The Key to Successful Tokenization: Not on the Chain, but in the Ability to Truly Measure

Renewable energy certificates operate on blockchain, while carbon credits do not.

Written by: Thejaswini M A

Compiled by: Block unicorn

How do you tokenize a rock? Find a rock, mint a token that represents it, and store the rock somewhere. Now, this rock can be traded around the clock and can be divided into fragments. This token trading is fast, highly liquid, and can settle in seconds, with more and more regulators endorsing it.

This way, you can put anything on the chain, but at the same time, you cannot. We have not reached that level yet; the relationship remains complex.

Today, a can of tuna in a supermarket in Lisbon has a QR code printed on it. Scanning it reveals the fishing boat that caught the fish, the date of capture, the fishing area, and the full journey from catch to sea entry. But if the unloading personnel stick the wrong label, the entire system fails. The tracking system only works properly after data entry. The whole process relies on a person accurately recording the information, and we are under-investing in this crucial first step.

Similarly, the success of blockchain chickens is because they are not a tradable asset—the core idea is to establish an immutable traceability record. This aims to prove that, after years of food safety scandals, these chickens are indeed high-quality free-range poultry.

No one should ask whether you can put an asset on the chain. The answer is yes. But the ability to verify real-world facts is the key to judging the quality of a tokenization project.

That is why we should focus on environmental markets; there, I see the same technology heading in two directions. One is to record verified facts, and the other is to record completely fabricated claims.

Renewable energy certificates operate on blockchain, while carbon credits do not. As the cost of solving this problem decreases, the financial market for physical assets is opening up.

First, from an economic perspective, what exactly is a token? For the past decade, there has been a misconception in the industry about the description of tokens. A token is a claim of rights. It declares the existence of a certain unit, and that unit belongs to the holder. Blockchain is very good at ensuring the last point. It solves the double-spending problem of tokens, so claims of rights cannot be duplicated or forged during transmission, and their ownership is clear to everyone. However, blockchain cannot verify whether the underlying entity that the claim of rights points to actually exists or corresponds to what the claim states.

Renewable Energy Certificates (RECs) indicate that one megawatt-hour of clean electricity has been delivered to the grid. This market is valued at about $22 billion to $28 billion and is growing at 14% annually. Why are RECs easily placed on the blockchain?

Since all electricity in the grid is mixed together, once electricity flows through the wires, it is impossible to separate clean energy from polluting energy. To solve this problem, physical meters are installed directly at solar and wind farms to accurately measure their 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 that they have indeed generated a specific amount of clean energy and added it to the system.

This is how the grid works:

Its economic significance lies in the fact that the certification of the device is not done by a human who has a self-interest in tampering with the data. It is just a meter, and behind the meter is the grid—a non-voluntary third-party verifier that has no vested interest in anyone's sustainability report. Tampering with readings means destroying infrastructure that the seller does not own. In terms of information economics, there is almost no information asymmetry regarding core attributes. Both buyers and sellers face the same objective data, which is generated by equipment that neither party can control.

When you tokenize an REC, you are essentially encapsulating a unit whose quality has been verified by an independent entity. Blockchain inherits this fact. And its contribution is to reduce transaction costs, which is precisely what liquidity technology should achieve.

Australian company Power Ledger has been dedicated to peer-to-peer solar trading among neighbors for years and now operates a Renewable Energy Certificate (REC) trading platform called TraceX. On this platform, generating companies and corporate buyers can trade certificates directly without spending weeks on bilateral paperwork and legal procedures. In early 2025, TraceX completed over 1.2 million REC transactions in a month and connected with the actual issuing certificate registration authority. TraceX has integrated with one of North America's largest voluntary REC registries, M-RETS, and plans to connect with Texas grid operator ERCOT by mid-2025. ERCOT issued over 32 million RECs in 2023 alone. Power Ledger claims users can save up to 72% in management costs.

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 promised shareholders and the public that they will achieve "carbon neutrality" or "net-zero emissions." Since they cannot completely stop pollution, they purchase carbon credits to mathematically offset the pollution they continue to cause.

In 2021, a protocol called Toucan built a bridge to put these tokens on the chain. Meanwhile, a project called KlimaDAO cleverly incentivized users to deposit tokens into its treasury and supported prices through acquisitions, theoretically raising the cost of pollution. Funds flooded in, and the market cap of the KLIMA token surpassed $1 billion before people noticed the content of the bridge connection.

The core issue with carbon credits is that they measure a hypothetical scenario, such as assuming trees were never cut down. Currently, there is no independent hardware to verify this, making these metrics entirely subjective. While tokenization cannot solve this fundamental flaw, it makes it more dangerous. By aggregating these credits on the chain, protocols like Toucan treat all assets as completely identical.

It is not that blockchain itself is bad, but rather that the specific way they aggregate these credits creates problems.

Then, KlimaDAO artificially created demand for these pooled tokens by buying pooled tokens with its newly issued KLIMA tokens at prices far above the actual value of the junk assets in the pool. This strategy manipulated the market. If you hold a high-quality credit that could sell for a good price in a normal market, exchanging it for a low-priced pooled token is a bad deal, so you would avoid it. If you hold a credit that no one cares about, and the pooled token price is higher than your credit, then you would bridge the transaction and sell. The pooled tokens ultimately become filled with the lowest quality credits because only those credits are worth making such a trade.

A researcher from CarbonPlan found in 2022 that most carbon credits bridged into Toucan came from projects that were excluded from the formal carbon offset market due to quality issues. Since Verra's delisting information is public, CarbonPlan was able to accurately read which carbon credits were put on the chain. The research found that 99.9% came from projects that could not enter the standard aviation carbon offset market due to being outdated, and another 28% came from "zombie projects" that had not sold carbon credits for years until the emergence of cryptocurrency demand revived them. A hydropower project in China completed its first delisting through the chain bridge 15 years after its launch.

A meta-analysis published in Nature Communications in 2024 studied nearly 1 billion tons of carbon credits (about one-fifth of all issued carbon credits) and found that less than one-sixth of the carbon credits actually reduced emissions.

As the largest carbon emissions registry, Verra watched helplessly as its canceled carbon credits were transformed into tradable "digital ghosts," and in May 2022, it completely banned this practice. The value of KLIMA's carbon credits plummeted from $3,600 to single digits. KlimaDAO used over $1 million of its own funds to cancel its least valuable carbon credits.

Tokenizing a flawed unit does not fix it; it industrializes it. You connect a measurement problem with a liquidity engine, and now, these originally flawed units circulate faster, at higher prices, and can reach more buyers.

This provides you with a test that can be used for any tokenization scheme, and it is unrelated to the token itself. Is there an independent witness to measure each unit? Can this witness be forged? One more point that is easily overlooked: 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, then the entire transaction depends on someone proving that this barrel of oil is indeed in the tank and has been there all along. If the person doing the proving is the one using this barrel of oil or grain to secure a loan, then you have no collateral.

For a century, commodity trade financing has collapsed in this way, 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 long been reluctant to lend against livestock as collateral, with the value of a cow being discounted by as much as 60% because they cannot ascertain whether the livestock is healthy, where it is located, or even if it is still alive. A cow as collateral could wander away, get sick, or quietly die in the field before the loan is paid off. Who will take care of the barn?

A few days ago, ten cows on 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 an agricultural technology company called Cowmed. The collar can track the cow's health, behavior, and location, hashing this data to generate a cryptographic identity linked to the loan. The farmer used ten cows as collateral to borrow about $20,000. This system can even detect the death of a cow and allow 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 adopt this smart collar, it can only tell you that the collar is transmitting health and location data. But it cannot tell you which cow the collar is on, nor can it tell you that this cow is the one being pledged, or even confirm that there is indeed a cow at the other end. All the loopholes that farm inspectors used to find in the past still exist. You can put the collar on the healthiest cow and then pledge a sick cow. You can transfer the collar between different cows. Theoretically, you can input false data. Therefore, it does not prevent farm inspections. But it can turn an annual inspection into a daily record, so fraudulent behavior must be continuous. With records in place, the same cow cannot now be pledged to three lending institutions at the same time.

The meter is fixed in a location that the seller cannot move. Cows, however, can move, and the reliability of the collar depends on who puts it on the cow.

A cow without a collar is almost impossible to verify, so banks value it at a 60% discount. A cow with a collar is also not fully verifiable, but the verification cost is low enough that lenders are willing to accept smaller losses. Therefore, the value of this cow has increased. This transaction has only been three days, and we do not have many similar examples to support it.

Successful tokenization relies on a series of reliable measurement metrics. High-quality assets use automated, tamper-proof sensors, such as grid meters, satellites, and weighbridges, whose data cannot be tampered with by the seller. Low-quality assets rely on hypothetical predictions and self-reported calculations, such as carbon offsetting.

Even measurement is not as simple as it sounds. Meters can prove that there has been a megawatt-hour of electricity, but they cannot prove that it is nearby or exists when you need it. For years, a company in Ohio could purchase certificates from a Texas wind farm that generated electricity at 3 AM and claim to be a clean energy operator.

Therefore, the market is now subdividing 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 hard to convince, as measuring whether a river has become cleaner is one thing, while proving that your project is the real reason for the river's cleanliness is another. Measurement metrics determine the accuracy of asset tracking. Each improvement in metrics leads the market to modify the true meaning of certificates.

In normal markets, buyers and sellers constantly argue over the value of assets, leading to price fluctuations. This is entirely normal, but it presupposes that the asset has a solid, objective benchmark. For example, a company's actual revenue or the actual weight of a barrel of oil. Ultimately, the transaction price will align with these objective facts. If these objective bases are removed (such as subjective carbon credits), the price will completely detach from reality. The price loses its benchmark.

Tokenization is merely an accelerator. If the underlying asset is verified, tokenization can create wealth. If the asset is unverified, it will only accelerate the occurrence of scams. Blockchain cannot distinguish between true and false. Cryptocurrency projects often use high liquidity and institutional capital as proof of their legitimacy. Liquidity does not create facts. You can build the most efficient and smoothest trading system in the world, but if the physical assets are worthless, then the entire market is just a highly optimized scam.

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