How Tokenization Works: Bringing Off-Chain Assets Onchain
Aug 13, 2025
In the rapidly evolving world of decentralized finance (DeFi), tokenization is a game-changer. It allows real-world assets (RWAs) like real estate, corporate loans, or government bonds to be represented as digital tokens on a blockchain. This process unlocks liquidity, enhances accessibility, and integrates these assets into the DeFi ecosystem. For Nest, offchain assets are brought onchain through Arc, a tokenization platform.
What is Tokenization?
Tokenization is the process of converting rights to an asset into a digital token on a blockchain. Think of it like this: instead of owning a physical piece of real estate, you own a digital piece (token) that represents your share of that property. This token can be traded, lent, or used as collateral just like any other digital asset, but it’s backed by something tangible off-chain.
The beauty of tokenization lies in its ability to integrate Real-World Assets (RWAs) into the DeFi ecosystem, unlocking new opportunities for yield generation and portfolio diversification. For instance, a $10 million corporate loan, when tokenized, can be used as collateral or lent out on platforms like Nest, earning stable returns. This transforms illiquid assets into dynamic components of DeFi, allowing users to tap into real-world income streams without the need for traditional ownership structures.
The Role of Arc in Tokenization
Arc, part of Plume’s ecosystem, is a tokenization platform designed to transform real-world assets into digital tokens on Plume's blockchain. It's not just a tool – it's the backbone of Plume's RWA revolution, enabling seamless integration of diverse asset classes into the DeFi space.
How Arc Works
Asset Identification and Structuring: The process begins off-chain, where assets are identified and legally structured. This involves ensuring compliance with regulations and verifying ownership. For example, a corporate loan or a renewable energy project is assessed for its legal and financial viability.
Token Creation on Plume: Once the asset is prepped, Arc leverages Plume’s infrastructure to create digital tokens. These tokens are minted on Plume's blockchain, which is specifically designed for RWAs. Each token represents a fraction of the asset’s value, making it tradable and interoperable with DeFi protocols.
Metadata and Smart Contracts: Arc embeds critical information about the asset into the token through metadata and smart contracts. This includes details like the asset's description, value, ownership rights, and compliance data - who’s allowed to own the token and where it can be transferred.
Ecosystem Integration: The tokenized assets are then integrated into Plume's ecosystem, where they can interact with protocols like Nest. This allows users to lend, borrow, or trade these tokens within the DeFi environment.
How Arc Ensures Security and Integrity
Arc safeguards tokenized RWAs by embedding protections at every stage of the process. Off-chain assets (e.g., a corporate loan or real estate) are prevented from being sold without proper authorization by the issuer or devalued in ways that unfairly impact tokenholders.
Legal Structures and Binding Agreements:
Assets are typically held in Special Purpose Vehicles (SPVs) or trusts created through accredited legal partners. These entities legally bind the off-chain asset to its onchain token representation, meaning the asset can't be sold or transferred without corresponding updates to the tokens (e.g., via redemption or buyback mechanisms). This creates a direct claim for token holders on the asset's value, enforced by jurisdiction-specific compliance.
Partnerships with legal firms ensure that tokenization adheres to regulatory standards, reducing the risk of unauthorized actions by asset issuers or managers.
Funds Custody:
Federally regulated digital banks like Anchorage and qualified custodians like Fireblocks handle the storage and management of funds.
Asset Management:
Transfer Agents custody tokenized shares of SPVs or trusts through administrative controls similar to digital stock certificates. These regulated entities prevent unauthorized access of the physical or financial assets. Access to the tokens is restricted to authorized multi-sig approvers.
For devaluation risks (e.g., due to market changes or asset deterioration), fund administrators and oracles provide ongoing monitoring and reporting, with token values updated via Net Asset Value (NAV) calculations to reflect real-time integrity.
Compliance and Identity Verification:
Arc integrates Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols through partners like Predicate and zk.me. This ensures only verified participants can interact with tokenized assets, minimizing fraud or unauthorized transfers that could devalue the asset.
Compliance is baked into the tokenization process, with automated checks for distribution and trading, further protecting onchain ownership from off-chain manipulations.
Smart Contract Mechanisms:
Arc smart contracts enable asset issuers to self-custody both assets and stablecoins in vaults, which lets them make yield payments to any valid tokenholder.
Real-Time Transaction Screening:
Built on Plume, Arc inherits AML security from Forta, which is embedded within the deepest layer of the Plume blockchain to ensure that OFAC non-compliant wallets can never interact with tokenized assets.
Nest: Bringing RWAs to DeFi
Nest, the flagship credit protocol on Plume Network, takes the tokenized assets created by Arc and integrates them into a robust lending and borrowing framework.
Here's how it works:
Tokenizing Off-Chain Assets
Off-Chain Asset Selection: Nest starts with high-quality RWAs, such as treasury bonds, institutional loans, or renewable energy projects. These are chosen for their stability and income-generating potential.
Legal and Compliance Framework: The assets undergo a rigorous process to ensure they meet regulatory standards. This includes legal agreements that bind the off-chain asset to its onchain representation.
Tokenization on Plume: Using Arc, these assets are tokenized on Plume Network. The tokens are created as digital representations of the off-chain assets.
Vault System: Nest introduces a curated vault where issuers of these tokenized assets can make them available through index-like products. The vault pools stablecoins, tokenized assets diversify risk, and together simplify user interaction. Instead of managing individual tokenized loans with each user, issuers are able to give access to RWAs through Nest vaults.
Using Tokenized Assets Onchain
Once tokenized, these assets are no longer just off-chain paper; they become active participants in the DeFi ecosystem. Here's how Nest enables their use:
Staking: Stablecoins can be used to stake into a Nest vault, allowing users to gain a position with now-tokenized RWAs to earn yield and also leverage their holdings for amplified strategies, all while maintaining the integrity of the underlying RWA.
Lending and Borrowing: Users can lend their tokenized representations to earn yield or borrow against them to access liquidity. For instance, if you hold tokens representing a position in a Nest vault, you can lend against that position to earn interest, or use it as collateral to borrow stablecoins.
Risk Tranching: Nest’s innovative risk tranching system automatically ensures a limited risk exposure level. Within each vault, conservative tranches absorb losses first, protecting higher-yield ones. This ensures stability even when dealing with illiquid assets.
Seamless Integration: Powered by Plume, Nest ensures that these tokens can be used without the liquidation risks seen in traditional DeFi. Instead of forcing sales on DEXs, Nest manages redemptions and liquidity through expert curation and off-chain processes.
The Synergy of Arc and Nest
Arc and Nest complement each other beautifully. Arc handles the initial tokenization, creating digital representations of off-chain assets on Plume Network. Nest then takes these tokens and integrates them into a user-friendly platform where they can be actively used in DeFi.
For example:
A renewable energy project is tokenized via Arc, becoming 1 million tokens, each representing a share of the project's ongoing revenue.
These tokens are then brought onto Plume Network, where Nest’s vaults allow users to gain a position in that vault, earning 8% APY from the project's income.
If a user wants liquidity, they can borrow against these tokens without fear of liquidation, thanks to Nest’s risk management.
Why This Matters
Tokenization with Arc and Nest democratizes access to RWAs. It turns illiquid, high-value assets into tradable, lendable, and borrowable digital tokens. This not only benefits individual investors by providing new opportunities but also attracts institutional capital by offering efficient, transparent, and compliant ways to engage with DeFi.
In a world where crypto yields often rely on speculation, Arc and Nest offer a path to sustainable, real-world returns. Whether you’re a DeFi enthusiast looking for stable income or a TradFi institution seeking to tap into blockchain efficiency, this combination is a gateway to the future of finance.
Conclusion
Tokenization is the bridge between the physical and digital worlds, and Arc and Nest are paving the way. By understanding how off-chain assets are tokenized and integrated onchain, you can see the potential for a more inclusive, efficient, and stable financial system.