The concept behind RWA is to replace common certificates with digital certificates (tokens) and lawyers with smart contracts. In this way, buyers and sellers save precious time and money...

Tokenized real-world assets (RWA) are digital representations of tangible assets that are transformed into digital tokens. These tokens can be transferred and stored on a blockchain, and include securities, commodities, art, and even real estate ownership rights. Tokenizing the economy is becoming a hot topic for institutional investors because there are too many benefits to be ignored.

Exploring RWA -Real World Asset Tokens

Replacing ownership certificates and reducing transfer costs

Valuable assets are usually linked to some type of ownership certificate. The concept behind RWA is to replace common certificates with digital certificates (tokens) and lawyers with smart contracts. In this way, buyers and sellers save precious time and money.

 

Pros and cons of tokenized real-world assets

At this early stage, RWA projects focus on general DeFi and real-estate applications.  However, the prospect of tokenizing a broader part of the real economy is realistic. Note that globally, in 2030, there will be 29 billion connected IoT devices (sources).

The tokenization of real-world assets through blockchain offers several advantages.

RWA Advantages

  • Enables tokenization of a wide variety of real assets (commodities, securities, art, hardware, etc.)
  • Enables 24/7 trading by enhancing the overall liquidity and transparency of all markets
  • Lowers management fees and intermediary costs (smart contracts can replace brokers and lawyers)
  • Allows the owner’s privacy if RWA protocols use zero-knowledge proofs (ZK-proofs)
  • Expands financial markets on a global scale, as individuals in developing countries do not have access to Western markets
  • Allows fractional ownership and makes high-priced assets accessible to small retail investors in every country

RWA Disadvantages

There are also some major disadvantages:

  • Vulnerability to fraud and/or unfair business practices (issuer)
  • Vulnerability to hacking activity if smart contracts are built carelessly (it has happened before)
  • Difficulty complying with various local laws and regulations (needs a global legislative perspective)

 

Major RWA Projects

Currently, in DefiLama, there are 33 RWA projects with a total value locked of USD 5,775 million. The great majority of these protocols involve the tokenization of financial securities. Of course, there are many more RWA projects at an early stage.

(a) Financial Instruments

Tokenizing financial securities on the blockchain can automate several tasks such as issuance, record-keeping, and financial auditing.

MakerDao leads the space; however, there are quite a few smaller promising projects:

Some projects to watch (listed on exchanges):

Others:

(b) Real Estate

Some projects to watch (listed on exchanges):

  • Propy.com (24/7 real-estate closings)
  • Lofty.ai (invest in rental properties without getting locked in/out)

Others:

(c) Art and collectibles

Initially, blockchain was used to tokenize digital art (NFTs). However, some marketplaces allow the issuance of NFTs that involve physical assets (copyrights, licenses to copy books, etc.).

Some projects to watch (listed on exchanges):

Others:

 

 

How does the tokenization process work?

Tokenization refers to the process of converting real-world assets into digital tokens that can be bought, stored, and sold in the blockchain using an unchangeable ledger. This ledger tracks of all transactions and verifies who owns which tokens.

Basic steps for tokenizing an asset on the blockchain:

  • Creating a special vehicle for managing the tokenization process
  • Valuing physical assets and safeguarding them (custody)
  • Creating smart contracts and digital tokens and offering them to the public

 

Analytical steps for tokenizing physical assets

(1) Creating a Special Purpose Vehicle (SPV) for managing the entire process

(2) Identify and categorize assets that will be tokenized. Common categories include securities, commodities, real estate, and fine art

(3) Calculate the total value of the physical assets that will be tokenized (based on market data and scarcity) and divide the total value into a number of digital tokens

(4) Selecting the platform of tokenization (for example Ethereum/ERC-20)

(5) Creating smart contracts that specify how digital tokens will be managed and traded

(6) Creating digital tokens that represent the physical asset and offer ownership

(7) Select and specify custody (storage and protection of the physical assets)

(8) Offering new tokens to investors by considering regulatory compliance. This can be achieved in cooperation with a cryptocurrency exchange

What is a Special Purpose Vehicle (SPV)?

An SPV is a special-purpose legal entity that allows the creation of a pool of capital by different investors and the formation of a single company for managing this pool of capital.

 

Final Thoughts

Tokenizing real assets on the blockchain can offer numerous advantages to many industries. Currently, many fintech companies are exploring the possibilities of RWA. This trend is expected to accelerate and expand to more economic fields soon.

Even in today’s early RWA stage, some financial instruments can be easily transferred into the blockchain through smart contracts. Concerning physical assets, things are a little bit more complicated. Centralized entities can issue digital tokens representing a fraction of the value of their holding assets. However, centralized governance requires transparency and regulation. A new global legislative framework focusing on digital ownership may help protect all parties against fraud and unfair business practices.

 

□ G. Protonotarios for ExpertSignal.com (December, 5th 2023)

 

Sources:

 

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