Since ancient times, money has always been the most important thing in the world, and there is no reason why money should not be considered carefully, because it carries information about the value of things. All economic activity stems from the recording of this information, if the recordings are done correctly.w

In 2009, when Bitcoin was born, it opened a new door, a new perspective on how that information is managed and transmitted. Or in other words, blockchain technology already does this. While Satoshi Nakamoto imagined Bitcoin as an order of power and sovereignty, standing outside the control of governments and central banks, blockchain remains a neutral tool.

One tool that could drive a new wave of technofinance – is the creation of tokens that represent real-world assets (RWAs). These tokens have all the characteristics of blockchain assets – transparency, efficiency and self-governance – but are backed by real-world assets.

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Blockchain technology has played a key role in building the trust needed for Bitcoin to become a digital asset worth nearly half a trillion USD. By using cryptography with serialized blocks of data, where each new block depends on the previous block, Bitcoin demonstrated that digital records could become immutable and unchangeable.

And if value in the real world can be safely brought into the digital world, we seem to be at the door of a new era. The era of creating tokens that represent real world assets. If something can be legally verified as an asset, that principle can be expressed as a tradable asset. Therefore, the scope of RWAs is unlimited, from real estate, art, stocks or luxury items,...

Tokenization of RWAs is groundbreaking because it opens the doors to 24/7 trading to a global market – previously only available to special entities. Even heterogeneous assets such as machinery or goods can be easily divided to sell proportional ownership across the digital space. But above all, tokenizing RWAs helps accelerate the circulation of capital by eliminating or significantly reducing the intervention of intermediaries.

Yet, when it comes to something as important as value, “breakthrough” innovation is often overlooked. Furthermore, it is unclear whether it would be possible to eliminate intermediaries in all cases, but that could take away the significance of tokenized RWAs. With that in mind, how should we assess the current state of tokenized RWAs and their future?

Measuring the dynamics of monetary innovation

Fourteen years after Bitcoin emerged, 4.2% of the global population, more than 420 million people, participate in blockchain technology by holding crypto assets. Is this ratio good or bad? What if anchoring it to a reference point to measure the tokenization rate of RWAs?

To measure the momentum of the fintech revolution, one notable approach is to look at investor interest. However, this often leads to exaggerated results and does not reflect the robustness of the technology. Another approach is to look at the long-term cycle of technological change, following a “Perezian” framework.

According to this model, there are four phases in the technological change cycle: Inception Phase, Adaptation Phase, Bubble Phase and New Development Phase. Currently, we seem to have gone from phase one (emergence – the internet) to phase two (installation – blockchain).

During the golden phase, the maturity stage, new technology is fully integrated into the economic and social structure. This typically lasts several decades until profits diminish or until the next disruption.

Image provided by “Technological Revolutions and Financial Capital” by Professor Carlota Perez

Through each stage, we can immediately remember the period of the dot-com bubble in the late 1990s, when the “emergence” was the Internet, which was also the premise for Bitcoin and tokenization. In October 2002, the Nasdaq Composite index, which represents Internet-focused companies, was down 740% from its March 2000 peak. If we apply the Perezian model, we have gone from phase one (Internet) to phase two (blockchain).

Furthermore, with the emergence of a never-ending series of bankruptcies in 2022, from Terra and Celsius to FTX, we appear to have reached the bubble phase. This is also reflected in the sharp decline in venture capital cash flow. According to data from PitchBook, in the first half of 2023 only 814 investment transactions in the cryptocurrency market were carried out, a sharp decline from 1,862 transactions in 2022.

Contrasting the data, startups only attracted about 325 million USD in the second quarter of 2023 compared to 3.5 billion USD at the peak of the first quarter of 2021. So have RWAs even evolved from the “Bubble Phase” to the “New Development Phase”?

RWA Token: Resilience from Decentralization

As mentioned before, tokenized RWAs only represent “appearance” if an asset can be identified without intermediaries. For example, imagine a farmer buys a token to expand his operations. This specific RWA token will represent agricultural equipment such as a tractor.

This token is available on a specific platform. The farmer will pay less for the token/plow because he will not have to deal with an intermediary like a distribution agent. But what happens if that platform crashes?

Without a token issuance platform, how will a farmer redeem the token or determine the ownership of the tractor in the future when he wants to sell it?

This solution is proposed in the form of a clear contract and hosted on the platform of major blockchains such as Ethereum. As you may remember, the US Treasury Department sanctioned Tornado Cash, a cryptocurrency mixing service. However, even after the punishment, the underlying smart contract continued to function, albeit without the web interface provided by Infura/Alchemy .

And then it's just a few simple steps to get over the block with Interplanetary File Storage. This is a DeFi tool that investors look forward to when purchasing real assets in the form of tokens. As long as the blockchain network remains active, secured by thousands of nodes around the world, the ability to exchange tokens remains independent of trust in any Web3 platform.

In other words, RWA tokens act as irreversible and irrevocable smart contracts. We have seen this with non-fungible tokens (NFTs), where they can verify ownership/fee rights conditions, including fractionalized proportional ownership. RWA tokens will expand smart contract terms to include dispute resolution through decentralized dispute resolution suites.

The current landscape of RWA is tokenized

As tools for tokenizing fiat currencies, stablecoins have been driving the RWA market, while cryptocurrencies can generate profits from specific projects or serve as a scarce commodity rare. For example, Bitcoin is likened to digital gold. While NFTs will generalize ownership of property for e-books, albums or works of art. Overall, the generic RWA Token is a natural progression.

The first boom will involve assets that do not require additional infrastructure, such as the Internet of Things (IoT). Ultimately, real assets will have to be integrated in real time so that their status (location/price) is transmitted to the blockchain network.

The earliest form of this technology appeared in package tracking. For this reason, more abstract RWAs are preferred. Larry Fink, CEO of the world's largest asset management company, BlackRock, has hinted that, these assets will be familiar stocks, bonds and other financial instruments.

Blackrock is the world's largest asset manager with $10 trillion in AUM. Blackrock CEO Larry Fink:"I believe the next generation for markets… for securities, will be tokenization of securities." pic.twitter.com/f3MmASXywi

— The Tokenist (@thetokenist) January 20,

Startups like Tzero and Securitze have established themselves as veteran tokenization service providers. Similarly, the Goldman Sachs Digital Asset Platform (DAP) was also launched in January 2023. Major US banks and Big Tech companies have participated in building tokenized products on a permissioned blockchain network called Canton.

Digital Asset Company developed the Canton Network, with Goldman Sachs as the main investor. Surprisingly, even outside financial institutions are participating. The European Investment Bank (EIB) has issued its second digital bond in euro currency on Canton.

On permissionless blockchain networks, the tokenized bond market is worth around $630.2 million, with an average yield of 5.25%. Notably, German technology group Siemens used Polygon to issue the first corporate digital bond worth 60 million euros, with a term of one year.

dApp RWA, as an extension of popular lending app AAVE, has a market size of 7 million USD. Suffice it to say, it's all very small compared to the figure of $1 billion. This is why the scope of the global RWA market is in the pricing phase and is subject to many uncertainties. Meanwhile, Boston Consulting Group predicts on-chain RWA activity to grow from $4 trillion to $16 trillion by 2030.

The rise in retail trading, as seen through Discord servers focused on stock trading, also has the potential to pave the way into the world of RWA. According to CySEC, nearly 22% of retail investors get trading ideas from social media platforms. Furthermore, these communities serve as incubators for innovative ideas, so it's not hard to see tokenized RWAs getting attention there too – in this new 'home' of the house. retail transactions.

In the near future, as a percentage of global GDP, the tokenization market will reach 2.5% by 2025, mainly equity and bonds. True adoption will be seen with more diverse “other tokenable assets” than in the late 2020s.

Besides blockchain assets and cryptocurrencies, understanding traditional financial instruments such as options trading is important as they continue to play a role in market dynamics. Their coexistence and potential synergies with tokenized assets could become an attractive area of ​​research and investment as this new era of financial diversification unfolds.

Image by Boston Consulting Group The ultimate goal of RWAs: A complete economy

Due to the restrictions remaining after the crypto winter, banks' suspension of cryptocurrency services and the FED's interest rate hike cycle have made capital even more scarce. However, according to the World Economic Forum (WEF), the world is completely ready for tokenization. While professor Jason Potts from RMIT University said that the ultimate goal of tokenization is to “recreate real-world social infrastructure into the digital world.”

According to the 2030 Agenda, Prof. Potts envisions a new type of commerce that seamlessly combines the physical and digital economies into a “computable economy.” That's the final cog in the encryption puzzle. If all assets in the world were encrypted and accessible on a public ledger, this would create a “complete economy.”

Even so, the growth of the RWA market also depends on support from regulatory agencies and legal regulations. Real world assets, such as real estate and bonds, are often subject to a variety of legal regulations. Tokenizing RWAs therefore requires a close collaboration between the cryptocurrency industry and regulators.

Regulators must ensure that the tokenization of these assets complies with regulations on consumer protection, preventing money laundering and terrorist financing, and ensuring transaction transparency and security. . Additionally, the involvement of central banks and fiscal authorities is needed to ensure the stability of RWA tokens and prevent extreme price fluctuations.