Translation: Blockchain in Vernacular
Real World Assets (RWA) is a topic you may see discussed a lot online. It is an interesting topic and a piece of the puzzle in the cryptocurrency market.
Real World Assets (RWA) are a trend, a market with huge potential, and will undoubtedly become a very hot topic in the near future.
The combination of real-world assets (RWA) and blockchain technology is a major technological advancement that is driving finance to become more open, transparent and interconnected, which can be called a revolution.
So, what is a Real World Asset (RWA)? How does it work? I will dive into the topic of RWA so that you can understand it better. (Throughout the article, I will use the abbreviation RWA). This will be a long article, I hope you enjoy reading it.
We must first understand the concept of RWAs. Real World Assets (RWAs) are physical or tangible assets that have intrinsic value in the real world. They include financial instruments such as loans and insurance contracts, as well as assets such as commodities and real estate. RWAs are blockchain-based tokenized versions of these assets, making them easier to use for online transactions and investments.
What is the potential of RWA in the cryptocurrency world?
Liquidity: Tokenization can increase market liquidity by converting previously illiquid assets, such as real estate, into divisible and easily tradable tokens.
Accessibility: RWAs on the blockchain enable more people to invest in high-value assets by lowering the minimum investment amount and entry barriers.
Transparency and Security: Blockchain provides a tamper-proof ledger of ownership and transaction history, making asset management more secure and transparent.
Financial Product Innovation: RWAs open the door to cutting-edge financial products, such as fractional ownership and asset-backed lending, which can lead to more dynamic financial markets.
1. What differentiates traditional real-world assets (RWAs) from tokenized RWAs?
1) Traditional RWAs
Definition: Traditional RWAs include physical assets such as machinery, real estate, or commodities such as gold and oil. These resources are used in economic activities and have intrinsic value.
Ownership and transactions: Ownership is typically recorded in a central database or via paper certificates. These assets are often traded through multiple intermediaries, which increases transaction costs and delays.
Liquidity: Traditional RWAs are generally less liquid than digital assets. The process of selling these assets can be drawn out and complicated due to the need for physical valuations, legal inspections, and finding willing buyers.
2) Tokenized RWAs
Definition: Tokenized RWAs are digital representations of traditional real-world assets based on blockchain. Each token represents a share, stake, or ownership of the underlying asset.
Ownership and Transactions: Tokenized RWA ownership is represented on the blockchain through digital tokens, providing immutability and transparency. This makes transactions simpler, faster, and requires fewer intermediaries.
Liquidity: Tokenization improves the liquidity of RWAs by allowing fractional ownership and removing barriers to entry for investors. For example, investors can purchase tokens that represent parts of real estate instead of purchasing the entire asset.
Example:
Imagine a commercial building valued at $10 million. In the past, such buildings were usually bought or sold as a whole, usually involving a large amount of capital and many parties such as banks, brokers and lawyers.
Through tokenization, the building can be represented by one million tokens, each worth $10. Investors can purchase any number of tokens, which represent a fraction of the building's ownership. This process simplifies transactions and makes investment opportunities accessible to a wider audience.
2. What types of assets are suitable for tokenization?
1) Real Estate
Real estate is one of the most popular tokenized assets, giving users the opportunity to own commercial and residential real estate. This asset class has the potential to gain greater liquidity, which will open up investment opportunities and simplify the management of rental yields and other income through smart contracts.
2) Products
Commodities include gold, oil, and agricultural products, etc. The benefits of tokenization are more transparent pricing and easier entry into markets that usually have high barriers to entry.
3) Artwork
Including sculptures, paintings and other precious artworks. Through art tokens, ordinary artworks can be owned and profited by more people. In addition, artists can still retain ownership and profit from part of the sales.
4) Intellectual Property
This includes software code, copyrights, and patents. Tokenization can facilitate the licensing and commercialization of intellectual property. Artists may choose to sell partial rights to their work to raise funds and maintain some control over their creations.
The advantages of asset tokenization are increased liquidity, reduced transaction costs, and easier access to investment opportunities.
However, RWAs currently lack clear regulations, may present cybersecurity risks, and require a robust technology system to securely process these asset transactions.
3. How does RWA work?
Tokenization is a blockchain technology that solves the problem of transferring ownership of physical assets to digital tokens.
Each token represents a portion or share of an asset, making it easier to trade, transfer, and manage assets.
Consider the following scenario: You own a house worth $400,000. Through tokenization, you can generate 400,000 tokens worth $1 each. These tokens can be bought, sold, or traded on a blockchain platform.
1) The importance of blockchain technology in the tokenization process
Tokens are issued, tracked and traded on the decentralized, transparent and secure ledger provided by blockchain technology.
Efficiency of blockchain: Blockchain ensures tamper-proof and secure transactions. The public ledger records every transaction, ensuring transparency. It reduces fees, improves efficiency, and eliminates middlemen.
Examples of real-world applications of blockchain technology: In 2023, the Ethereum blockchain processed more than one million transactions per day without any interruptions. On public blockchains, thousands of nodes verify each transaction, making record changes nearly impossible. A report by Deloitte states that eliminating middlemen in financial transactions could save up to $20 billion per year. To make it easier to understand the tokenization process of RWA, let's look at a more practical example:
There is a business asset worth $100,000. In order for it to be legally tokenized and traded, the legality of the asset must first be established.
During the token creation process, 100,000 tokens with a value of $1 will be generated.
In this case, assets for token issuance and management were selected and built on the Ethereum blockchain (there are multiple blockchains to choose from, including Ethereum, Solana, BSC, etc.).
The tokens are then distributed to investors using an Initial Coin Offering (ITO).
After the distribution is complete, the tokens can be traded on the secondary market.
If the asset value rises to $200,000, each token will be worth $2 in transactions.
This process increases liquidity in illiquid assets while also democratizing investment opportunities.
According to a report by Deloitte, the tokenized asset market could reach $24 trillion by 2027 as cryptocurrencies gain popularity and open new channels for real-world assets (RWAs).
World Economic Forum
Due to the decentralized nature of tokens and proportional ownership, small investors now have more opportunities to participate in the market, thereby increasing liquidity. This portion of the asset can be traded more easily on the secondary market than traditional stocks.
2) Efficiency and transparency of transactions
Blockchain technology is particularly useful in industries such as real estate and supply chain management because it provides an immutable, transparent ledger of all transactions.
Many organizations have conducted the following data analysis on the effectiveness of blockchain technology:
A study by Santander FinTech estimates that distributed ledger technology could generate annual cost savings of $15-20 billion for financial services infrastructure by 2022.
Research from PwC suggests that companies using blockchain technology could save up to $20 billion per year by 2022.
According to a McKinsey study, using blockchain could increase the efficiency of trade finance by around 30%.
Research from the World Economic Forum suggests that blockchain could create up to 21 million new jobs by 2025.
According to research from Capgemini, blockchain technology could save the insurance industry up to $10 billion per year by 2025.
Research by Deloitte suggests that the securities industry could save up to 60% on clearing and settlement fees by implementing blockchain technology.
According to IBM research, using blockchain technology could reduce fraud detection costs in the healthcare industry by up to 50%.
Research by PwC shows that blockchain technology can reduce costs associated with compliance, auditing, and reconciliation by up to 50%.
Blockchain technology has the potential to reduce the typical U.S. real estate transaction time from the current 30 to 60 days to just a few hours.
In the near future, the efficiencies blockchain offers when tokenizing RWAs will lead to many incredible outcomes.
There is an emerging trend towards heavily tokenized assets and items, including valuable real estate, fine art, and even exotic assets like wine or rare collectibles.
By 2023, sites like Securitize will have more than $500 million worth of tokenized assets, including private equity and real estate.
On sites like Masterworks, investors can buy shares of famous artworks for $20.
The above data highlights the many benefits of implementing an RWA token. But what are the issues that are causing trouble and hindering the development of RWA?
4. Problems encountered in the development of RWA
1) Regulatory uncertainty regarding tokenized securities
The U.S. Securities and Exchange Commission (SEC) filed lawsuits against multiple companies in 2023, revealing the legal risks of offering unregistered digital asset securities.
The World Economic Forum claims that regulatory uncertainty could slow the adoption of digital assets, potentially limiting market growth by up to 20% per year.
In order for RWAs to thrive in the cryptocurrency space, regulatory clarity is essential. Tokenized securities are still being categorized and regulated by regulators.
Because of this, legal and compliance barriers are critical.
2) Technical defects and the possibility of fraud.
Since blockchain technology is still relatively new, there are bound to be many hacking attempts and technical vulnerabilities.
Some of the hacks that shocked the crypto community:
A hack of the Ronin network in 2022 resulted in a total loss of $625 million.
According to Chainalysis, fraud and hacking attacks in 2022 resulted in the theft of approximately $3.8 billion worth of cryptocurrency.
According to the Defillama website, hackers have stolen $7.82 billion since 2016. (That’s a pretty big amount.)
Although blockchain increases transparency, it also introduces new risks. Mitigating these vulnerabilities and protecting investor assets requires investment and building security infrastructure. This is a brand new market, and a significant portion of investors are not aware of RWA or cryptocurrency trading. The increased interest from cryptocurrency investors is evidence of their willingness to take risks. But it is crucial for investors to understand the advantages and risks of RWA in cryptocurrency.
I will list the important RWA tokens for each asset class at the end. The history and future prospects of each RWA market. The tokenized real estate market is still relatively new, but many organizations predict that it could reach $1.4 billion by 2027. Trade finance and supply chain management involve numerous intermediaries and complex procedures. Blockchain can simplify these procedures, reduce fraud, and increase transparency. Trade finance and supply chain management are complex processes involving numerous intermediaries. Blockchain can increase transparency, reduce fraud, and simplify these procedures.
Blockchain-based trade finance solutions are expected to grow at a compound annual growth rate (CAGR) of 20% from 2022 to 2030, with the market valued at approximately $9 trillion in 2021.
The global art market will reach $65 billion in 2022.
According to Defillama, as of May 2024, the total locked value (TVL) of the Defi market is $90.8 billion, of which the RWA network accounts for $6.57 billion. RWA integrated projects are expected to occupy the majority of the market, and TVL is expected to reach $10 billion in 2025.
Defillama — Total Defi TVL
Defillama — RWA TVL
What role does the decentralized finance (DeFi) I mentioned earlier play in the RWA token? The following platforms, namely Centrifuge and MakerDAO, have made the RWA tokenization process much easier:
Centrifuge allows companies to tokenize notes or properties, which can then be used as collateral for loans.
Lending and borrowing: DeFi protocols allow for loans using RWA as collateral. An example is using tokenized real estate to obtain financing on platforms like Aave or Compound.
Yield Mining and Staking: Tokenized RWA can be staked in liquidity pools to generate interest, or used for yield mining technology. This provides a second source of income for asset owners. The effectiveness of the RWA project depends on regulatory compliance, especially Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.
Tokenized assets are regulated in various ways in different countries: The U.S. Securities and Exchange Commission (SEC) has set strict regulations that define security tokens.
In order to provide a comprehensive framework for crypto assets (including RWA), the EU is developing a regulation to regulate the crypto asset market, namely MiCA. We can clearly see the huge potential of this market.
5. RWA projects with potential
I concluded by listing a few RWA projects that I think have potential in the future.
What I learned while investing in crypto is that tokens with reasonable market cap attract whales and sharks more than low market cap projects.
Ondo Finance ($ONDO): Finance/Structured Products — Ondo Finance’s primary goal is to develop structured financial products that offer high yield and stable return opportunities. It offers a range of investment options to suit different risk appetites and aims to bridge the gap between traditional finance and DeFi.
Pendle ($Pendle): Finance — The Pendle is a financial asset designed specifically for tokenizing and trading future earnings.
Polymesh ($POLYX): Financial/Blockchain Infrastructure — Security tokens are used in regulated financial markets, and Polymesh was born for them.
Centrifuge ($CFG): Financial/Real World Assets (RWAs) — Centrifuge connects decentralized finance (DeFi) with tangible assets like invoices.
Goldfinch ($GFI): Finance — Goldfinch focuses on real-world lending and provides a decentralized credit protocol.
Creditcoin ($CTC): Finance — Creditcoin uses blockchain technology to improve trust in credit history and lending markets.
Propy ($PRO): Real Estate — Propy uses blockchain technology to make real estate ownership and transactions easier.
AllianceBlock Nexera ($NXRA): Finance — AllianceBlock Nexera connects decentralized finance (DeFi) with traditional finance.
CANTO ($CANTO): Blockchain Infrastructure — CANTO provides a platform and tools for decentralized applications (dApps) as part of its DeFi infrastructure.
Polymath ($POLY): Financial/Blockchain Infrastructure — Polymath makes it easier to create, issue, and manage security tokens.
LEOX ($LEOX): Finance/DeFi — LEOX is a decentralized finance company focused on different financial services.
Stobox ($STBU): Finance/Tokenization — Stobox provides tokenization services, allowing for the digitization of securities and assets.
LandX Governance Token ($LNDX): Real Estate/Agriculture — LandX connects investments in agricultural land with blockchain-based governance.
Realio ($RIO): Real Estate/Finance — Realio merges blockchain technology with real estate investing to improve transparency and liquidity.
Wadzpay ($WTK): Payments/Finance — Wadzpay hopes to use blockchain technology to update the payment system, making transactions faster and more secure.
