Real World Asset Tokenization: Top 5 Trends to Watch in 2023
Nothing following this constitutes financial advice, please do your own research. All data presented henceforth are accurate as of 10 April 2023.
Traditionally, trillions of dollars worth of assets such as real estate, fine art, metals, and trade finance have been locked away, inaccessible to most retail investors due to their high cost of entry. These assets have primarily been owned by institutional investors, with limited opportunities for individual investors to participate.
However, with the emergence of tokenization — the process of creating digital representations of assets on a blockchain — these industries are poised for disruption. Tokenization has the potential to attract a broader base of smaller-ticket investors, democratizing access to previously inaccessible assets. For institutional investors, this also means greater liquidity and increased efficiency.
In the following section, we will look at the top 5 trends for Real World Assets (RWA) tokenization, covering the recent developments, on-chain metrics and a brief look into the up and coming RWA protocols.
Increasing adoption by TradFi Institutions
There has been an increase in the adoption of asset tokenization applications. According to a survey by BNY Mellon, 97% of institutional investors agree that “tokenization will revolutionize asset management”, with 70% willing to pay extra for increased liquidity and faster asset turnover.
MAS’ Project Guardian has collaborated with JP Morgan, DBS Bank, and SBI Digital Asset Holding on a pilot that involved foreign exchange and government bond transactions using liquidity pools on the Polygon blockchain. These transactions comprises tokenized Singapore and Japanese government securities bonds, as well as SGD and JPY.
In February, German-based Siemens’ issued a $63 million digital bond on Polygon which aimed to reduce paperwork and open “new markets to new customers of those bonds”. Just this month, French investment bank Credit Agricole CIB and Swedish bank SEB collaborated to create a blockchain-based platform for digital bonds.
We should expect to see this trend continue as tokenization gains traction amongst institutional investors looking to improve asset liquidity.
Growth of tokenization platforms and infrastructure
RWA tokenization remains a promising area of growth in the blockchain space, which is expected to be a $16 trillion business opportunity by 2030. This represents a growth of more than 50,000% compared to $310 billion in 2022. Investment bank Citi concurred and claimed that blockchain tokenization would supersede legacy financial infrastructure because it is technologically superior and it provides more investment opportunities in private markets.
Lastly, according to rwa.xyz, the Total Active Loans Value has grown by ~87.4% since the start of 2023, reaching an estimated of $476 million. These loans provide investors an average of 11.96% APR. These yields are relatively higher and more sustainable compared to the yield you typically find in current DeFi protocols.
Expansion of asset classes up for tokenization
The tokenization market has grew rapidly and there are a handful of asset classes that are now tokenized and available for fractional ownership. Below is a non-exhaustive list of some up-and-coming RWA protocols:
OpenEden provides 24/7 access to on-chain US T-Bills. It is the first smart contract vault managed by a regulated financial institution. Stablecoin holders can mint TBILL tokens via the OpenEden TBILL Vault to earn the U.S. risk-free rate, which yields close to 5% p.a. as of March 2023.
Polytrade is a decentralized trade finance platform focused on invoice factoring. In invoice factoring, a lender buys due invoices from a supplier at a discount, then collects the full invoice amount generating a profit or yield. These invoices are often raised by SMEs but are payable by large corporations such as IKEA.
Goldfinch is a decentralized credit protocol that enables businesses to access crypto lending without having to post crypto collateral, instead using real-world assets as collateral. In just over one year, Goldfinch grew to over $100M in active loans across 28 countries, and hundreds of thousands of end borrowers
RealT fractionalizes U.S. real estate properties into RWAs and creates a two-sided market between sellers and buyers. RealT replaces paper deeds with digital tokens based on the Ethereum blockchain and Gnosis Chain. You can own real estate starting at ~$50 and collect weekly rental payments.
Increasing reliance on oracles
An oracle is a critical component for tokenization as it acts as a bridge between the on-chain and off-chain world. Oracles provide reliable and secure data feeds to smart contracts that execute the terms of a tokenized asset. One example would be Chainlink’s Proof of Reserve. Without a reliable oracle, smart contracts cannot receive accurate and timely information from the real world, which can result in invalid execution of tokenized assets. This can lead to significant financial losses for token holders and negatively impact the overall adoption and credibility of tokenization.
According to Defillama, Chainlink has 46% of market share with 262 protocols currently under its belt. Though unlikely, this could be a potential single point of failure in the case of a black swan event. Investors should take note of any regulatory and centralization risk that could cause a major disruption to the market.
Increasing user interest on Twitter
There has been a growing interest in RWA Tokenization on social media platforms lately as well. Here are some notable tweets, with some coming from prominent founders:
“The next generation of markets and securities will be tokenization of securities.” — BlackRock CEO Larry Fink
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References
ADDX & Boston Consulting Group. (2022). Navigating the digital asset ecosystem. https://web-assets.bcg.com/1e/a2/5b5f2b7e42dfad2cb3113a291222/on-chain-asset-tokenization.pdf
Binance Research. (n.d.). Real-world asset report. https://research.binance.com/static/pdf/real-world-asset-report.pdf
Cointelegraph. (2023, March 31). ‘Killer use case’: Citi says trillions in assets could be tokenized by 2030. https://cointelegraph.com/news/killer-use-case-citi-says-trillions-in-assets-could-be-tokenized-by-2030
DeFi Llama. (n.d.). DeFi Llama — The DeFi Dashboard. Retrieved from https://defillama.com/
Goldfinch Finance. (n.d.). Goldfinch Finance. Retrieved from https://goldfinch.finance/
OpenEden. (n.d.). OpenEden — Platform for launching and trading tokenized real-world assets. Retrieved from https://openeden.com/
Polytrade Finance. (n.d.). Polytrade Finance — Decentralized Finance for Real Estate. Retrieved from https://polytrade.finance/
Realt. (n.d.). Realt — A platform to tokenize real estate assets. Retrieved from https://realt.co/