How does tokenization improve asset liquidity?

Tokenization converts the rights to an asset into digital tokens recorded on distributed ledgers, and this structural change alters the economics and mechanics that determine liquidity. Research by Christian Catalini at MIT Sloan and Joshua Gans at University of Toronto explains how lowering search, verification, and transaction costs via digital ledgers increases the pool of potential buyers and sellers, which directly supports tighter bid ask spreads and more continuous trading. Institutional reports from the Bank for International Settlements and the International Monetary Fund corroborate this view by identifying faster settlement finality and reduced counterparty risk as channels through which tokenization can deepen markets.

Mechanisms that increase liquidity

Fractionalization sits at the center of tokenization’s liquidity case. Dividing a high-value asset such as commercial real estate, art, or infrastructure into many low-denomination digital tokens lowers the financial barrier to entry. A broader base of investors increases the probability that a willing counterparty exists at any moment, improving market depth. Smart contracts automate settlement and compliance rules, shortening settlement cycles and removing frictions that traditionally lock capital during multi-day clearing. Token standards like widely adopted fungible token specifications enable interoperability across trading venues and custodial services, which supports secondary market formation.

Market structure and technology effects

Tokenized markets can operate around the clock, enabling continuous price discovery and the absorption of shocks outside traditional market hours. Atomic settlement on a ledger reduces intraday credit exposure and the need for large margin buffers, which can unlock capital for other trades and thus raise turnover. Empirical evidence on these precise effects is still emerging, but both academic analysis and central bank studies point to meaningful liquidity gains when tokenization is implemented alongside robust market infrastructure and legal clarity.

Risks, regulation, and social consequences

Improved liquidity is not automatic. Fragmentation of trading venues, unclear property rights, and weak custody arrangements can create false liquidity that evaporates under stress. Regulators face tradeoffs between enabling innovation and protecting investors. The International Monetary Fund stresses the need for legal frameworks that recognize tokenized ownership and for cross-border coordination to prevent regulatory arbitrage. Environmental and cultural dimensions also matter. The ability to fractionalize cultural heritage or community land can expand local participation in value creation, but it raises questions about stewardship and the commodification of culturally significant assets. Energy use that accompanied early proof of work chains posed sustainability concerns; transitions to lower energy consensus mechanisms have materially reduced those impacts in some networks, but energy and hardware footprints remain factors for jurisdictions prioritizing environmental goals.

Practical relevance

For issuers and investors, tokenization promises faster access to capital and improved exit options, particularly in markets where secondary trading is thin. For policymakers and custodians, the immediate priorities are establishing clear ownership law, ensuring operational resilience, and designing disclosure and investor protection rules that preserve the real liquidity benefits while containing systemic and social risks. When technology, legal clarity, and market practice align, tokenization can convert previously illiquid assets into more tradable instruments with tangible economic and social consequences.