What's New in Crypto: Tokenization of Real World Assets (RWA)
The post-Web 2.0 world is now clear as day. And soon enough, most of the 'real' world as we know it will take the form and shape of 'tokenized' assets when more people join the decentralized Web 3.0.
Abstract
The rise of blockchain technology has led to the emergence of tokenization, a new form of asset ownership. Tokenization allows real-world assets (RWA) to be represented digitally as tokens, which can be bought, sold, and traded on blockchain networks. This article will examine the definition of tokenized real-world assets, their advantages, and the necessary measures to ensure secure and effective tokenization of real-world assets.
Definition
Tokenization of real-world assets is the process of representing physical and traditional (tangible and intangible) assets as digital tokens on a blockchain.
These tokens are secured by cryptographic protocols and can be easily traded on a peer-to-peer basis (P2P) without the need for traditional intermediaries such as banks or brokerages. Tokens of real-world assets can be fungible, like tokenized stocks, or non-fungible, like the copyright of the Mona Lisa painting.
Institutional parties are increasingly interested in the concept of tokenized real-world assets. In fact, its core idea has been applied to make issuing the two most widely traded stablecoins USDC (and USDT) possible.
The process of minting USDC involves users sending real dollars to Coinbase (Circle). The company then takes custody of the fiat currency and sends users USDC tokens. Owning USDC in your wallet represents the ownership of dollars, and users can choose to convert USDC to USD at any time.
In other words, USDC tokens now become the entry point for investors to set foot in Web3 and exit when they want to.
Since the birth of USDC, RWA tokenization has expanded to include real estate, copyright of paintings and digital arts, and tokenized managed funds.
By using a managed fund, investors put their money together, and an investment manager takes care of it for everyone's benefit. This way, investors can reach more investment chances that they couldn't get if they acted alone.
Source: Magellan Financial Group
Blockchain is the Key Technology in Tokenized RWA
Blockchain technology is the backbone of RWA tokenization, providing the infrastructure for secure and transparent ownership of tokenized real-world assets.
The blockchain enables trustless, transparent, and tamper-proof P2P transactions, with records that can be easily verified and traced back to the original owner.
Smart contracts can be programmed to execute automatically when certain conditions are met, allowing for the automation of many aspects of asset ownership.
Previously, it was argued that blockchain technology was unsuitable for financial transactions because it couldn't handle large amounts of transactions. However, the new Proof-of-Stake (PoS) blockchain and roll-up technology have made this argument irrelevant.
While Bitcoin’s transactions per second (TPS) perch at 7, Ethereum could handle 20 TPS, and Visa could handle 24,000 TPS, according to an article written by crypto.com in 2020.
By 2025, Ethereum 2.0 (post-Merge) will be capable of processing 100,000 TPS. Being able to handle as many as TPS and more than those of Visa makes blockchain a potential disruptor to the traditional financial industry.
The Merge was one of the most well-known update in the history of Ethereum blockchain development. It has successfully replaced the network’s Proof-of-Work (PoW) consensus mechanism with a scalable Proof-of-Stake layer, signifying a new era of Ethereum 2.0. Read more about Ethereum’s The Merge in this article.
When tokenized, RWAs can also be integrated into DeFi applications, which are built on blockchain and offer users several benefits:
Risk reduction: it is almost impossible for malefactors to make double-spend attacks (49-51 rule: Someone can change the blockchain only when they control more than half of the network's nodes), which makes it possible to mitigate fraud since blockchains are tamper-resistant.Â
Transparency: Public block explorers and data dashboards provide clear insight into the health of the applications.Â
Higher control: Users take control of their assets through self-custody wallets. Your investment portfolio stays with you and in your wallet whereas in the traditional market, your brokers get a hold of your stocks or any entrusted properties.
Reduced cost: This is achieved thanks to the reduced number of middlemen and lower switching costs between DeFi applications.
Let’s put it this way. Before blockchain, when you want to sell a high-value asset, say a house, there is a high chance that you would like to meet with a real estate agent so that he/she can take care of the in-between hassle for you. This indicates that you put all your trusts (sacrificing risk management as well as transparency) and control of your assets in one person only, while still paying a high cost to these middlemen, hoping they would not swindle you.
Benefits of Tokenized Real-World Assets to Investors
Transforming real-world assets into tokens presents multiple benefits that can offset the drawbacks investors are facing on a standard market.
Firstly, tokenization unlocks a new way to monetize illiquid assets.
DeFi protocols that embrace real-world assets tokenization as a source of collateral or as new investment opportunities will provide more consistent returns for investors. For instance, a $300,000 house can be tokenized into 100 NFTs worth $3,000 each. The house owner can collateralize a part of the house (using one or more NFTs) for a loan.Â
Private equity funds are unlisted closed-end funds that are not listed on public exchanges, unlike most hedge funds which are open-ended, allowing investors to consistently buy or sell their shares. In contrast, private equity funds have a set initial investment period, after which no further capital can be added.
Source: Investopedia
Secondly, it eliminates the need for intermediaries like banks or brokerages, resulting in reduced costs and a more efficient market for asset ownership.
For example, mortgage loans can be tokenized and sold directly to lenders. Furthermore, tokenizing real-world assets will lower investment minimums by allowing retail investors to buy tokenized private equity funds.
Other benefits of tokenizing real-world assets include: enabling fractional ownership, enhanced transparency and security, and automated ownership management.
What Assets can be Tokenized?
As briefly touched upon earlier, numerous real-world assets are subject to tokenization. The following section provides examples of such tokenized assets.
Collectors can tokenize and fractionize their collection which enables shared ownership of assets in that collection.
Artists can sell NFTs to represent the copyright of their artworks.
The NFT representing copyrights can be further classified into the rights to use the artworks for commercial or non-commercial activities, thereby generating a yield on their intellectual property (IP).
For example, Royal is a music marketplace that allows people to invest in music by owning a piece of a song or album's streaming royalty rights in the form of NFTs. The platform allows fans to support artists at an early stage of their careers, and the artists retain independence and creative control as fans fuel their careers.
Tokenized real estates allow many people to be owners of ONE property.
Timeshare models when met with blockchain technology can enable shared ownership of vacation real estates.
Time-sharing is a form of fractional ownership, where buyers purchase the right to occupy a unit of real estate over specified periods.
For example, purchasing one week of a timeshare means the buyer owns one-fifty-second of the unit. Buying one month equates to one-twelfth ownership.
Another application of tokenized real estate is to allow people to invest in real estate by buying a fraction of a house. For example, a house in Columbia, South Carolina was sold as a real word NFT for $175,000.
The Roofstock Onchain took ownership of the property, then, tokenize the property & mint an NFT that represents ownership of the house. Owning the NFT gives you ownership of the actual house.
Commodities, such as oil, gas, corn, wheat, silver, gold, etc., can be tokenized as NFT contracts.
Thus, investors can allocate their capitals to commodities without having to own the physical assets.
Most commodities are in the form of future contracts. The contracts provide protection to both sellers (farmers) and buyers by allowing farmers to lock in sales prices for their grain at different points during the year rather than only at harvest when prices tend to be low.
In the commodities exchange, the buyers can sell those contracts to other buyers. While traditional commodities traders are required to have a brokerage account, tokenized commodities trading allows buyers and sellers of commodities NFT contracts to trade in a decentralized manner, reducing the usually expensive and time-consuming middle layers.
Funds, private equity, stocks, and bonds can be tokenized, allowing retail investors to access a market that was previously only available to institutional investors
For example, Hamilton Lane (HLNE) – an investment-management firm – has opened the first of three "tokenized" funds. Prior to launching the fund, the company made its objective quite clear: to provide a greater number of investors with access to private markets.
With blockchain technology, players are finally able to own their in-game assets.
According to a report by Dappradar, over 1 million unique active wallets were connected to game dApps daily on average in 2022; this trend could push traditional game studios to integrate blockchain into their own games.
In addition, tokenized in-game assets can help indie game studios to raise funds through community and early game adopters can also benefit from rare game NFT.
What Needs to be Done to Make RWA Tokenization Safe and Effective
Asset tokenization is a novel idea with potential benefits, yet it is facing various challenges that must be addressed for it to be safe and effective.
Firstly, blockchain needs help to develop technology that supports decentralized exchange without sacrificing security with a key factor being Decentralized digital identities.
We will need a global system of Decentralized digital identities (DID) with which people, organizations, and things interact with each other transparently and securely; while we control their own digital identities and credentials.
Secondly, regulatory frameworks need to be developed to govern the creation and trading of tokenized assets without taking away the freedom of decentralized markets. Robust regulation will ensure that tokenized assets are traded transparently and safely.Â
By addressing these issues, it will be possible to make real-world assets tokenization safe and effective, unlocking the potential benefits of this novel idea.
Conclusion
In conclusion, the article has explored various aspects of tokenizing real-world assets, including its definition, the essential role of blockchain technology, and the numerous benefits it offers investors.
We've seen how tokenized assets can encompass various sectors such as art, real estate, and commodities, and how tokenization can democratize access to previously exclusive markets.
However, there are still challenges to overcome, such as developing decentralized digital identities and creating regulatory frameworks that balance security with freedom. By addressing these issues, tokenization has the potential to revolutionize asset ownership and investment opportunities for individuals and institutions alike.
Disclaimer
The views expressed herein are for informational purposes only and should not be considered as investment advice. They may not necessarily represent the opinions of M3TA. As every investment and trading opportunity carries risk, you should conduct your own research before making any decisions. M3TA assumes no responsibility for our users' investment activities or their profits or losses. The articles, data, and content provided by M3TA should not be relied upon for any investment-related decisions. We do not advise investing funds you cannot afford to lose.
This article, encompassing text, data, content, images, videos, audio, and graphics, is presented for informational purposes only and is not intended for trading purposes. M3TA cannot guarantee the accuracy, comprehensiveness, or timeliness of the content, documents, data, materials, or website pages accessible through any service, and neither M3TA nor any of its affiliates, agents, or partners shall be liable to you or anyone else for any loss or injury caused in whole. The content available through this website is the property of M3TA and is safeguarded by copyright and other intellectual property laws. Failing to provide proper citation may result in being accused of plagiarism.