Everything that generates income or at least retains its value with time is an asset. But why do we differentiate between real-world assets and digital assets? At first glance, this distinction may seem petty. However, the whole financial landscape has evolved from so-called traditional brick-and-mortar businesses to fully digital, multi-divisional companies.
Tokenized real-world assets, or RWAs, offer the promise that one may either fractionally own a building in New York or just the smallest share of a U.S. Treasury bond with just a simple mouse click.
In this digitally inclined reality, a new path is forged where the best of both worlds meet. Real-world assets like real estate or stocks are being tokenized into digital assets. These tokenized assets can be globally traded, creating a new opportunity in crypto.
This article talks about tokenized real-world assets in crypto, their implications on the financial system, and what it means for the common man.
What Are Real-World Assets (RWAs)?
Tokenized real-world assets are digital tokens representing physical and traditional financial assets on the blockchain, such as cash, commodities, stocks, bonds, credit, art, and intellectual property. Tokenization of RWAs represents a colossal paradigm shift in access, exchange, and oversight of these assets, as it opens up a wide spectrum of secondary avenues for blockchain financial services and a plethora of applications in non-financial areas backed by cryptography and decentralized consensus.
Asset tokenization is one of the highest-potential applications of blockchain. The bright dawn of finance is on-chain, comprising hundreds of blockchains that hold trillions in tokenized real-world assets on a common substrate of blockchain and distributed ledger technology-based networks, united by a universal standard for interoperability.
Tokenizing Real-World Assets
Tokenizing real-world assets means the transfer of legal ownership rights of assets into on-chain tokens. Creating tokens representing assets involves creating a digital representation of an asset, allowing for on-chain management of ownership rights to the asset, and bridging the gap between physical and digital assets.
Tokenized assets enjoy all the benefits of liquidity, access, transparent on-chain management, and reduced friction in transactions compared to traditional assets. From a financial asset perspective, the tokenization of RWAs also puts distribution, trading, clearing, settlement, and safekeeping processes into one layer, allowing for a more streamlined on-chain financial system with lesser counterparty risk in the mobilization of capital.
Why are Tokenized RWAs Becoming Popular?
Traditionally, many asset classes have been available only to institutional investors and high-net-worth individuals because of their high entry barriers. The tokenization of RWAs is turning the tide and democratizing access to these exclusive markets. Blockchain allows retail investors to levels usually considered investment-grade by lowering the minimum investment threshold through fractionalization.
Fractional ownership refers to a method in which a person can invest in small amounts, even just a few dollars, while the other counterpart requires substantial capital to purchase a house or gain exposure to private credit, for instance.
This phase of democratization is much more effective in emerging markets, where smaller investors are now given access to global opportunities. Thus, by eliminating financial borders, tokenization is building an inclusive global financial ecosystem.
This rapid growth of tokenized assets is also boosting protocols designed to support interoperability. For example, Quant has emerged as a strong contender in the expanding RWA landscape, as covered in our detailed analysis.
How To Tokenize Real-World Assets
At a high level, the process of tokenizing a real-world asset comprises several steps.
- Asset selection: Select a real-world asset to be tokenized.
- Token specifications: Determination of the type of token to be issued (fungible or non-fungible), token standards to be used (for example, ERC20 or ERC721), and other fundamental issues about the token.
- Blockchain selection: Selecting the blockchain network, whether public or private, on which tokens are going to be issued. This integration helps make tokenized RWAs available on any blockchain.
- Off-chain connection: Most of these tokenized assets call for external data of the highest quality supplied by secure and trustworthy oracles. Using a verification system, preferably an industry-standard one, to verify the assets backing the RWA tokens would, therefore, be paramount for user transparency.
- Issuance: This consists of deploying smart contracts on a chosen network and minting tokens so that they can be used.
How are Tokenized RWAs Transacted?
Adaptation of RWAs for tokenization provides a major liquidity impetus to traditionally illiquid assets. Real estate, commodities, and financial instruments have long been considered somewhat difficult to trade because of their indivisibility and the high costs.
For instance, blockchain-powered fractional ownership allows assets to be broken into smaller units and traded seamlessly on decentralized platforms.
Moreover, liquidity pools in DeFi act as artificial mechanisms to keep these tokenized assets liquid. This greater liquidity benefits investors by providing them with exit opportunities and also stimulates capital efficiency.
The Impact of Tokenizing RWAs
Why invest in RWAs if they don’t directly solve any problems? The tokenization of Real-World Assets may not be of any direct value to an average person, but what it is doing to the whole system is nothing short of a paradigm shift.
- Removal of intermediaries: Selling assets in the global market is often a tedious process, requiring interaction with various entities before the desired process can even begin. The RWA protocols make the trading of assets much easier. In the real world, claiming these assets may have some bureaucratic hurdles, but the presented system is light-years ahead of the one that forces individuals to encounter a whole gamut of challenges just to participate in the global market.
- Better market dynamics: The system with the least restrictions on information and liquidity is, of course, the trustless permissionless system that encourages people to shift to one that maximizes their value. Tokenization of RWAs will eventually carve the market down into a frictionless version.
- DeFi Matrix: A framework that would enable users to exchange every type of asset for any other. Transactions could, therefore, be traded for houses in Brazil or luxury cars in Tokyo that could then be traded for stock in a Canadian company, all done sitting in Australia.
Conclusion
Asset tokenization is a fundamental shift towards an accessible, efficient, and interconnected global financial system. Converting physical assets and traditional financial assets into tokens on a blockchain is now being viewed as a method of democratizing investment opportunities, which were previously perceived as only accessible to institutional players and very high-net-worth individuals.
This transformation will affect more than just the landscape of technology. Markets are being shaken by the movement towards cutting intermediaries, enhancing liquidity, and offering instances of fractional ownership.
With the evolution of blockchain infrastructure into its full potential and the adaptation of regulatory frameworks, tokenized real-world assets will undoubtedly form the backbone of the financial system on which the world of tomorrow will be balanced. This means, for the common investor, avenues into a variety of asset classes, better liquidity, and an easy method to be part of a truly global marketplace, with just a couple of clicks.
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