Tokenizing real assets (RWA) represents a revolutionary approach to bringing tangible assets like real estate, artwork, commodities, and intellectual property into the digital financial ecosystem. The tokenization process involves creating digital representations (tokens) of physical assets on the blockchain, making them tradable, fractionally owned, and accessible to more investors.
Tokenizing RWA allows assets that were confined to slow, high-barrier traditional markets to benefit from the speed, transparency, and accessibility that blockchain technology offers.
Why tokenize real assets (RWA)?
The main drivers of real asset tokenization include increased liquidity, accessibility, transparency, and global reach. Traditional asset types like real estate or artwork often have poorly liquid markets due to high costs and limited access.
By converting these assets into tokens, they can be made accessible to a broader range of investors, even allowing for fractional ownership of the asset (rather than having to purchase it in full). Additionally, tokenization helps simplify and enhance the transaction process, reducing costs associated with intermediaries and legal procedures.
Below are the benefits of tokenizing real assets:
Liquidity: Tokenization enhances liquidity by allowing assets to be traded on blockchain platforms 24/7. Tokenized assets can be sold partially or in full, enabling owners to unlock value without going through lengthy selling cycles.
Accessibility and fractional ownership: Tokenization allows breaking down high-value assets into smaller parts, making them affordable for more people. For example, you could own a fraction of a commercial building, a rare piece of artwork, or luxury assets through fractional ownership tokens. This expands the pool of investors who can access assets previously reserved for a select few. Thus, tokenization can improve liquidity (easier buying and selling) and contribute to more reasonable pricing.
Transparency and security: The immutable ledger system of blockchain ensures that every transaction is traceable, minimizing fraud risk and enhancing transparency. Smart contracts also automate compliance and ownership updates.
Reducing intermediaries: The tokenization process removes traditional intermediaries such as brokers or legal agents, helping to reduce costs and making asset transfers faster and more efficient. This often allows on-chain transactions to be settled in real-time.
Unlocking liquidity: Capital markets typically operate on a T+2 basis, where T is the transaction execution time, and T+2 is the time to finalize the transaction and exchange assets. This takes two days of liquidity away from exchanged assets, affecting the yield of companies involved in trading. When real-time payment mechanisms (T) are applied, a substantial amount of liquidity is freed up for capital markets and participants to use more efficiently.
Effective transfer of ownership: Tokenization on the blockchain enables easy, fast transfer of ownership and can even integrate secondary markets where tokens backed by assets can be traded. Effective ownership transfer is crucial, but the ability to track the ownership history of an asset also helps in assessing credibility and, in some cases, better asset valuation. This is especially true for high-end assets like art and gemstones.
Better risk management: As mentioned, instant settlement helps reduce liquidity risk. Furthermore, tokenizing mainstream capital market assets can also help mitigate counterparty risk. If all the assets of a company are transferred onto the blockchain, its actual liquidity status can be determined immediately before executing a transaction. This can help bolster confidence in the market during crisis periods, such as the global financial crisis of 2008.
Steps to tokenize real assets
The process of tokenizing real assets (RWA) typically includes the following steps:
Step 1 – Select and value the asset: Identify and value the asset to determine its tokenizable value. This may require collaboration with valuation firms to establish a reliable reference price.
Step 2 – Legal compliance and structuring: Ensuring compliance with legal requirements is key. The tokenization process must adhere to local regulations regarding ownership and securities, often requiring work with legal and financial professionals to create an appropriate structure.
Step 3 – Digitizing the asset and developing smart contracts: A smart contract is self-executing code on the blockchain designed to manage the rules and transactions of the asset. This contract defines the terms of ownership, access rights, compliance requirements, and profit distribution if any.
Step 4 – Issuing and distributing tokens: Tokens representing the asset are created on the blockchain. They are then distributed to investors through public sales (such as ICOs – initial coin offerings) or private placements.
Step 5 – Creating a secondary market: To enhance liquidity, a secondary market for tokenized assets can be established on compatible exchanges, allowing investors to buy or sell tokens based on demand.
Step 6 – Tools supporting tokenization: As blockchains develop token standards to support real assets, it is crucial to build an ecosystem to enhance these standards with supporting tools. Since fund managers often lack the technological capacity to develop these tools in-house, providing supporting tools for popular real assets will drive widespread adoption.
Step 7 – Ongoing compliance and management: Continuous compliance with regulations, updating, and maintaining records on the blockchain is essential, especially to ensure the assets are secure and compliant with changing legal regulations.
Ethereum and Solana: A comparison in tokenizing real assets (RWA)
Both Ethereum and Solana have adopted RWA tokenization with innovative standards and products. However, each platform has its own advantages and challenges in implementing real asset tokenization. Here is a detailed comparison:
Network performance and transaction speed
Ethereum: Ethereum, known for its decentralized security, processes about 15-30 transactions per second (TPS). This speed can be limiting when tokenizing real assets with high demand, especially in cases of network congestion.
Solana: Focusing on scalability, Solana achieves over 1,000 real transactions per second, making it very suitable for tokenizing assets that require real-time transactions and high transaction volumes. This efficiency is particularly important for highly liquid assets such as foreign exchange being transferred to the blockchain.
Transaction costs
Ethereum: The high gas fees of Ethereum have been a clearly documented challenge. Although various upgrades to Ethereum aim to reduce costs, they remain significantly higher than those of Solana.
Solana: Transaction costs on Solana are extremely low, often below $0.01 per transaction, making it very cost-effective for asset tokenization and performing complex activities affordably.
Although Solana has cost advantages, some trading platforms on Solana, like Zeta Markets, have chosen to create their own application chains to enhance performance based on what Solana provides.
Ecosystem and maturity of the project
Ethereum: As the leading blockchain for decentralized applications (DApps), Ethereum has a large ecosystem and broad support for RWA tokenization projects, with protocols like Centrifuge. Ethereum benefits from innovation, with the ERC-3643 standard created to support RWA tokenization.
Solana: Solana, though newer, is rapidly growing and attracting attention due to its high performance and low costs. However, in terms of ecosystem maturity, Solana still lags behind Ethereum. There are currently several projects tokenizing RWA on Solana, but the ecosystem is still in its early stages. For example, Paypal has used internal technology to develop on Solana and launched the stablecoin PYUSD.
Support from the community and developers
Ethereum: Ethereum has a large developer community, providing extensive documentation, tools, and support for new projects.
Solana: The Solana community is smaller but rapidly growing, with increasing resources and support for developers as the ecosystem matures.
Characteristics Ethereum Solana Speed 15-30 TPS; limited scalability Over 1,000 TPS; high scalability, suitable for real-time transactions Transaction cost High gas fees Extremely low Ecosystem maturity Mature with strong RWA standards (e.g., ERC-3643) Developing but less mature Developer support Large and established community Smaller but growing community
Below are some examples of projects and market opportunities surrounding RWA tokenization.
Ethereum: Centrifuge is a decentralized platform specializing in tokenizing real assets on Ethereum, helping businesses raise capital based on real assets like invoices and real estate. As of 2024, Centrifuge has supported the tokenization of over $250 million in asset value. RealT provides real estate tokenization services on Ethereum, allowing for fractional ownership of properties. With over 200 tokenized properties, RealT enables users to earn income from rentals and easily trade ownership stakes in real estate.
Solana: Ondo Finance and several other projects on Solana have led initiatives for tokenization across various asset types. Leveraging Solana's speed and low costs, these projects provide easy trading opportunities for individual investors.
Tokenizing real assets is reshaping how assets are bought, sold, and managed. By making high-value assets more accessible, tokenization democratizes investment opportunities and provides liquidity for traditionally illiquid assets. While Ethereum remains the popular choice due to its extensive ecosystem, Solana is emerging as a cost-effective and high-speed alternative, particularly suited for high-volume transactions.
With ongoing advancements in blockchain technology, RWA tokenization has the potential to redefine asset ownership, investment opportunities, risk management, and liquidity on a large scale. The coming years may witness explosive growth in this area, with both Ethereum and Solana playing crucial roles in shaping the market's future.
However, any major conversion of traditional assets is a process that spans decades, even across generations. The pace at which RWA tokenization is adopted remains an unknown.
