Written by: Thejaswini M A
Compile: Block Unicorn
How do you tokenize a rock? Find a rock, mint a token representing it, and store the rock somewhere. Now, the rock can be traded 24/7 and divided into fractions. This token trades quickly with high liquidity, settles in seconds, and is increasingly backed by regulators.
This means you can put anything on the chain, but at the same time, you can’t. We haven’t reached that point yet; the relationship remains complex.
Today, a can of tuna in a Lisbon supermarket bears a QR code that, when scanned, reveals information about the fishing vessel, catch date, fishing area, and the entire journey from catch to shelf. But if the unloading staff mislabels the product, the entire system fails. The tracking system only works if data is accurately entered. The entire process depends on one person faithfully recording the information—and yet we invest too little in this critical first step.
Similarly, the blockchain chicken succeeded because it is not a tradable asset—its core concept is to establish an immutable traceability record, aiming to prove that these chickens are indeed high-quality free-range poultry after years of food safety scandals.
No one should ask you whether you can put assets on-chain. The answer is yes. But the ability to verify real-world facts is what determines the quality of a tokenized project.
That’s why we should pay attention to environmental markets; there, I’ve seen the same technology moving in two directions—one to record verified facts, and another to record entirely fabricated claims.
Renewable energy certificates operate on blockchain, whereas carbon credits do not. As the cost of addressing this issue decreases, financial markets for physical assets are opening up.
First, from an economic perspective, what exactly is a token? Over the past decade, the industry has consistently misunderstood the nature of tokens. A token is a claim of right. It asserts the existence of a unit and declares that this unit belongs to the holder. Blockchains excel at ensuring this latter point—they solve the double-spending problem, preventing claims from being copied or forged during transfer and making ownership transparent to all. However, blockchains cannot verify whether the underlying asset referenced by the claim actually exists or matches the description provided in the claim.
A Renewable Energy Certificate (REC) indicates that one megawatt-hour of clean electricity has been delivered to the grid. This market is valued at approximately $22 to $28 billion annually and grows by 14% each year. Why are RECs easily suited for blockchain?
Since all electricity in the grid mixes together, once power flows through the wires, it’s impossible to distinguish clean energy from polluting energy. To address this, physical meters are installed directly at solar and wind farms to precisely measure their output before the clean energy enters the main grid. When a meter records a specific amount of clean energy, it generates an official document called a Renewable Energy Certificate (REC). Companies use these certificates to verify that a specific quantity of clean energy has been generated and added to the system.
This is how the grid works:
Its economic significance lies in the fact that the device is not certified by humans who have their own motives to manipulate data. It is merely a meter, and behind the meter is the power grid—an involuntary third-party verifier with no vested interest in anyone’s sustainability reports. Tampering with the readings means damaging physical infrastructure that the seller does not own. In terms of information economics, there is virtually no information asymmetry regarding the core attributes. Both buyer and seller are presented with the same objective data, generated by a device that neither party can control.
When you tokenize REC, you are essentially encapsulating a unit whose quality has been verified by an independent authority. The blockchain inherits this fact. The contribution it brings is reducing transaction costs—the very goal that liquidity technologies should achieve.
Australian company Power Ledger has long focused on peer-to-peer solar energy trading among neighbors and now operates TraceX, a platform for trading Renewable Energy Certificates (RECs). On this platform, power generators and corporate buyers can transact certificates directly without spending weeks on bilateral paperwork and legal procedures. In early 2025, TraceX completed transactions for over 1.2 million RECs in a single month and is integrated with the registries that issue the actual certificates. TraceX is already connected to M-RETS, one of North America’s largest voluntary REC registries, and plans to integrate with ERCOT, the Texas grid operator, by mid-2025. ERCOT issued over 32 million RECs in 2023 alone. Power Ledger states that users can reduce administrative costs by up to 72%.
However, the same logic does not apply to carbon credits (similar to renewable energy certificates). Each carbon credit is a numbered, tradable unit representing one ton of avoided carbon emissions. Many companies have pledged to their shareholders and the public that they will achieve "carbon neutrality" or "net-zero emissions." Since they cannot completely stop polluting, they purchase carbon credits to mathematically offset the pollution they continue to generate.
In 2021, a protocol called Toucan built a bridge to bring these tokens on-chain. Meanwhile, a project named KlimaDAO cleverly incentivized users to deposit tokens into its treasury and supported prices through acquisitions, theoretically increasing the cost of pollution. Funds poured in, and the market capitalization of the KLIMA token surpassed $1 billion before many even realized what the bridge connected.
The core issue with carbon credits is that they measure a hypothetical scenario, such as the assumption that trees were never cut down. There is currently no independent hardware capable of verifying this, making these metrics entirely subjective. Tokenization does not resolve this fundamental flaw—it only makes it more dangerous. By aggregating these credits on-chain, protocols like Toucan treat all assets as identical.
It's not that blockchain itself is bad, but rather the specific way they aggregated these credit lines that caused the issue.
KlimaDAO then artificially created demand for these pooled tokens by using its newly issued KLIMA tokens to buy them at prices far exceeding the actual value of the junk assets within the pool. This strategy manipulated the market. If you held high-quality credits that could fetch a good price on a normal market, converting them into low-priced pooled tokens would be a bad deal—so you would avoid it. If you held credits with no market demand, and the pooled token price was higher than the value of your credits, you would perform the bridge transaction and sell. As a result, the pooled tokens eventually became saturated with the lowest-quality credits, because only those credits made this transaction worthwhile.
A researcher at CarbonPlan found in 2022 that the majority of carbon credits accessed through bridges to Toucan originated from projects excluded from legitimate carbon offset markets due to quality issues. Since Verra’s delisting information is public, CarbonPlan was able to accurately identify which carbon credits had been tokenized. The study revealed that 99.9% came from projects too old to qualify for standard aviation carbon offset markets, and 28% came from “zombie projects” that had not sold any carbon credits for years until cryptocurrency demand revived them. A hydropower project in China completed its first delisting via the bridge system 15 years after its launch.
A 2024 meta-analysis published in Nature Communications examined nearly one billion metric tons of carbon credits—about one-fifth of all carbon credits issued—and found that fewer than one-sixth of these credits genuinely reduced emissions.
As the largest carbon registry, Verra watched helplessly as its retired carbon credits were converted into tradable "digital ghosts," ultimately banning the practice in May 2022. The value of KLIMA’s carbon credits plummeted from $3,600 to single digits. KlimaDAO deployed over one million dollars of its own funds to retire the least valuable carbon credits in its holdings.
Tokenizing a flawed unit doesn’t fix it—it industrializes it. You connect a measurement problem to a liquidity engine, and now these inherently flawed units circulate faster, command higher prices, and reach more buyers.
This provides you with a test applicable to any tokenization scheme, independent of the token itself. Is there an independent witness to measure each unit? Can this witness be forged? Another easily overlooked point: Can the borrower own this witness? This is the real challenge.
If you tokenize a barrel of oil in a tank or a ton of grain in a warehouse, the entire transaction depends on someone proving that the barrel of oil is indeed in the tank and has remained there. If the person providing this proof is the same person using the oil or grain as collateral for a loan, then you have no real collateral.
For a century, commodity trade finance has collapsed in this manner, with warehouse receipts issued against metals that have already left or never existed.
Look at livestock—for those who cannot access credit, livestock is one of the largest stores of value on Earth. Banks have been reluctant to lend against livestock, often discounting the value of a cow by as much as 60%, because they simply cannot verify whether the animals are healthy, where they are located, or even if they are still alive. A cow as collateral could wander off, fall ill, or quietly die in a field before the loan is repaid. Who will watch the barn?
A few days ago, on a dairy farm in Paraná, Brazil, ten cows became the first livestock officially registered as collateral on the country’s stock exchange.
Each cow is fitted with a smart collar produced by Cowmed, an agricultural technology company. The collar tracks the cow’s health, behavior, and location, then hashes this data to generate a cryptographic identity linked to the loan. The farmer used ten cows as collateral to secure a loan of approximately $20,000. The system can even detect when a cow has died and allows the farmer to replace it with a live one. Cowmed currently monitors 100,000 cows with a total value of nearly $400 million.
If many farmers use this smart collar, it can only tell you that the collar is transmitting health and location data. But it cannot confirm that the collar is actually on the registered cow, that the cow is the one pledged as collateral, or even that the other end is truly a cow. All the loopholes that farm inspectors used to detect still exist. You could put the collar on the healthiest cow and pledge a sick one instead. You could transfer the collar between different cows. In theory, you could input false data. So, by itself, it cannot prevent farm fraud. But it can turn an annual inspection into daily recorded data, meaning fraud must be continuous. With records in place, the same cow can no longer be pledged to three different lenders simultaneously.
The meter is fixed in a location that the seller cannot move. Cows, however, are mobile, and the reliability of the collar also depends on the person who puts it on.
A cow without a collar is nearly impossible to verify, so banks reduced its valuation by sixty percent. A cow with a collar is not fully verifiable either, but the verification cost is low enough that lenders are willing to accept a smaller loss. As a result, the value of this cow has increased. This transaction has only been underway for three days, and we don’t yet have many similar examples to support this.
Successful tokenization relies on a set of reliable metrics. High-quality assets use automated, tamper-proof sensors—such as grid meters, satellites, and weighbridges—whose data cannot be manipulated by sellers. Low-quality assets, by contrast, rely on speculative projections and self-reported calculations, such as carbon offsets.
Even in terms of metering, it’s not as simple as it sounds. A meter can verify that megawatt-hours of electricity have been generated, but it cannot prove that this electricity was available near you or when you needed it. For years, a company in Ohio could purchase certificates from a wind farm in Texas that generated power at 3 a.m. and claim it was operating on clean energy.
Therefore, the market now subdivides units more finely, printing the production time and production grid on each certificate. Water resource credits follow the same pattern. Watershed credits are easy to sell but difficult to convincingly substantiate, because measuring whether a river has become cleaner is one thing, while proving that your project is the true cause of the river’s cleanup is another. Metrics determine the accuracy of asset tracking; each improvement in metrics causes the market to redefine the true meaning of the certificates.
In a normal market, buyers and sellers continuously debate the value of an asset, leading to price fluctuations. This is entirely normal, provided the asset has a solid, objective benchmark—such as a company’s actual revenue or the actual weight of a barrel of oil. Ultimately, the trading price aligns with these objective facts. If these objective foundations are removed—such as with subjective carbon credits—the price becomes completely detached from reality, losing its reference point.
Tokenization is merely an accelerator. If the underlying asset is verified, tokenization can create wealth. If the asset is unverified, it only accelerates fraud. Blockchain cannot distinguish between real and fake. Cryptocurrency projects often cite high liquidity and institutional capital as proof of legitimacy. Liquidity does not create fact. You can build the most efficient, seamless trading system in the world, but if the physical asset has no value, the entire market is merely a highly optimized scam.