Tokenized real-world assets (RWAs) are blockchain-based digital tokens that represent traditional financial assets: cash, commodities, equities, bonds, credit, artwork, and intellectual property. Learn all you need to know about this emergent asset class in this guide by ChangeHero.
Key Takeaways
- Real-world assets in crypto refer to assets that are represented on the blockchain and are backed by physical assets in the real world. They include tangible and intangible assets like real estate, commodities, precious metals, fine art, and more.
- By tokenizing assets on the blockchain, individuals can invest in and trade fractional ownership of these assets in a more accessible and efficient manner. It also helps to increase liquidity and transparency in traditional asset markets.
- As good as the description of this type of asset sounds, there are risks inherent to all digital tokens on the blockchain. In addition to regulatory uncertainty and market volatility, backing and transparency also prove to be challenging.
What are Real-World Assets (RWAs) in Crypto?
Real-world assets in the context of blockchain technology refer to assets with a physical presence or real-world value outside the digital realm. These assets are tokenized on the blockchain, meaning that a digital representation or token is created to represent the ownership or value of these traditional assets.
Phrasing with “real world” serves to distinguish between assets that have a tangible presence in the physical world and digital assets that exist purely in the digital space (such as cryptocurrencies). Real-world assets can be tokenized and traded on blockchain platforms and even cryptocurrency exchanges.
How Does Tokenization of Real-World Assets Work?
Tokenization of real-world assets involves creating digital tokens to represent ownership of physical assets on a blockchain. The first step is to select the real-world asset that will be tokenized. This could be real estate, art, commodities, or any other physical asset with value. To define ownership rights, responsibilities, and how the tokenized asset will be managed, setting up a legal structure with a special purpose vehicle (SPV) or a similar entity might be necessary.
The next step will have you move into the realm of the digital. Choose a blockchain platform that supports real-world asset tokenization. Ethereum, for example, is a popular choice due to its smart contract capabilities.
If you want to, develop smart contracts to define and track the ownership of the real-world asset. Particularly, they would define the rules for ownership, transfer, and any associated rights or benefits. The next step after the smart contracts is digital tokens that represent RWA ownership, issued on the blockchain according to the rules defined in the smart contracts. Luckily, there are already protocols that facilitate the process and eliminate the need to know how to code.
This, however, covers only the tokenization part. For the “real world” part, going back to one is once again necessary. Linking your tokens to tangible assets may involve audits, inspections, or other verification processes.
Once the tokens are issued, they can be traded or otherwise put to use in the decentralized finance sector. The tokens representing ownership of the real-world asset can be sold to investors through a token sale or offering. Mind that this will also require you to go off-chain and set up the sale with an adequate framework.
How does backing of real-world assets (RWAs) work?
It depends on the asset type and the platform that issues the tokens. Common methods of verifying backing include audits, custodianship, smart contracts, and compliance measures.
- Independent audits can be conducted to verify the existence and ownership of the physical assets backing the tokens. These audits ensure that the assets are genuine and held securely.
- Tangible assets may be held in custody by a trusted third party, such as a bank or a licensed custodian. This assures that the assets are securely held and can be verified.
- Smart contracts on the blockchain can be used to enforce the backing of the tokens with real-world assets. These contracts can be programmed to trigger actions based on physical asset verification.
- Lastly, platforms issuing tokenized real-world assets may need to comply with regulations and standards to ensure the tokenized assets are indeed backed by the corresponding financial assets in the real world.
Use Cases for Real-World Asset Tokenization
Why would you need to put traditional financial assets on the blockchain? To do things impossible in traditional financial markets, of course! Let us give you a few examples of the possibilities.
Real estate properties can be tokenized and represented as digital tokens on a blockchain for investors to buy and trade. It lets them own a fraction of the property without the need for traditional real estate transactions.
Physical commodities like gold, silver, or oil can be tokenized to enable trading on blockchain platforms. This provides greater liquidity and accessibility to investors who want exposure to these assets without physically owning them.
High-value artworks can be tokenized to represent ownership shares. Art enthusiasts and investors can get their hands on a portion of valuable art pieces and participate in the art market through digital tokens.
Traditional securities such as stocks, bonds, and funds, as well as debt instruments, can be tokenized to make them more easily tradable on blockchain platforms. You can already guess that this makes it more accessible and enables fractional asset ownership. On top of this, it can streamline the trading process, reduce intermediaries, and improve transparency.
Risks and Benefits of Tokenized Real-world Assets
Perks of Tokenization
There are three major benefits to tokenizing traditional assets. It is believed that RWAs can massively improve transparency, liquidity, and accessibility of all asset types involved.
Due to most blockchains being add-only fully public ledgers, the records are virtually immutable and accessible. RWAs on blockchain provide transparent and immutable records of ownership, transactions, and asset details, enhancing trust and reducing fraud.
Moreover, with smart contracts and oracles, real-time asset performance tracking and ownership change updates can improve transparency and accountability.
The crypto market is not known to have enhanced liquidity in comparison to traditional finance but with fractional ownership, investors become able to buy and sell smaller portions of assets, increasing liquidity. It also remedies some of the issues with traditionally illiquid assets, thanks to the continuous liquidity of a market that is always open, among other things.
Last but not least, and probably due to the current legal status of the DeFi ecosystem, digital assets are for the time being more accessible in comparison to traditional markets. Lower investment thresholds also make for lower entry barriers for retail investors.
It is not only a matter of price for high-value assets. Blockchain-based platforms offer global accessibility to investors, enabling them to invest in diverse tangible assets without geographical limitations.
Risks inherent to RWA tokens
While novel financial products such as RWA tokens attempt to solve certain issues, they face hurdles in other areas. Some are growing pains, such as compliance challenges, and others are inherent to decentralized finance and cryptocurrencies.
For instance, legally defining these assets in the context of securities laws, ownership rights, and investor protection can cause debate due to uncertainty. Additionally, there is a high chance for cross-border transactions with RWAs to encounter regulatory disparities across different jurisdictions.
By putting even traditional asset classes in the crypto market, we expose them to market volatility, price fluctuations, and liquidity concerns. RWAs, such as real estate or commodities, are subject to market volatility and price fluctuations. Limited liquidity in some real-world assets can also make buying or selling quickly at fair prices challenging.
Highlights of RWA Crypto Projects
Asset tokenization is not a theoretical idea: quite a few blockchain ecosystem examples demonstrate how it works.
For one, MakerDAO is a decentralized lending platform that uses RWAs. Particularly, their main offering is Ethereum-based collateral like stablecoins (such as DAI) backed by real-world assets. Users collateralize their assets to generate DAI stablecoins, pegged to the US dollar. This allows users to access liquidity without selling their assets.
If you think about it, most popular stablecoins like Tether USD or USDC are RWA tokens! They represent real-world US dollars under the management of the stablecoin’s respective issuer. As such, users get access to a widely accepted medium of exchange with all the perks of crypto payments.
TokenFi (TOKEN) is a platform created by the FLOKI team that tokenizes real-world assets such as real estate, private equity, and fine art. By tokenizing these assets, TokenFi enables fractional ownership and trading on blockchain networks, providing increased liquidity and accessibility to traditionally illiquid assets.
Mantra (OM) is a platform that tokenizes securities, including real estate assets and investment funds, to create digital securities compliant with regulations. By tokenizing these assets, Mantra enables efficient trading, investor onboarding, and compliance management on blockchain networks.
Propchain (PROP) is a platform that tokenizes real estate properties, allowing investors to purchase fractional ownership of rental properties. Each property is tokenized into digital shares, providing investors with passive income from rental payments and potential property appreciation.
Last but not least, Synthetix (SNX) is a decentralized platform that allows users to mint synthetic assets, including real-world assets like commodities, currencies, and indices. By using collateral in the form of SNX tokens, users create and manage RWAs for further trading in the decentralized finance sector.
Conclusion
Fungible and non-fungible tokens that represent tangible assets on a blockchain are one of the many emergent use cases for blockchain technology. Rather than being a crypto-native idea, it suggests use cases for these digital platforms in the financial system of today.
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Frequently Asked Questions
What is a RWA in crypto? What are real-world assets in crypto?
Real-world assets in crypto are tangible or physical assets like real estate, precious metals, or artworks that are tokenized and represented on blockchain networks. These assets bridge the gap between traditional markets and blockchain technology, offering new opportunities for investments and increased accessibility to a broader spectrum of investors.
How can real-world assets be tokenized?
Real-world assets can be tokenized by representing their ownership rights as digital tokens on a blockchain. This process involves creating a digital form of the underlying asset that can be divided into smaller units and traded on a blockchain network. With smart contracts and tokenization protocols, real-world assets can be securely recorded and transferred on the blockchain.
What are the benefits of tokenizing real-world assets?
Tokenizing real-world assets can increase liquidity by allowing fractional ownership and easy transferability on blockchain networks. It can also reduce barriers to entry for investors, as tokens can be traded 24/7 and across borders, providing greater access to a wider range of assets. Additionally, tokenization can streamline the process of asset management and simplify compliance.
What are the use cases for real-world assets?
Real-world assets can be tokenized for various use cases such as real estate investment, art ownership, commodity trading, and even tokenizing company shares. These tokens can represent ownership in physical assets, providing fractional ownership opportunities and enabling easier transferability and liquidity. Tokenization of real-world assets can also facilitate crowdfunding, asset securitization, and the creation of decentralized financial products.
Disclaimer
This article is not a piece of financial advice. When dealing with cryptocurrencies, remember that they are extremely volatile and thus, a high-risk investment. Always make sure to stay informed and be aware of those risks. Consider investing in cryptocurrencies only after careful consideration and analysis and at your own risk.
