From ERC Tokens to Real Assets: A DeFi Primer

Introduction

The last decade has seen the emergence of a new financial ecosystem that builds on the transparency, programmability and global reach of blockchain technology. Decentralised Finance, or DeFi, has taken many of the functions that used to be performed by banks and other intermediaries—lending, borrowing, trading and insurance—and placed them in the hands of code that can run on a network of thousands of computers. At the heart of that ecosystem are tokens. Tokens are digital representations of value or rights that exist on a blockchain—see our A Beginner’s Guide to Token Standards and RWA Tokenization for more details.

The journey from simple ERC‑20 tokens that model a fungible asset to complex real‑world asset (RWA) tokenizations that give a blockchain representation of a house or a corporate bond is a story of standardisation, regulation and innovation. In this primer we will walk through the evolution of token standards, the building blocks that enable DeFi, and how the technology is now being applied to real assets.

The ERC Token Landscape

What is an ERC?

ERC stands for Ethereum Request for Comments. It is a community process used to propose, discuss and adopt standards for how data should be stored and interacted with on the Ethereum network. The most well‑known standard is ERC‑20, which defines how a fungible token behaves. Other standards extend or modify that behaviour.

ERC‑20: The Classic Fungible Token

ERC‑20 tokens are interchangeable. Every unit of the token is identical in value and meaning. A single token of a stablecoin such as USDC is equal to every other USDC token. The standard defines a small set of functions—totalSupply, balanceOf, transfer, approve, transferFrom—that allow wallets, exchanges and smart contracts to interact in a predictable way.

ERC‑721: Non‑Fungible Tokens (NFTs)

When the need arose to represent unique items—digital art, collectibles, real‑estate deeds—ERC‑721 was introduced. Unlike ERC‑20, each token has a unique identifier and can hold its own metadata. This standard became the foundation for the explosion of NFTs in 2020 and 2021.

ERC‑1155: A Multi‑Token Standard

ERC‑1155 was designed to reduce on‑chain transaction costs by allowing a single contract to manage multiple token types—both fungible and non‑fungible—within the same address. This flexibility is especially valuable in gaming and DeFi, where assets of different natures must be swapped or bundled frequently.

Beyond ERC: Other Token Standards

While Ethereum dominates, other blockchains have their own token standards: Solana’s SPL token, Binance Smart Chain’s BEP‑20, and the Cosmos SDK’s CW‑20. These standards perform the same roles as their Ethereum counterparts but are tailored to each chain’s architecture.

Token Standards Deep Dive

Standardised Interfaces

The core of any ERC standard is a set of function signatures that a contract must expose. This makes it possible for wallets, exchanges and other contracts to call transfer on any ERC‑20 token without knowing its implementation details. This interoperability is the backbone of DeFi.

Metadata and Off‑Chain Data

While ERC‑20 and ERC‑1155 keep metadata on-chain, ERC‑721 introduced a tokenURI function that points to a JSON file stored off‑chain. This file may contain images, descriptions, or other data. The ability to link to external resources gives NFTs their rich media capabilities.

Gas Efficiency

Each function call consumes transaction fees measured in gas. ERC‑1155’s batch functions, such as safeBatchTransferFrom, reduce gas costs by packing multiple transfers into one transaction. This becomes a critical factor when building high‑frequency DeFi protocols.

Upgradability and Proxy Patterns

Smart contracts are immutable by default. To allow future updates, developers use proxy patterns. A proxy contract holds the storage while a logic contract implements the functionality. The address that users interact with remains constant, enabling upgrades without breaking integration.

Building Blocks of DeFi

Smart Contracts

At the core of DeFi are smart contracts—self‑executing code that runs on the blockchain—enforce rules (see our post on Building Blocks of DeFi Asset Tokenization and Protocol Fundamentals).

Liquidity Pools

Protocols like Uniswap, SushiSwap and Curve use automated market makers (AMMs) that allow users to add liquidity to pools and receive fees in return. Liquidity pools provide price discovery and enable instant token swaps without a traditional order book.

Yield Farming and Liquidity Mining

Users can earn rewards by providing liquidity or staking tokens. These incentives drive adoption and create a self‑sustaining ecosystem where capital is continuously redeployed.

Governance Tokens

Many DeFi protocols issue a governance token that gives holders voting power over protocol parameters. This tokenized governance model aligns incentives between users and protocol evolution.

Oracle Networks

Oracles supply external data, such as price feeds, to smart contracts. Chainlink, Band Protocol and Tellor are popular choices. Accurate oracle data is essential for derivatives, lending and insurance contracts.

Risk Management

DeFi exposes users to smart contract bugs, oracle manipulation, liquidity crises and regulatory risk. Protocols implement risk parameters, collateralization ratios, liquidation triggers and insurance funds to mitigate these dangers.

Real World Asset Tokenization

What Are Real World Assets?

Real world assets include tangible items such as real estate, fine art, commodities and even corporate bonds. Traditionally, ownership of these assets requires legal documents, intermediaries and custodians.

Tokenizing an Asset

Tokenization turns an RWA into a digital representation on a blockchain—a process detailed in our post on Mastering DeFi Token Standards and Real‑World Asset Tokenization. A legal entity holds the asset and issues tokens that represent fractional ownership or usage rights. Each token can be transferred, sold or used as collateral within DeFi protocols.

Advantages of Tokenization

• Liquidity: Assets that were once illiquid become tradable on global exchanges.
• Fractional Ownership: Investors can purchase small portions of high‑value assets.
• Transparency: Transaction history is immutable and publicly verifiable.
• Programmable Rights: Tokens can embed rules for distribution of dividends, voting, or usage.

Key Stakeholders

The Tokenization Process

1. Asset Valuation and Legal Structuring

Before a token can be created, the asset must be appraised and legally registered. A special purpose vehicle (SPV) often holds the asset to isolate risk.

2. Issuance of Tokens

A smart contract is deployed to mint a fixed supply of tokens. The contract is linked to the SPV’s legal documentation, often via a digital signature or a notarised contract.

3. On‑Chain Representation

Tokens are stored on a blockchain and may conform to ERC‑20 for fungibility or ERC‑721/1155 for unique rights. Metadata, including legal documents, is attached through IPFS or similar decentralized storage.

4. Liquidity and Marketplaces

Tokens are listed on a marketplace or integrated into a DeFi protocol. Liquidity pools may be created to enable quick trading, and automated market makers can price tokens based on supply and demand.

5. Usage as Collateral

Tokens can be supplied to lending platforms such as Aave or Compound, where they serve as collateral for borrowing stablecoins or other assets. The protocol calculates a collateralisation ratio that accounts for the token’s real‑world value.

6. Dividends and Distributions

Smart contracts can automate the distribution of rental income, interest, or other cash flows to token holders, proportionally to their stake.

7. Regulatory Compliance

Know‑Your‑Customer (KYC) and Anti‑Money Laundering (AML) checks are integrated at issuance or trading stages. Compliance modules may prevent certain addresses from receiving tokens or enforce reporting thresholds.

Platforms and Standards for RWA

Ethereum‑Based Platforms

• Securitize: Provides a full compliance stack, issuing ERC‑1400 tokens that embed regulatory requirements.
• Harbor: Focuses on real estate tokenization, using ERC‑20 with off‑chain KYC.
• tZERO: Combines blockchain with traditional securities regulation for a regulated trading platform.

Layer‑2 and Other Chains

• Polygon: Offers lower fees and fast confirmation times, suitable for high‑frequency trading of RWA tokens.
• Solana: Provides high throughput and lower gas costs, ideal for large‑scale tokenization projects.

Standards Beyond ERC‑20

• ERC‑1400: A security token standard that includes partitioning of token rights and compliance checks.
• ERC‑165: Allows contracts to declare which interfaces they support, improving interoperability.

Use Cases for RWA Tokenization

1. Real Estate

Fractional ownership of commercial or residential property, enabling investors to diversify with lower capital requirements—see our guide on Real World Asset Tokenization: Core Principles and Techniques.

2. Commodities

Tokenised gold or oil can be traded instantly and settled in minutes, removing the need for physical storage.

3. Corporate Bonds

Bond certificates can be tokenised, allowing on‑chain settlement, automated coupon payments and instant secondary market trading.

4. Fine Art

Pieces of art can be tokenised, giving multiple investors exposure to a high‑value asset while preserving provenance.

5. Infrastructure Projects

Public works or renewable energy assets can be tokenised, providing transparent funding and returns to community investors.

Challenges and Risks

Regulatory Uncertainty

Different jurisdictions have varying definitions of securities, commodities and property rights. Token issuers must navigate complex legal frameworks.

Technical Risks

Smart contract bugs, oracle failures and network congestion can lead to loss of funds or mispricing.

Market Liquidity

While tokenization promises liquidity, secondary markets may remain thin for niche assets, causing price volatility.

Custodial Concerns

Even with tokenisation, physical assets may still require trusted custodians. A failure in custody can expose token holders to loss.

Compliance Costs

KYC/AML integration and legal compliance add overhead that can erode the cost savings of tokenisation.

Future Outlook

The intersection of DeFi and RWA tokenisation is still in its early stages, but several trends point toward broader adoption:

• Standardisation: More widespread adoption of ERC‑1400 and similar standards will simplify cross‑chain compliance.
• Layer‑2 Scaling: As Layer‑2 solutions mature, gas costs will fall, making high‑volume trading of RWA tokens more efficient.
• Regulatory Clarity: Governments are beginning to draft regulations that explicitly address tokenised securities, reducing legal ambiguity.
• Interoperability: Bridges between chains and cross‑chain protocols will allow RWA tokens to move seamlessly across ecosystems.
• Institutional Adoption: Banks and asset managers are exploring tokenisation to improve liquidity and automate asset servicing.

Conclusion

From the humble beginnings of ERC‑20 tokens that allowed simple value transfers to the sophisticated tokenisation of real‑world assets, DeFi has continually expanded the possibilities of what can be represented, traded and governed on a blockchain. Token standards provide the predictable interfaces that enable developers to build complex protocols on top of simple building blocks.

The tokenisation of real assets heralds a new era where ownership is fluid, divisible and programmable. It offers liquidity to traditionally illiquid markets and opens up investment opportunities to a broader audience. However, these benefits come with regulatory, technical and operational challenges that must be addressed through collaboration between technologists, regulators and industry participants.

By understanding the evolution of token standards, the mechanics of DeFi building blocks, and the practical steps involved in tokenising real‑world assets, stakeholders can better navigate this emerging landscape and participate in shaping a more inclusive, transparent financial system.