With the growing use of blockchain technology and the increasing popularity of crypto, real-world assets, such as gold, bonds, lands, and more, are no longer just physical assets. They can be tokenized for use in decentralized finance (DeFi) to enhance liquidity and offer opportunities to global investors, even those looking for small investments.
RWAs provide sustainable and excellent yields in decentralized finance and build the gap between decentralized and conventional financial systems. But what these RWAs are, how can they benefit investors, how can they be tokenized, and what are the challenges and risks associated with RWAs?
There must be numerous questions about RWA or RWA tokenization in your mind at this moment. So, let’s move forward and resolve all your queries with easy-to-understand information provided by top crypto and blockchain experts.
What are Real-World Assets or RWA in Crypto?
Real-world assets include both physical assets (real estate, arts, books, etc.) and intangible assets (government bonds, credits, etc.). These assets are transferred into digital tokens and stored on a blockchain to make them available for global investors.
Types of Real-World Assets
There are mainly four categories of real-world assets that can be tokenized. These categories are yield-bearing instruments, real estate, financial products, and alternative assets. Let’s explore the assets that fall under these categories:
#1 Real Estate
It includes commercial, residential, or industrial lands, buildings, and natural resources with intrinsic value. These tangible assets offer potential appreciation and rental income and might also involve maintenance costs and market fluctuations.
#2 Commodities
Commodities are raw materials such as oil, wheat, gold, coffee, etc.. These tangible goods hold intrinsic value and are usually traded directly on different exchanges or via derivative contracts.
#3 Infrastructure
It is an RWA that includes transportation systems, public facilities, and utilities necessary to run economic activities. Infrastructure offers essential services, such as roads, power plants, water treatment facilities, and bridges, to businesses and civilians.
#4 Natural Resources
It involves renewable and non-renewable assets obtained from the environment essential for the economic development and the survival of human beings. Some examples of natural resources are forests, minerals, wind, and more.
#5 Art and Collectibles
Arts and collectibles, like rare stamps, coins, paintings, vintage cars, and antique furniture, are tangible objects that hold immense value for their aesthetic, historical, and cultural importance.
What is the Tokenization of Real-world Assets?
The process of onboarding tangible and intangible real-world assets on a blockchain is called the tokenization of RWA. Tokenization of assets is becoming a crucial part of the decentralized finance sector and offers ample benefits that are discussed in the later sections of this blog.
RWA Tokenization: Year-on-Year Market Growth
Let’s check out some interesting market statistics to understand why RWA and tokenization of assets are becoming popular:
- The market value of tokenization real-world assets is increasing at an unprecedented rate, reaching $2.77 in Feb 2024.
- Similarly, the market of tokenized financial assets, including bonds, private credit, real estate, and more, reached an all-time high of $1.61 billion in Feb 2024.
- The number of addresses communicating with decentralized finance has reached two-year highs, reaching 445K addresses.
What are the Benefits of RWA Tokenization?
Real World Asset Tokenization offers immense benefits to transform the financial landscape by reshaping real-world assets, such as commodities, arts, real estate, and more, into digital tokens. Let’s delve deeper to understand the other interesting benefits of RWA Tokenization.
#1 Increased Liquidity
The first advantage of RWA Tokenization is that it increases liquidity by converting physical assets into digital tokens to make fractional ownership feasible. It enables even smaller investors to participate and trade real-world assets.
#2 24*7 Market Access
Digital tokens require a decentralized platform for trading, which provides users with round-the-clock access to global markets. In other words, investors can sell, purchase, or trade real-world assets anytime without geographical constraints or time limitations.
#3 Improved Transparency
Blockchain technology supports tokenization to ensure complete transparency and immutability of the stored records and transactions. It fosters a more secure and highly efficient asset trading and ownership ecosystem.
#4 Fractional Ownership
Another significant benefit of RWA Tokenization is that it divides real-world assets into small tokens and tradable fractions, allowing investors to expand their portfolios by investing in different assets.
#5 Cost Efficiency
Real-world tokenization streamlines asset transfer, settlement, compliance, and other real-world asset management and trading-related operations. It minimizes dependency on human resources while minimizing significant costs.
Tokenization of Real-world Assets: Risks and Challenges Involved
Real-world Tokenization involves a set of risks and challenges that must be addressed to ensure smooth buying, selling, and trading of lands, artifacts, collectibles, and other assets. Let’s have a look at some of them:
Regulatory Uncertainty
Regulatory frameworks that monitor tokenized assets are still evolving, causing uncertainty and compliance issues. Besides, changed regulations across different jurisdictions can also become a roadblock to token issuance, trading, and ownership.
Lack of Standardization
The absence of standardized practices and protocols defined for real-world asset tokenization can hamper the interoperability, liquidity, and market adoption of digital tokens. This may lead to inefficiencies and fragmentation and can limit the scalability and accessibility of tokenized assets.
Security Vulnerabilities
Blockchain-based systems are vulnerable to fraud, cyber crimes, and security breaches. The irreversible nature of blockchain transactions doubles the impact of security incidents, causing problems with asset ownership.
Market Illiquidity
Even if RWA has the potential for increased liquidity, asset tokenization may be impacted by market illiquidity because of limited investor demand, technology constraints, and regulatory issues. It can further lead to price volatility and challenges in executing trades.
Improper Custody and Asset Management
It is necessary to have robust custody and asset management solutions to protect tokenized assets against theft, fraud, and unauthorized assets. Ensuring all this while complying with the regulations may present operational and technological challenges.
Market Fluctuations
The market for tokenized assets may be vulnerable to fluctuations or manipulations via different bots or algorithms. Improper management or monitoring of these bots and algorithms can lead to market manipulation.
Technological Risks
Limited access to technology and technical failures may lead to network congestion, scalability issues, and other interoperability issues, disrupting the entire asset tokenization process and causing financial losses.
Valuation Complexity
The inability to determine the fair market value of the tokenization assets can be a real problem, especially for assets like real estate or artifacts. Besides, variations in valuation methodologies may also cause discrepancies in the pricing of assets.
Which Blockchain Protocols are Used for the Tokenization of Real-World Assets?
While tokenizing real-world assets such as real estate, commodities, loans, and more, it is crucial to choose the right one, as each blockchain protocol and platform has different features. Here are some you can consider:
Ethereum
Owing to its robust smart contract functionality, Ethereum is a preferred choice for RWA tokenization. It facilitates the seamless creation of programmable digital assets or tokens. ERC-20 is the most commonly used blockchain that is used for tokenizing assets with complete interoperability and compatibility.
Hyperledger Fabric
Backed by the modular architecture, Hyperledger Fabric is a globally accepted blockchain used for asset tokenization. Besides, it also has a plethora of privacy features and access controls to make it an apt choice for compliant asset tokenization solutions in domains like finance and logistics.
Steller
Real-world assets that involve high transaction volumes or liquidity requirements use the Steller blockchain. It facilitates fast and low-cost transactions and has a built-in decentralized exchange for the seamless trading of assets.
R3 Corda
Developed by R3, Corda is a distributed ledger platform designed mainly for enterprise use cases, mainly in sectors where privacy and regulatory compliance adherence is a must. Data security and privacy are the two main aspects Corda focuses on. It is a perfect choice for tokenizing intellectual properties, real estate, and other assets.
Tezos
Tezos comes up with on-chain governance and high verification capabilities to ensure security and flexibility, which is crucial in the tokenization of assets. Besides, it has a self-amending protocol that facilitates the evolution of networks for long-term stability and compatibility for tokenization of assets.
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Tokenization of Real-World Assets: A Step-by-Step Process
Here is a step-by-step explanation of how real-world assets are tokenized:
Step #1 Identification and Evaluation
The first step involves real-world asset identification and valuation based on parameters like market demand, liquidity, etc.
Step #2 Legal and Regulatory Compliance
Ensuring all legal and regulatory compliance associated with the RWA are addressed. In other words, make sure the asset can be legally represented as a digital token.
Step #3 Asset Structuring
Now, structure the asset for tokenization by clearly stating the ownership rights, revenue-sharing arrangements, and other terms and conditions.
Step #4 Tokenization Platform Selection
Choose a suitable blockchain platform or protocol (Ethereum, Polymesh, etc.) considering factors like security, compatibility, and scalability.
Step #5 Smart Contract Development
Create the smart contracts required to represent the defined ownership rights as well as other T&Cs to mention the issuance, transfer, and redemption of the tokens.
Step #6 Token Generation
Now, generate the asset-backed tokens on the selected blockchain protocol or platform. Make sure each token represents a fraction of ownership in the underlying asset.
Step #7 Legal Documentation and Token Offering
Complete the legal documentation, including token offering documents and storing ownership records, to offer clear information about the token to potential investors.
Step #8 Custody Solutions
This step involves getting custody solutions to ensure the security of physical assets that underpin the tokens. It may also incorporate adopting physical security measures for RWAs.
Step #9 Creating an Exchange Platform
Create an exchange platform or marketplace where investors can seamlessly and securely buy, sell, or trade tokenized real-world assets.
Like the above process of tokenization of real-world assets, if you want to know the stepwise procedure for multi-currency wallets, click here.
Top 5 RWA Projects
The market is inundated with numerous real-world asset projects; however, the projects that have maintained to be in the top five positions are as follows:
#1 Goldfinch
Founded in 2020 with its headquarters in California, USA, Goldfinch is a decentralized leading protocol that aims to offer credit to growing markets leveraging blockchain technology. It focuses on unlocking liquidity for borrowers with limited or no access to traditional banking services by connecting them with lenders globally.
Goldfinch leverages blockchain’s decentralized credit score model and risk assessment measures to analyze borrowers’ creditworthiness to ensure seamless, secure, and transparent lending. According to an online report in Dec 2023, GFL has a market capitalization of $94,394,233.
#2 Centrifuge
Centrifuge is a globally-known decentralized platform that facilitates seamless tokenization of real-world assets to enable businesses to access liquidity by collateralizing their assets like royalties, invoices, and more.
The platform relies on a blockchain-based protocol to create NFTs that represent real-world assets and can be utilized for borrowing stablecoins or digital assets. CFG’s market capital is $238,507,309.
#3 TrueFi
TrueFi is the top DeFi credit platform that aims to offer uncollateralized loans to borrowers, depending on their creditworthiness. It leverages a blend of on-chain data and off-chain evaluation to examine the borrowers’ credit risk and ensure only the eligible ones can borrow funds without posting collateral.
It has a market cap of $65,261,939, which is influenced by the volume of loans generated and the spiking demand for TRU tokens.
#4 Maple Finance
Established in July 2021, Maple Finance is another popular RWA project and a leading decentralized lending platform that aims to offer enterprise-grade liquidity solutions for DeFi protocols.
It enables institutional investors to lend funds to DeFi protocols in exchange for interest and token incentives. The best parts of Maple Finance are their 24*7 availability and uncollateralized lending, which frees businesses from the limitations associated with traditional lending. Its market capitalization is $77,709,076.
#5 Polymesh
Polymesh is an out-of-the-box blockchain protocol designed mainly for security token issuance and management. It focuses on regulatory compliance and investor protection and facilitates the smooth creation and trading of security tokens, representing equities, bonds, commodities, and other real-world assets.
The blockchain protocol has gained worldwide recognition for bridging traditional finance with blockchain technology while maintaining adherence to regulatory compliance and building investor trust. It has a market capitalization of $195,443,943.
7 Real-World Asset Trends in 2024
Considering the spiking demand and popularity of real-world assets over the past few years, it is right to say that its future looks very promising. Here are seven RWA trends that you can expect in 2024:
RWAs Trend #1: Stablecoins
Growing demand for stablecoins to provide stability and flexibility and revolutionize cross-border payments, trading, and more!
RWAs Trend #2: Tokenized Treasuries
To fill the gap between conventional and decentralized finance and provide new investment opportunities and avenues!
RWAs Trend #3: Private Credit
To change the game for SMEs and allow them to access debt capital from multiple sources, including banks, public markets, and conventional private credit originators!
RWAs Trend #4: Backed Non-Fungible Tokens
To revolutionize collectible financing by bringing art, coins, stamps, books, and more onto the blockchain for borrowing and lending against different assets.
RWAs Trend #5: Consumer Brand Non-Fungible Tokens
To enhance customer engagement by incorporating gamification elements (rewards, quizzes, etc.) and deliver immersive experiences by integrating metaverse.
RWAs Trend #6: Increasing Contribution to Climate and Regenerative Finance
To leverage blockchain’s transparency and immutability capabilities to address the growing environmental, social, and governance (ESG) concerns and foster a sustainable future.
RWAs Trend #7: Tokenized Deposits and Wholesale Bank Settlements
To revolutionize the way and enhance the efficiency of how banks manage tokenized deposits, wholesale bank settlements, and cross-border transactions.
Just like RWA trends, here is your way to explore cryptocurrency trends.
Conclusion
RWA in crypto are the real-world assets that could be tangible or intangible and can be tokenized for buying, selling, or trading on decentralized finance platforms. The blog covers almost all important aspects of RWA and real-world asset tokenization, including its benefits, year-on-year growth statistics, future trends, top projects, how real-world assets are tokenized, and more. Go through the information to understand this next crypto trend.