Real World Asset Tokenization
Bringing the physical world on-chain to improve efficiency, accessibility, and liquidity.
Real world asset (RWA) tokenization is all the rage lately. But, what is RWA and why are people talking about it?
Let me help you break it down simply.
In past articles, we’ve covered what a blockchain-based token is — basically, a digital record of ownership. We’ve got that covered. So, what is meant by “real world asset”?
Real world assets are just that — really anything that exists in the real world that you want to bring on-chain:
- Art
- Real Estate
- Gold
- Diamonds
- Carbon Credits
- Mutual Funds
- Etc.
The list goes on and on — it’s only limited by your imagination! But just to clarify, not everything needs to go on-chain — you still need appropriate product-market fit and a clear reason why to put something on chain.
Coming back to the topic at-hand — real world asset tokenization then refers bringing these off-chain assets on-chain by recording their ownership through a shared digital ledger.
Great. What’s that do for you?
Let’s take two scenarios to give you an idea:
- You don’t have $5 million USD laying around to buy a Banksy? Okay, we will tokenize the painting and allow you to buy smaller shares (fractions) so that you have access to that real world asset.
- OR, you don’t know where your diamond came from but want to see its provenance? Okay, we will tokenize a digital representation of your physical diamond and track it throughout the supply chain.
With those scenarios in-mind, you can see that bringing real world assets on-chain brings a number of benefits:
- Accessibility: through fractionalization (smaller shares), more users can gain access to different asset classes
- Liquidity: with more users exposed to asset classes, theoretically liquidity will improve
- Tradability: blockchain-based mechanisms improve the buying/selling of assets through more efficient exchange operations
- Transparency: tying the physical to the digital in an unbreakable way enables users to be confident in their real world purchases
All of that sounds pretty great, right? That’s why we are seeing an explosion in this space. The market has seen web3-native platforms like Securitize, Centrifuge, Mantra, Tokeny, Propy, ACX and many more build solutions for real world asset tokenization, while it’s also seen more traditional players like JPMorgan and Franklin Templeton enter the space.
Right now, the RWA trend is being led by the investment use cases for these varied asset classes, rather than the asset provenance/verification type use cases. However, both are potentially valuable.
There is no denying that RWA presents major opportunities for a variety of asset classes.
However, these opportunities must be balanced against the risks of today AND tomorrow. Some risks to keep in-mind:
- Regulatory — across different jurisdictions, it’s still unclear what is and what is not a security
- Legal — does the technology implementation actually reflect the legal framework and if not, is the legal framework holding back the potential of the technology? There are also general legal liability concerns.
- Business — what is the impact on your existing business and your customers — what’s the user experience you’re trying to bring them and do they want it?
- Technical — ensuring your technology choice is mature and secure is crucial in this emerging space
These are just some of the risks — it’ll all depend on your specific real world asset and on-chain use case for that asset. With these in-mind, you can work on capitalizing on the opportunities that RWA presents.
Real world asset tokenization is an exciting (and wide!) area within web3. Historically, crypto has been about crypto-native tokens. The “real” in real world asset tokenization is truly about connecting this technology with the “real” economy. This is a topic you should keep your eye on!
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