Tokenization, or the representation of real-world assets on the blockchain, is potentially Web3’s biggest use case with projections estimating that it will reach a staggering $16 trillion by 2030.
Real-world assets such as stocks, bonds, and real estate are highly regulated in nature which presents a significant opportunity for the XRPL. That’s because the XRPL is focused on being highly regulatory compliant and is already working closely with many financial institutions, and working closely with major projects like Archax and Zoniqx utilizing the XRPL to help tokenize more assets. However, a concern is that neither fungible tokens nor non-fungible tokens (NFTs) are ideal for tokenized assets that require more flexibility.
To address this, Multi-Purpose Tokens (MPTs) have been introduced and scheduled for release in Q3 2024. Below I’ll provide an overview of how these tokens will play a critical role in representing financial instruments on-chain.
The Challenge: Tokenizing Complex Financial Instruments
Traditional financial instruments such as stocks, bonds, and other securities possess intricate data requirements that prove challenging to represent on-chain as fungible tokens. For instance, two bonds may be identical in all regards except their expiry dates, which is a critical detail and makes it inappropriate to present both as being equivalent.
This is a challenge for the XRPL whose extensive partnerships and tokenization infrastructure have helped to establish it as a leader in facilitating institutional-grade blockchain solutions.
To solve this, the XRPL developer community has introduced Multi-Purpose Tokens (MPTs) which bridge the gap between fungible and non-fungible tokens and share parallels with ERC-1155 tokens on Ethereum. They are akin to “semi-fungible” tokens whereby key associated metadata can be attached. This provides them with more flexibility than fungible tokens, while they’re not truly unique such as with NFTs.
Key Capabilities of MPT
The key functionalities can be summarized as follows:
1. On-chain Metadata & Metadata Pointer: Unlike traditional tokens, MPTs can store comprehensive asset-specific information directly on-chain which can be referenced in real-time, while the metadata pointer references off-chain data. This off-chain data is especially important for integrations with financial institutions as much of their data may typically reside off-chain.
2. Flexibility: MPTs can be adapted as needed to evolve for future tokenization needs. This could include a) support of diverse institutional asset portfolios or complex token structures, b) custom token supplies, and c) imposing fees (e.g. transfer fees) which are automatically paid out as needed.
There are also various compliance and security features such as:
- Clawback & Global Freeze features that I covered in-depth here. Capability to revoke, re-assign tokens, or freeze MPT balances in exceptional circumstances. including why they are critical for institutional adoption and should not be of concern.
- Freezing: The ability to lock tokens held by specific holders, ensuring compliance with regulatory requirements.
- Non-Transferable Tokens: Ability to restrict token transfers except to the issuer’s wallet, enhancing control over token movements.
This allows for some key use cases:
1. Treasury Bonds: Transferable fungible-tokens with Metadata
2. Airline Credits: Non-transferable fungible-tokens with Metadata
3. Art/collectibles: Transferable Non-Fungible-Token with Metadata
4. University Certificate: Non-transferable Non-Fungible-Token with Metadata
Broader Impact of MPT on the Ecosystem
The XRPL developer community is heavily focused on tokenizing real-world assets and laying out the technological prerequisites to support it. The ability to create semi-fungible tokens that can be used within compliant tokenization infrastructure is a major step forward.
Without MPTs, neither fungible nor non-fungible tokens would be ideal for necessary on-chain tokenization use cases, such as adequately representing tokenized financial instruments. MPTs also complement the core properties of the XRPL, such as the protocol-native approach whereby any protocol changes are integrated into the consensus layer itself.
To learn more about Multi-Purpose Tokens, click here.
And if you’re a developer interested in building on the XRPL – let’s chat!
My Calendly is here.
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