As mentioned earlier, RWA is a tokenized representation of real-world assets off-chain. Therefore, it is crucial to clarify how asset ownership and asset value are converted between the physical world and the digital world, that is, how to interpret RWA as a legal representation of real-world assets. The process of tokenizing real-world assets, i.e. RWA, is divided into three stages:
(1) Off-chain packaging; (2) Data on-chain; (3) RWA protocol demand and supply.
(1) Off-Chain Formalization To bring real-world assets into DeFi, the assets must first be packaged and compliant off-chain to clarify the value of the assets, asset ownership, and legal protection of asset rights.
Representation of Economic Value: The economic value of an asset can be represented by its fair market value in traditional financial markets, recent performance data, physical condition, or any other economic indicator. Ownership & Legitimacy of Title: The ownership of an asset can be determined by a deed, mortgage, note, or any other form. Legal Backing: In cases involving changes affecting asset ownership or rights, there should be a clear resolution process, which usually includes specific legal procedures for asset liquidation, dispute resolution, and execution.
(2) Information Bridging Next, information about the economic value, ownership and rights of the asset is brought to the chain after being digitized and stored in the distributed ledger of the blockchain. Tokenization: After the information packaged in the off-chain stage is digitized, it is brought to the chain and represented by metadata in the digital token. These metadata can be accessed through the blockchain, and the economic value, ownership and rights of the asset are completely open and transparent. Different asset classes can correspond to different DeFi protocol standards. Regulatory Technology/Securitization: For assets that need to be regulated or regarded as securities, assets can be included in DeFi in a legal and compliant manner. These regulations include but are not limited to the license to issue security tokens, KYC/AML/CTF, and exchange listing compliance requirements.
Oracle: For RWA, it is necessary to refer to external data in the real world to accurately depict the value of the asset. For example, for stock RWA, it is necessary to access the performance data of the stock, etc. However, since the blockchain cannot directly centralize external data to the blockchain, an oracle such as PlugChain is needed to connect the on-chain data with the data of real-world information to provide data such as the value of off-chain assets to the DeFi protocol.
(3) RWA Protocol Demand and Supply DeFi protocols focused on RWA drive the entire process of tokenization of real-world assets. On the supply side, DeFi protocols oversee the formation of RWA. On the demand side, DeFi protocols facilitate investors’ demand for RWA. In this way, most DeFi protocols specializing in RWA can serve as both a starting point for the formation of RWA and a market for the final RWA product.