What are real world assets or RWA?
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Real-world assets or RWAs are cryptographic tokens that represent tangible assets that exist outside the digital realm such as artwork, real estate, raw materials or commodities. They also represent intangible assets such as bonds, patents, copyrights, credits and concessions.
Tokenization, which is the process of digitizing assets, allows the programming and interaction of these assets through distributed ledger networks such as Ethereum, Chainlink, Avalanche or Solana. Their growing popularity has led them to be traded on different exchanges such as UniSwap or PancakeSwap.
RWA tokens have become an interesting tool for financial institutions and businesses to simplify their operations, reduce costs, and explore new revenue streams through innovative use cases. They also offer traders alternatives to diversify their portfolios with assets that can be traded without intermediaries.
The RWA token market has seen exponential growth in recent years. In 2023, the total value of these tokens reached $3 billion. However, this number has multiplied significantly in just one year.
By 2024, the total value locked (TLV) of RWA tokens has amounted to over $5.9 billion. In terms of market capitalization, this figure is even more impressive, standing at $8.2 billion at the time of writing and rising.
Furthermore, the entry of large players such as BlackRock, which plans to tokenize USD 10 billion so that its investors have an exit vehicle for their investments with the speed, efficiency and availability properties of a cryptocurrency, demonstrates the growing institutional interest in this sector.
Are stablecoins like RWA tokens?
By definition, yes, stablecoins can be seen as assets that represent the value of another existing asset, primarily the US dollar. Since the emergence of the first stablecoins, some projects have diversified the type of asset backing the issue. DAI, for example, is backed by other cryptocurrencies. Others are backed by gold. The market value of these coins is much higher than that of RWA tokens and by the end of 2024, it stood at USD 180 billion in market capitalization.
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What is the difference between a traditional asset and a RWA?
To understand how RWA tokens work, it is helpful to understand the difference between them and traditional assets.
Traditional assets are those that represent a tangible or intangible value in the world. They can range from real estate, works of art, company shares, government bonds, to commodities such as gold or oil. These assets are traded through traditional financial markets and are subject to the regulations of each country.
On the other hand, real-world assets or RWAs are digital tokens that represent ownership of traditional assets, also called underlying assets. These tokens are created from computer codes, powered by smart contracts, and recorded on distributed ledger networks. They can commonly be traded on cryptocurrency exchanges or DeFi platforms.
Which platforms offer RWA for investment?
The list of decentralized exchanges that allow buying RWA tokens is huge. It includes platforms such as Aave, Uniswap, Pancake Swap, Compound, Cuve Finance, SushiSwap, (Ondo and Centrifigue focus on asset tokenization). It is worth mentioning that platforms such as Binance, Coinbase and Kraken also allow trading of RWA tokens.
Traditional assets often require intermediaries to buy and sell, which can make transactions more expensive and limit accessibility. RWAs, being digital tokens, can be bought and sold without intermediaries, meaning there are fewer restrictions for traders to make their investments.
One of the advantages of RWA tokens is that they allow high-value assets, such as luxury real estate or artwork worth millions of dollars, to be split into smaller pieces. This makes them more accessible to a wider range of investors.
Furthermore, decentralized marketplaces provide transparent records of all RWA transactions as they are built on distributed ledgers such as Ethereum, Solana, or Polygon.
The importance of RWAs lies in their ability to offer financial benefits such as income generation, investment portfolio diversification and inflation protection.
How does RWA asset tokenization work?
In essence, tokenization is turning a real-world tangible or intangible asset (such as property, artwork, stocks, commodities, etc.) into a digital token, representing it on distributed file networks such as Ethereum, Chainlink, Avalanche, Polygon, Arbitrum, Base, and others. This digital token, or cryptoasset, can then be bought, sold, or transferred on exchanges.
Evaluating the asset: The first step in getting an RWA token up and running is to value the underlying asset to determine what value the token could have. A conventional valuation is done here, considering factors such as location, condition, demand, etc.
Token creation: A digital token is created through a smart contract, which represents a specific fraction of the asset. These tokens can be fungible (interchangeable) or non-fungible (unique). The number of tokens issued influences the value; greater fragmentation means less value for each individual token.
What is a smart contract?
A smart contract is a computer program that has the ability to execute agreements between different parties automatically, without the need for intermediaries. Smart contracts use computerized data exchange systems and secure files such as those provided by the protocols of Ethereum, Bitcoin, among others, so that information can be safeguarded and the clauses of each agreement can be confirmed to be fulfilled.
Ledger: Traders' funds are recorded on a distributed ledger such as Ethereum, Polygon, Chainlink, Avalanche, Solana, Base, and others, providing transparency, immutability, and transaction security. Choosing the network is crucial, as they offer different benefits. While networks like Ethereum are more secure, they are also more expensive. Networks like Polygon and Solana require lower fees.
Trading: Tokens are offered on specialized markets, where they can be bought and sold by anyone with internet access.
How to invest in RWA?
Investing in an RWA token is the same as investing in virtually any cryptocurrency on the market. It is necessary to consider that all investments involve risks and staying informed or consulting with experts can be crucial elements to protect yourself from losses or maximize profits.
First, it is necessary to do research and understand the nature of the different RWA tokens offered on the market. Evaluate the benefits and risks.
Next, you have to look at market prices. How is the value of a tokenized RWA determined? Well, there are intrinsic factors that determine its value. These include the value of the underlying asset, the number of tokens issued (the more the value of the underlying asset is divided, the lower the value of each token), the utility of the token, and its liquidity. External factors include demand and supply, market sentiment, the technologies involved, and the reputation of the team and the project.
Next, you need to choose a platform, create an account on an exchange, and connect a wallet such as MetaMask, Ledger, or another to manage your assets.
Finally, a certain amount of tokens is purchased and the investment is monitored through platforms that offer real-time information on prices and web portals that report on news events related to the chosen token.
What should I consider before investing in RWA?
Knowledge is power. So the main focus point is to understand the fundamentals of distributed ledger technology and smart contracts, how secure and scalable they are. It is also necessary to analyze the reputation of the project, regulations, token liquidity and fee value. Understand the nature of the underlying asset and its value, as well as specific risks such as obsolescence of a product or damage to a property or artwork. Aspects such as cryptocurrency volatility and counterparty risks should be part of the research.
What are the advantages of investing in RWA?
1. Liquidity:
Faster transactions: Tokenization allows assets to be bought and sold almost instantly, unlike traditional processes that are often slow and bureaucratic.
Asset fractionation: Assets are divided into small fractions, which facilitates investment with smaller amounts and allows a greater number of people to access them.
2. Accessibility:
Global Investment: Tokenization removes geographical barriers, allowing investors around the world to access a wide range of assets.
Democratization of investment: Previously, certain assets were reserved for large investors. Now, thanks to tokenization, anyone with internet access can participate in this market.
3. Transparency:
Immutable ledger: All information about token ownership and transactions is recorded on a distributed ledger, ensuring transparency and traceability.
4. Diversification:
Wide range of assets: Tokenization allows investing in a variety of assets, from real estate to artwork, making it easier to diversify your portfolio.
5. Cost efficiency:
Cost reduction: companies' operating costs are minimized through the use of tokens that do not require large transaction fees.
Elimination of intermediaries: By eliminating intermediaries, the costs associated with the custody and administration of assets are reduced.
6. New investment opportunities:
Unique Assets: Tokenization makes it possible to invest in unique assets that were previously difficult to acquire, such as works of art or luxury real estate.
Passive income generation: Some tokens generate passive returns, such as dividends or interest, which can be attractive to investors.
7. Greater efficiency:
Process Automation: Many processes such as token issuance, ownership transfer, and asset management are automated, increasing efficiency.
What advantages do RWAs offer in terms of portfolio diversification?
Assuming the investor specializes in cryptocurrencies, RWA tokens offer some advantages for portfolio diversification. These include access to traditional asset classes; lower exposure to risks from a specific jurisdiction, as assets from anywhere in the world can be traded; and greater exposure to different economic sectors and industries.
What are the risks associated with RWAs?
1. Market Volatility:
Price fluctuations: The value of RWA tokens may experience significant fluctuations due to the inherent volatility of cryptocurrency markets and external factors such as the global economy.
Correlation with the cryptocurrency market: The value of many RWA tokens is correlated with the broader cryptocurrency market, meaning that a drop in the price of cryptocurrencies can negatively impact the value of the tokens.
2. Counterparty Risk:
Non-compliance with obligations: There is a risk that the platform issuing the tokens or the custodian of the underlying assets may fail to fulfill its obligations, which could result in the loss of the investment.
3. Regulatory Risk:
Changes in regulation: Regulation of digital assets is constantly evolving. Changes in laws and regulations can affect the value of investments and limit investment options.
Legal uncertainty: Lack of regulatory clarity in some countries may create uncertainty and increase the legal risks associated with investing in RWA.
4. Liquidity risk:
Difficulty selling: Some RWA tokens may have low liquidity, meaning it may be difficult to sell them quickly without significantly impacting the price.
Market Breadth: The market depth of a specific RWA token can vary, which may impact your ability to buy or sell large amounts without moving the price.
5. Custody risk:
Loss of private keys: If the private keys of the wallets are lost, access to tokens is lost, whether for individuals or companies.
Hacks: Exchanges and digital wallets can be vulnerable to cyberattacks, which could result in the theft of funds.
6. Valuation Risk:
Difficulty to value: Accurately valuing a tokenized underlying asset can be complex, especially for unique or illiquid assets.
Valuation Discrepancies: There may be discrepancies between the valuation of the underlying asset and the market price of the token.
7. Market Risk:
Macroeconomic factors: Macroeconomic factors such as interest rates, inflation and economic crises may affect the value of RWAs.
