Introduction
In the rapidly evolving world of digital finance, two emerging concepts, tokenisation and composable finance, are reshaping how financial systems operate. Both are built upon blockchain and decentralised finance (DeFi) technologies, offering new ways to create, exchange, and combine financial assets.
Understanding what they are, how they interact, and the opportunities and challenges they present is crucial for anyone interested in the future of digital markets and investment.
So what Is Tokenisation?
Tokenisation refers to the process of converting ownership or rights to a real or digital asset into a digital token on a blockchain.
These tokens represent real-world assets such as property, stocks, bonds, commodities, or even art.
By storing asset ownership on a distributed ledger, tokenisation allows for faster, more transparent, and more efficient transactions.
Using a simple example. If a £100,000 house is tokenised into 1,000 tokens, each token represents £100 of the house. People can buy, sell, or trade these tokens instead of dealing with the whole property.
So what Is Composable Finance?
Composable finance, often referred to as DeFi composability, is the ability of different decentralised financial protocols and applications to interact, integrate, and build upon each other seamlessly.
In a composable system, one financial component’s output can become another’s input. This modular structure allows developers to combine multiple DeFi services (such as lending, borrowing, trading, and yield farming) into new, more complex financial products.
Again, using a simple example: a fintech app could let you earn interest (savings account), protect your money (insurance), and send payments instantly (payment app) all in one service. The innovation comes from connecting existing tools, not building everything from scratch.
So how can Tokenisation and Composable Finance work together?
When combined, tokenisation and composable finance create a powerful ecosystem that connects real-world assets with programmable, interoperable financial systems; namely.
- Tokenisation provides the digital representation of value, whereas
- Composable finance provides the framework to use, trade, and combine those tokens in creative ways across multiple systems.
Using another example: One could take a lending platform, a tokenisation platform, and a decentralised exchange, and combine them to create a new service that lets people borrow money using tokenised assets as collateral.
Together, they unlock a new era of programmable and interoperable finance, often referred to as “Finance 3.0.”
What are its Advantages
There are several
- Increased Accessibility and Inclusion – Tokenisation allows fractional ownership of assets, enabling smaller investors to participate in markets previously reserved for large institutions.
- Efficiency and Automation – Smart contracts in composable finance automate transactions, reducing intermediaries, manual errors, and settlement times.
- Transparency and Trust – Blockchain records are immutable and transparent, allowing real-time tracking of ownership and transaction history.
- Liquidity and Innovation – Tokenised assets can be traded instantly on global markets, while composability enables new financial instruments to be built from existing ones.
- Interoperability – Composable finance allows different protocols, blockchains, and financial systems to work together, maximising utility and connectivity.
But what are its disadvantages and challenges
Conversely, there are several challenges:
- Regulatory Uncertainty – Legal frameworks for tokenised assets are still evolving. Questions remain about ownership rights, taxation, and compliance with securities laws.
- Security Risks – Composable systems often rely on interconnected smart contracts, meaning a single vulnerability in one protocol could cascade through others.
- Technical Complexity – Integrating tokenised assets into composable financial systems requires advanced infrastructure, interoperability standards, and robust security.
- Liquidity and Valuation Issues – While tokenisation promises liquidity, many tokenised markets are still small and illiquid, making it difficult to determine fair value.
- Governance Challenges – Managing decentralised, multi-protocol systems requires clear governance models to prevent conflicts and ensure system stability.
What are the ‘real world’ uses and applications?
There are various uses and applications.
Real Estate Ownership: Tokenisation allows a £500,000 apartment to be divided into digital tokens, so multiple people can own fractions of the property and earn rental income proportional to their share. This makes real estate investment more accessible and flexible.
Art Investment: Famous artworks can be tokenised, enabling investors to co-own and trade shares of the piece without physically moving or selling the painting. This opens up opportunities for smaller investors to participate in the art market.
Combinable DeFi Products: Composable finance platforms can integrate multiple services, such as lending, earning interest, and insuring funds. Users can deposit crypto into a single platform and automatically benefit from all these services in a seamless way.
Business Financing: Composability also works for companies, where invoice financing can be combined with insurance and automated payments. This allows businesses to access cash quickly, reduce financial risk, and streamline operations through one integrated solution.
Music Royalties: Musicians can tokenise royalties so that fans and investors can buy small shares and earn a portion of streaming revenue. This provides liquidity for artists while giving fans a chance to invest in their favourite music.
Therefore to conclude
Tokenisation and composable finance are revolutionising how assets are created, traded, and managed in the digital age.
Tokenisation converts value into digital form, while composable finance provides the modular tools to connect, automate, and extend that value across financial systems.
This means that together, they enable greater accessibility, transparency, and innovation, but also raise significant regulatory, technical, and governance challenges.
If these challenges can be addressed responsibly, tokenisation and composable finance have the potential to create a fully interconnected, global, and inclusive digital financial ecosystem, transforming the way individuals and institutions interact with money and markets.
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