Tokenizing real-world assets (RWA) is a key area where blockchain technology can play an important role in solving real-world challenges.
Real-world assets on the blockchain
The process of tokenizing real-world assets (RWA) is an important area where blockchain can help solve real-world problems. Although RWA are often seen as purely investment assets, they are closely related to issues of social progress, housing, the environment, and more.
By tokenizing off-chain assets like currencies, commodities, stocks, carbon offsets, real estate, bonds, and artwork, a more transparent global trading market can be established to help address these challenges.
The purpose of cryptocurrency assets is to establish a valuable, crypto-coded storage or reward system in the digital realm. Cryptocurrency assets are easy to develop and monitor on the blockchain and can be categorized based on their use or purpose.
However, their downside lies in their intrinsic value, leading to significant price volatility. On the other hand, risk-weighted assets are related to the real world and operate within it, giving them intrinsic value and a relatively stable price advantage when linked to real-world value.
Tokenizing RWA can serve as on-chain assets, helping to increase total locked value (TVL) and on-chain transaction volume. In addition, they can also promote ecosystem expansion by developing communities, increasing on-chain liquidity, and expanding businesses.
This is a significant issue of concern for the entire blockchain industry.
How does tokenization improve asset availability for buyers?
It uses digital tokens to provide a digital representation of tangible assets. In today's world, purchasing a plane ticket or a new sweater takes just a click, but buying stocks or mortgages takes more time.
Many transactions do not happen instantly because they require document processing or settlement. Assets like gold, real estate, artwork, and carbon credits are among the hardest assets to transfer, requiring buyers and sellers to endure a lot of paperwork and lengthy procedures.
By representing real-world assets as digital currencies on a distributed ledger or blockchain, their value can be unlocked and exchanged in real time.
Using blockchain to accelerate value transfer
Current cross-border payment processes are inefficient, complex, and slow; payments are the foundation of global trade, but real-time payments have yet to be realized.
Whether it is asset trading or other types of assets, the ability to transfer tangible assets within the blockchain brings benefits to digital security platforms while still maintaining asset characteristics.
Tokenization is the process of synthesizing executable agreements (such as collateral, auto loans, consumer debt, accounts payable, and generated income) and selling them to investors in standardized units.
Since the early 1970s, this practice has become increasingly popular and widespread. However, 'tokenization' takes it a step further by encoding real-world assets. Tokenization of real-world assets does not restructure cash flows like securitization; instead, it focuses on 'tokens.'
An economy centered on tokenized assets
Asset-backed tokens are becoming increasingly popular. Initial Coin Offerings (ICOs) are one example. This novel crowdfunding method has raised over $4 billion globally in recent times.
To fund projects, ICOs require the creation and sale of cryptocurrencies or tokens. Through an ICO, an idea can adopt a viable alternative to traditional financing methods, such as banks or venture capitalists, which typically require significant time and control transfer.
Why tokenize real-world assets?
Our world is filled with assets, including stocks, real estate, precious metals, carbon credits, and hydrocarbons. Many of these items are difficult to physically transfer or divide, so buyers and sellers exchange documents representing part or all of the items.
However, cumbersome paperwork and complex legal procedures pose challenges for the transfer and monitoring of assets. A viable approach is to apply a digital system similar to Bitcoin to real-world assets.
Electronic trading and standardized protocols have largely replaced physical documents in the exchange of goods, but the management costs of these systems are high and often rely on the participation of trusted intermediaries.
Startups and well-known financial institutions around the world are urgently developing systems for the next phase of development, namely asset tokenization.
Transfer of specific rights versus transfer of ownership
The forms of asset transfer and ownership are diverse. Sometimes, only limited rights related to a new asset are transferred, such as time-limited land use agreements, rather than property ownership.
For thousands of years, property ownership has led to various forms of ownership structures and control mechanisms, such as 'trusts' (representing others' ownership of property).
Specific details depend on the applicable jurisdiction, legal form (common law vs. civil law), assets, and rights that need to be transferred.
Some intangible assets, such as music copyrights, can be licensed to millions of individuals simultaneously.
When customers 'purchase' a record from iTunes, they do not gain ownership (a change of ownership); rather, they are buying the right and license to listen to the music in certain situations.
In general, blockchain projects can be categorized into rights-based projects, such as music licensing, and fully ownership-based projects, such as selling real estate.
Tokenizing real-world assets requires the creation of virtual investment tools.
It is based on blockchain and supported by tangible assets such as real estate, precious metals, artwork, and antiques. Ownership is recorded on the blockchain rather than through tangible ownership. This can be traded directly between parties or divided and sold to a large number of individuals.
Maintaining ownership of tangible objects on the blockchain has many benefits:
It reduces costs by eliminating intermediaries like lawyers, brokers, and banks.
It makes product transactions quick and efficient, whereas previously they could only be completed during 'business hours.'
It lowers the barriers to entry and increases liquidity.
Its simple process enhances traders' confidence and sense of responsibility.
The future of tokenizing RWA
Traditional financial institutions are eager to tokenize assets such as gold, stocks, and commodities that they have always traded. The investment fund Franklin Templeton launched the Franklin OnChain US Government Money Fund on Stellar in 2021 and expanded to Polygon in 2023.
This investment fund is the first registered mutual fund in the U.S. to use a public blockchain to process and record stock ownership.
Bank of America recently called tokenizing RWA 'the main driver of digital asset adoption.' According to their report, investment in the tokenized gold market has exceeded $1 billion.
The demand for tokenizing U.S. Treasury bonds is also rising, and the cumulative market value of cryptocurrency market funds has approached $500 million.
An internationally leading business consulting firm predicts that by 2030, global demand for tokenized real-world assets will rise to $16 trillion, indicating a bright future for tokenization.
