Real-world assets are blockchain-based digital tokens that represent physical and traditional financial assets.
The first wave of decentralized finance (DeFi) was a demonstration of the power of blockchain technology to create a new more efficient financial system. It was a sort of playground for developers and entrepreneurs to push the boundaries of the status quo and create new and innovative products and services. However, the vast majority of DeFi projects have been built on top of cryptocurrencies, which are inherently volatile and speculative assets. This has limited the potential of DeFi to reach a wider audience and provide real-world value to people who are not already involved in the crypto space.
Arguably, the next wave is about bridging the gap between the crypto world and the real-world. This involves creating new financial products and services that are backed by real-world assets, such as stocks, bonds, commodities, and real estate. These assets are less volatile and more stable than cryptocurrencies, making them more attractive to a wider audience of investors and users. By tokenizing real-world assets (RWA) on the blockchain, we can create new opportunities for people to access and invest in these assets in a more accessible, efficient and transparent way.
In this blog post we will explore the potential of real-world assets, including the use cases, benefits, challenges, and examples of how they can be tokenized on the blockchain.
Benefits
Tokenizing real-world assets might seem like a complex and risky endeavor, but the potential benefits are significant and far-reaching. Here are some of the key benefits of tokenizing real-world assets on the blockchain.
Accessibility
By tokenizing real-world assets on the blockchain, we can create new opportunities for people to access and invest in these assets in a more accessible way. This can help to democratize finance and provide new opportunities for people who are currently underserved by the traditional financial system.
Transparency
The blockchain is an open and immutable ledger that can provide a high degree of transparency, trust and accountability for real-world assets. This can help reduce the risk of fraud, corruption, and other abuses related to holding and transferring these assets which can invite more investors to participate in the markets.
Liquidity
There are many traditional assets that are illiquid and difficult to buy and sell on the open market. By including these assets on the blockchain, we can create new opportunities for people to buy and sell these assets in a more liquid and secure way.
Efficiency
The blockchain is a decentralized and automated system that can help to reduce the costs and inefficiencies of the traditional financial system such as middlemen, paperwork, physical storage, and manual processes. History has shown the market is always looking for more efficient ways to operate and blockchain technology can provide that.
Security
One of the key strengths of the blockchain is its security and resilience against cyber attacks and other threats. By moving real-world assets to the blockchain, they inherit the security features of the blockchain, such as encryption, decentralization, and immutability. This increases the trust and confidence of investors in the system.
Interoperability
The blockchain is a global and interoperable system that can help to connect different financial markets and assets. It’s a common substrate that can be used to create new financial products and services that are compatible with each other and can be easily integrated with other systems – something that is not possible with the traditional financial system and can unlock a variety of new possibilities.
Innovation
The blockchain is a programmable and extensible system that can help to create new type of financial products and services that are more suitable for the digital age. This can help to drive innovation and create new opportunities for people to access and invest in the financial markets.
Use Cases
In theory, almost any type of real-world asset can be tokenized on the blockchain. Yet, some assets are more suitable for tokenization than others, depending on their characteristics and use cases. Here are some of the most promising use cases for tokenizing real-world assets on the blockchain.
Stocks
Stocks are shares of ownership in a company that are traded on public stock exchanges. By tokenizing stocks on the blockchain, we can create new opportunities for people to invest in these assets in a more efficient and transparent way 24/7. This can help to reduce the costs and inefficiencies of the traditional financial system and provide new opportunities for people to access and invest in the stock market.
Bonds
Another promising use case for tokenizing real-world assets is in the area of bonds. Bonds are debt securities that are issued by governments, corporations, and other entities to raise capital. By tokenizing bonds on the blockchain, we can open those markets to a wider audience and create new opportunities for people to invest in these assets across borders and expand the markets.
Commodities
Commodities are another interesting use case for tokenizing real-world assets. Commodities are raw materials and natural resources such as gold, silver, oil, and wheat that are traded on traditional commodity exchanges. By tokenizing commodities on the blockchain, we can benefit from the transparency, efficiency, and liquidity of the blockchain and open new horizons for the commodity markets.
Real Estate
Real estate is one of the largest asset classes in the world, with trillions of dollars worth of property owned by individuals and institutions. By tokenizing real estate on the blockchain, many new possibilities can be unlocked, such as fractional ownership, global access, and automated transactions. This can help to reduce the costs and inefficiencies of the traditional real estate market and create new opportunities for people to invest in these assets.
Fiat Currencies
Stablecoins are already one of the most popular use cases for tokenizing real-world assets on the blockchain. Basically, stablecoins are digital tokens that are pegged to the value of a fiat currency such as the US dollar or the Euro. They are used as a store of value, a medium of exchange, and a unit of account in the DeFi ecosystem.
Art and Collectibles
Art and collectibles are another prominent asset class that can benefit from tokenization on the blockchain. By tokenizing art and collectibles on the blockchain, we can create new opportunities for people to invest in these assets in a more transparent and efficient way. This can help to reduce the costs and inefficiencies of the traditional art market and create new opportunities for people to access and invest in these assets.
Intellectual Property
Intellectual property includes patents, trademarks, copyrights, and other types of intangible assets that can be bought and sold on the open market. However, the traditional intellectual property market is fragmented and inefficient, making it difficult for people to access and invest in these assets. By tokenizing intellectual property on the blockchain, we can increase the liquidity and efficiency of the market and create new opportunities for people to invest in these assets.
There are many other types of real-world assets that can be tokenized on the blockchain, including private equity, venture capital, debt, derivatives, luxury goods, carbon credits, music royalties, sports contracts, insurance policies, government bonds, and more. Each of these assets has its own unique characteristics and use cases, and they can all benefit from the transparency, efficiency, and security of the blockchain.
How It Works
Real-world assets are represented as standardized digital tokens on the blockchain. They can be either fungible or non-fungible, depending on the type of asset and the use case. Fungible tokens (ERC-20) are interchangeable and can be divided into smaller units, while non-fungible tokens (ERC-721) are unique and indivisible.
The main difference in tokenizing real-world assets is the need for off-chain data provided by trusted third parties who verify the authenticity and ownership of the represented assets. Then the data needs to be stored on-chain in a secure and tamper-proof way. This can be done using decentralized oracle networks that provide reliable and verifiable data feeds to smart contracts on the blockchain like Chainlink.
Real-world assets can be categorized into several types based on their characteristics and use cases:
- Physical: Real-world assets that have a physical form, such as real estate, commodities, and luxury goods;
- Traditional Financial Assets: Traded on traditional financial markets, such as stocks, bonds, and derivatives;
- Native: Created and traded on the blockchain, such as cryptocurrencies and bonds issued on the blockchain;
- Non-native: Represented on the blockchain, such as tokenized stocks and real estate;
- Synthetic: Usually represent a financial asset which is not directly backed by the asset itself, such as a synthetic stock or bond; Instead, they are backed by a collateral pool or other assets such as cryptocurrencies, stablecoins, or other assets;
- Backed: Assets that are backed by the underlying asset, such as gold-backed tokens or real estate-backed tokens;
- Fractional: Represent a fraction of the underlying asset, such as a fraction of a share of stock or a fraction of a real estate property.
Examples
Although the tokenization of real-world assets is still in its early stages, there are already several examples of projects that are working on the exploration and implementation of this concept.
RealT is a platform that allows people to invest in real estate properties in the United States by tokenizing them on the Ethereum blockchain. Each property is represented as a ERC-20 token that represents a fraction of the property’s ownership. Investors can buy and sell these tokens on the platform and receive rental income from the properties.
Ondo Finance is a platform that allows people to invest in short-term US Treasury bills by tokenizing them on the Ethereum blockchain. Each Treasury bill is represented as a ERC-20 token that represents a fraction of the bill’s ownership. Investors can buy and sell these tokens on the platform and receive interest income from the bills.
MakerDAO is a platform that allows people to create and trade stablecoins on the multiple blockchain networks. These stablecoins are backed by a collateral pool of cryptocurrencies and other assets, and they track the price of the US dollar.
Synthetix is a platform that allows people to create and trade synthetic assets on across the blockchains space. These assets are backed by a collateral pool of cryptocurrencies and other assets, and they track the price of real-world assets such as stocks, commodities, and currencies. Users can trade these synthetic assets on the platform without owning the underlying assets.
Challenges
As with many paradigm shifts, there are several challenges to overcome to realize the full potential of real-world assets on the blockchain.
Regulatory
Real-world assets are subject to a complex web of regulations that vary by jurisdiction and asset class. Navigating these regulations poses significant legal and compliance challenges for tokenization initiatives.
Data Validation
The need for trusted third parties to provide off-chain data can create a single point of failure and introduce the risk of data manipulation or fraud. Ensuring the accuracy and integrity of the data is a critical challenge for tokenization initiatives.
Wallet Recovery
The loss of private keys or access to wallets can result in the loss of ownership of the tokenized assets. This poses a significant risk to investors and users of tokenized assets.
Scalability
The scalability of blockchain networks can be a limiting factor in the adoption of tokenized assets, especially for assets that require high transaction throughput.
Conclusion
In the coming years, we can expect to see more projects that are working on tokenizing real-world assets on the blockchain, as well as new financial products and services that are backed by these assets. This will create new opportunities for people to access and invest in the financial markets in a more accessible, efficient, and transparent way.
As we look ahead, the tokenization of real-world assets promises to reshape the landscape of decentralized finance. By overcoming regulatory hurdles, technological challenges, and fostering innovation, these initiatives have the potential to revolutionize our financial systems in ways we have yet to imagine. The future of DeFi is bright, and real-world assets are at the forefront of this transformation.
