethereum, have been instrumental in pioneering the concept of asset tokenization. At their core, these platforms enable the creation of tokens that can represent ownership of assets, and facilitate their transfer between wallets. However, this simplistic model fails to account for the multifaceted nature of real-world assets, which are governed by various rights, including:

• Right of Ownership
• Right of Possession
• Right of Use
• Right of Destruction

These rights are taught in every law school, and are fundamental to property law in nearly every global jurisdiction. They are often separated in legal agreements and may be held or transferred independently.

For example, a property owner might lease the right to use a building (right of use) while retaining ownership (right of ownership). Similarly, the right to destroy an asset may be held by a government or regulatory body rather than the owner.

Current layer one tokenization models cannot provide the necessary visibility into the state of these rights without additional, complex programming through specific oracles—which presently do not exist in any practical form. This limitation leads to several key issues:

1. Lack of Fidelity in Representing Rights: A simple token transfer from one wallet to another fails to capture the detailed status of the associated rights. It only indicates a change in wallet location, without addressing whether the rights of possession, use, or destruction have also been transferred, modified, or retained by another party.
2. Regulatory and Institutional Challenges: From an institutional and regulatory standpoint, the lack of clarity and fidelity in the representation of these rights forces reliance on third-party custodial arrangements. These custodians must manually interpret legal contracts to manage and maintain the integrity of the status of any asset and its associated rights. This process is not only inefficient but also prone to errors and inconsistencies, which can lead to disputes and regulatory non-compliance.
3. Rigid and Inflexible Smart Contracts: Existing smart contract technology is typically rigid, designed to execute predefined actions based on specific conditions. This rigidity makes it difficult to model the dynamic and complex nature of real-world legal agreements, where rights and obligations may change over time or in response to external factors. Current systems lack the flexibility to handle these complexities, further limiting their utility in institutional settings.

The Need for Computable Contracts and Advanced Infrastructure

To address these shortcomings, there is a need for an infrastructure that can expose the underlying rights status through computable contracts. Unlike traditional smart contracts, computable contracts are flexible and capable of dynamically adapting to changes in the legal and regulatory environment. These contracts can model complex relationships between different rights and obligations, allowing for the accurate representation and automated management of these elements within a tokenized framework.

This advanced infrastructure must also support the integration of legal semantics into the tokenization process, ensuring that the digital representation of assets aligns with their real-world legal status. This would eliminate the need for manual custodial arrangements and reduce the potential for errors, while also providing the transparency and traceability required by regulators.

Conduit Network: The Foundation for Asset Tokenization 2.0

Conduit Network provides the necessary infrastructure to implement Asset Tokenization 2.0, a significant advancement beyond existing models. Here’s how it addresses the limitations of current layer one tokenization efforts:

1. Temporal Ledgers for Comprehensive Rights Management: Conduit Network utilizes temporal ledgers, which record the past, present, and future states of assets within atomic transactions. This system allows for detailed tracking of all associated rights—ownership, possession, use, and destruction—over time, providing the fidelity needed for accurate asset management.
2. Standardized Protocols and Semantics: Conduit Network offers a rich set of semantics and protocols designed to facilitate the separation and management of different rights. These standardized data structures enable the creation of computable contracts that can dynamically adapt to changes, ensuring that all parties have visibility into the current state of the asset and its associated rights.
3. Decentralized and Secure Infrastructure: By leveraging decentralized hardware nodes, Conduit Network ensures that the management of rights is secure and resilient. These nodes provide the computational power needed to enforce rights and obligations in real-time, without relying on centralized custodians or manual processes.
4. Interoperability and Flexibility: Conduit Network is designed to work across different blockchains, DLTs, and legacy systems, ensuring broad compatibility and ease of adoption. This flexibility allows institutions to integrate the platform with their existing infrastructure, minimizing disruption while maximizing the benefits of advanced tokenization.
5. Economic Incentives for Participation: The network employs a mining-based token economy, incentivizing participants to invest in and maintain the infrastructure. This approach ensures that the network remains decentralized and scalable, capable of supporting a wide range of assets and use cases.

Embracing the Future of Tokenization

The limitations of current layer one tokenization models highlight the need for a more advanced approach—one that can provide the necessary visibility into the complex rights associated with real-world assets. Conduit Network, with its robust Decentralized Physical Infrastructure Network (DePIN) and innovative approach to Asset Tokenization 2.0, offers a solution that addresses these challenges head-on.

By enabling the accurate representation and management of rights through computable contracts, Conduit Network paves the way for a new era of tokenization. This evolution not only enhances the efficiency and transparency of asset management but also aligns digital assets with the legal and regulatory frameworks that govern their real-world counterparts.

As the tokenization landscape continues to evolve, Conduit Network stands at the forefront, offering the tools and infrastructure needed to unlock the full potential of digital assets. It’s time to move beyond the limitations of the past and embrace a future where asset tokenization is not only more effective but also more aligned with the realities of the modern financial world.