How do you tokenize a rock? Find a rock, mint a token representing it, and store the actual rock somewhere. Now, the rock can be traded 24/7 and subdivided into fragments. This token trades rapidly, with high liquidity, settlement in seconds, and increasingly backed by regulatory oversight.

In this way, you can put anything on-chain—but also cannot. We haven’t reached that point yet; the relationship remains complex.

Today, a tuna can in a Lisbon supermarket bears a QR code that, when scanned, reveals details about the fishing vessel, catch date, sea region, and full journey from harvest to ocean. But if dockworkers mislabel the product, the entire tracking system collapses. The traceability system only works after data entry. The process relies entirely on someone accurately recording information—and we consistently underinvest in that critical first step.

Similarly, the success of blockchain chickens stems not from being tradable assets, but from their core purpose: establishing immutable provenance records. This aims to prove, after years of food safety scandals, that these chickens were genuinely free-range, high-quality poultry.

No one should ask whether an asset can be put on-chain. The answer is yes. But the true test of a tokenization project lies in its ability to verify real-world facts.

This is why we should focus on environmental markets, where I see the same technology diverging into two paths: one recording verified facts, the other recording entirely fabricated claims.

Renewable Energy Certificates (RECs) operate on blockchain, whereas carbon credits do not. As solving this verification problem becomes cheaper, financial markets for physical assets are opening up.

First, from an economic perspective: what exactly is a token? For over a decade, the industry has misunderstood the nature of tokens. A token is a claim of right—it asserts the existence of a unit and that ownership belongs to the holder. Blockchain excels at ensuring the final point: it solves double-spending, preventing replication or forgery during transfer, and making ownership transparent to all. However, blockchain cannot verify whether the underlying entity claimed by the token actually exists or matches the claim.

A Renewable Energy Certificate (REC) certifies that one megawatt-hour of clean electricity was delivered to the grid. This market is valued between $22 billion and $28 billion and grows annually by 14%. Why are RECs so easy to tokenize?

All electricity in the grid mixes together—once power flows through wires, clean energy cannot be separated from polluting energy. To solve this, physical meters are installed directly at solar and wind farms to precisely measure output before clean energy enters the main grid. When the meter records a specific amount of clean energy, it generates an official document called a Renewable Energy Certificate (REC). Companies use these certificates to prove they produced a specific quantity of clean energy and added it to the system.

This is how the grid works:

The economic significance lies in the fact that the certification is not subject to manipulation by humans with incentives to falsify data. It's merely a meter—behind which is the grid itself, a non-consensual third-party verifier with no stake in anyone’s sustainability report. Tampering with readings means disrupting infrastructure that the seller does not own. In information economics terms, there is near-zero information asymmetry regarding core attributes. Both buyer and seller face the same objective data, generated by equipment beyond their control.

When you tokenize an REC, you're essentially encapsulating a unit whose quality has already been independently verified. The blockchain inherits this truth. Its contribution is lowering transaction costs—exactly what a liquidity technology should achieve.

Australian company Power Ledger has long facilitated peer-to-peer solar trading among neighbors and now operates TraceX, a blockchain-based Renewable Energy Certificate (REC) trading platform. On this platform, power generators and corporate buyers can trade certificates directly without weeks of bilateral paperwork and legal procedures. At the beginning of 2025, TraceX completed over 1.2 million REC trades in a single month, interfacing directly with official issuing registries. TraceX has connected to M-RETS, one of North America’s largest voluntary REC registries, and plans to integrate with ERCOT, Texas’ grid operator, by mid-2025. ERCOT alone issued over 32 million RECs in 2023. Power Ledger claims users can save up to 72% in management costs.

Yet the same logic fails for carbon credits—similar in structure to RECs. Each carbon credit is a numbered, tradable unit representing one ton of avoided carbon emissions. Many companies commit publicly to achieving “carbon neutrality” or “net zero.” Since they cannot fully cease pollution, they purchase carbon credits to mathematically offset ongoing emissions.

In 2021, a protocol called Toucan built a bridge connecting these tokens to blockchain. Meanwhile, a project named KlimaDAO cleverly incentivized users to deposit tokens into its vaults and supported prices through acquisitions, theoretically increasing the cost of pollution. Funds poured in, and the market capitalization of KLIMA tokens surpassed $1 billion before most people even noticed what the bridge was connecting.

The core issue with carbon credits is that they measure hypothetical scenarios—for example, the assumption that trees were never cut down. No independent hardware currently verifies this, rendering these metrics entirely subjective. Tokenization doesn’t fix this fundamental flaw—it makes it more dangerous. By aggregating these credits on-chain, protocols like Toucan treat all assets as identical.

It’s not blockchain itself that’s flawed, but the specific way these credits are pooled together.

Then, KlimaDAO artificially created demand for these pooled tokens by using newly issued KLIMA tokens to buy them at prices far exceeding the actual value of the underlying junk assets. This strategy manipulated the market. If you hold high-quality credits that sell well in normal markets, exchanging them for cheap pooled tokens is a bad deal—so you avoid it. If you hold low-demand credits, and the pooled token price exceeds your credit’s value, you’ll bridge and sell. Over time, the pool fills with the worst-quality credits, because only those make such trades worthwhile.

In 2022, a researcher at CarbonPlan found that most carbon credits flowing into Toucan via blockchain bridges came from projects excluded from mainstream carbon offset markets due to quality issues. Because Verra’s delisting data is public, CarbonPlan could accurately identify which credits were tokenized. The study revealed that 99.9% originated from projects too old to enter standard aviation carbon offset markets, and another 28% came from “zombie projects”—projects that had sold no carbon credits for years until the rise of crypto demand revived them. A Chinese hydropower project completed its first delisting via a blockchain bridge 15 years after launch.

A meta-analysis published in *Nature Communications* in 2024 examined nearly 1 billion tons of carbon credits (about one-fifth of all issued credits), finding that fewer than one-sixth actually reduced emissions.

As the world’s largest carbon registry, Verra watched its canceled carbon credits transformed into tradable “digital ghosts,” banning the practice entirely in May 2022. KLIMA’s carbon credits plummeted from $3,600 to single digits. KlimaDAO spent over a million dollars of its own funds to retire the least valuable credits it held.

Tokenizing a defective unit doesn’t fix it—it industrializes it. You connect a measurement problem with a liquidity engine. Now, these inherently flawed units circulate faster, command higher prices, and reach more buyers.

This gives you a universal test for any tokenization scheme, regardless of the token itself: Is there an independent witness measuring each unit? Can that witness be forged? And here’s a subtle point often overlooked: Can the borrower own that witness? That’s the real challenge.

If you tokenize a barrel of oil in a tank or a ton of grain in a warehouse, the entire transaction hinges on someone proving that the oil is actually in the tank and has remained there. If the person providing proof is the same one using the oil or grain as collateral, then you have no real collateral.

For a century, commodity trade finance has collapsed this way—warehouse receipts issued against metals already gone or never existed.

Consider livestock: for those unable to access credit, livestock is one of the largest stores of value on Earth. Banks have long hesitated to lend against livestock—cow value is discounted by up to 60%—because they cannot know if the animal is healthy, where it is, or even if it’s still alive. A cow as collateral can wander off, fall sick, or quietly die in a field before the loan is repaid. Who watches the barn?

Just days ago, ten cows in a dairy farm in Paraná, Brazil, became the first livestock officially registered as collateral on the country’s stock exchange.

Each cow wears a smart collar produced by Cowmed, an agritech company. The collar tracks health, behavior, and location, hashing this data into a cryptographic identity tied to the loan. The farmer used ten cows as collateral to borrow around $20,000. The system can even detect death and allow the farmer to replace a dead cow with a live one. Cowmed currently monitors 100,000 cows, collectively worth nearly $400 million.

If many farmers adopt these smart collars, they can only tell you that the collar is transmitting health and location data. They don’t confirm whether the collar is on the registered cow, whether that cow is the one pledged as collateral, or even whether the other end is truly a cow. All the old vulnerabilities a farm inspector could exploit remain. You could place the collar on the healthiest cow and pledge a sick one. You could swap collars between cows. Theoretically, you could input false data. So, the collar alone doesn’t prevent fraud—but it transforms annual inspections into daily records. Fraud must now be continuous. With documented evidence, the same cow can no longer be pledged to three lenders simultaneously.

Meters are fixed in places sellers cannot move. But cows move—and the reliability of the collar depends entirely on who puts it on.

A cow without a collar is nearly impossible to verify, so banks reduce its valuation by 60%. A cow with a collar isn’t fully verifiable either, but verification costs are low enough that lenders accept smaller losses. Thus, the cow’s value increases. This transaction has only been running for three days—we still lack many comparable examples.

Successful tokenization relies on a chain of reliable measurements. High-quality assets use automated, tamper-proof sensors—like grid meters, satellites, and weighbridges—whose data cannot be altered by the seller. Low-quality assets rely instead on speculative forecasts and self-reported calculations—such as carbon offset claims.

Even measurement isn’t as simple as it sounds. Meters can prove megawatt-hours existed, but not that they were nearby or available when needed. For years, a company in Ohio could buy certificates from a wind farm in Texas generating power at 3 a.m., and claim to be a clean-energy operator.

Thus, markets now break units down finer, embedding creation time and grid of origin on every certificate. Water credits follow the same pattern. Basin-level credits are easy to sell but hard to believe—measuring whether a river is cleaner is one thing, proving your project caused that change is another. Measurement metrics determine the accuracy of asset tracking. Every improvement in metrics reshapes the real meaning of the certificate.

In normal markets, buyers and sellers constantly dispute asset value, causing price volatility. This is perfectly normal—but only if the asset has a solid, objective benchmark. For example, a company’s actual revenue or the actual weight of a barrel of oil. Eventually, the transaction price aligns with these objective facts. Remove these anchors—like subjective carbon credits—and prices completely detach from reality. Prices lose their foundation.

Tokenization is merely an accelerator. If the underlying asset is verified, tokenization creates wealth. If the asset is unverified, it only accelerates fraud. Blockchain cannot distinguish truth from falsehood. Crypto projects often cite high liquidity and institutional capital as proof of legitimacy. Liquidity does not create facts. You can build the most efficient, seamless trading system imaginable—but if the physical asset has no real value, the entire market is just a highly optimized scam.

By: Thejaswini M A, Translated by: Block unicorn