Real World Assets (RWAs) in crypto: Ultimate guide
Any tangible or intangible asset may be brought on-chain to leverage the perks of decentralization. With BlackRock’s recent foray into Real World Assets (RWAs), tokenization is poised for explosive growth. Our guide lays out the fundamentals of RWA crypto, from technicalities to regulation.
What is the point of Real World Assets (RWAs)?
Despite its dynamism, the crypto economy is still criticized for volatility and detachment from the physical world. RWAs present a new frontier where DeFi and traditional stores of value, such as bonds or real estate, converge, potentially revolutionizing the financial landscape.
This investment avenue breaks new ground, attracting growing institutional and retail interest. With the collective value projected to hit as much as $16 trillion by 2030, RWAs are “the next generation for markets,” according to BlackRock CEO Larry Fink.
Definition of Real World Assets (RWAs)
RWAs are crypto tokens representing tangible and intangible assets outside the blockchain, such as artworks, real estate, precious metals, and intellectual property. The tokenization of physical collectibles like antiques and vintage vehicles is also on the rise.
Accessible, secure, and liquid, these digital tokens support financial innovation. RWA tokenization endows them with five features of blockchain-based assets, enhancing liquidity and transactional ease:
➕ Transparency
➕ Tradability
➕ Immutability
➕ Divisibility
➕ Programmability
A single layer consolidates RWA distribution, exchange, clearing, settlement, and safekeeping. Investing procedures depend on the asset type.
For instance, commodity tokens, like all popular cryptocurrencies, may be traded on decentralized exchanges. Real estate tokens may require engaging with particular Web3 platforms.
How are RWAs created?
RWA tokenization is a groundbreaking invention of recent years. It transfers real-world property rights into blockchain-based tokens that represent ownership or shares. Ownership rights are managed on-chain, bridging the physical and the digital dimensions.
RWA cryptos are objects with substantive economic value. They are widely acknowledged and suitable for transactions and investments. Individuals and entities purchase them to derive financial benefits and may transfer ownership to others through licensing or sale.
RWA tokenization overview
Tokenization is a lengthy process with the key stages outlined below.
- Choice of assets. Selecting an asset (physical or intangible) that the RWA token will represent.
- Due diligence. Defining the asset value and auditing the asset to ensure its legitimacy.
- Legal framework. Specifying the rights and responsibilities of future holders.
- Token specifications. Choosing the type (fungible or non-fungible), the standard, such as ERC-20 on Ethereum, and other technical aspects of the RWA token.
- Choice of the blockchain(s). Picking a public or private blockchain to issue the tokens. Cross-chain operability protocols like Chainlink’s CCIP make tokenized assets more widely available.
- Off-chain linking. Establishing a reliable connection to external (off-chain) data for the tokens to interact with the real world.
- Issuance. Issuing RWA tokens on the chosen blockchain(s) so they can be sold, exchanged, and used in other financial operations.
Use cases for Real World Assets
Theoretically, any item with monetary value, from gold to carbon credits, may be transferred on-chain. Feasible use cases include:
- Commodities: real estate, gold, silver, and rare metals.
- Financial instruments: securities, equity shares, debt bonds, and deposits.
- Physical collectibles: fine art, automobiles, antique items, and costly electronic devices for corporate use.
- Intellectual property: patents, licenses, trademarks, and copyrights.
- Venture capital funds: governance, fractional ownership, shares, and due diligence.
- Energy assets: crude oil, carbon credits, and wind or solar farms.
- Consumer products: food, beverages, pharmaceuticals, and clothing (loyalty benefits and supply chain practices)
- Luxury goods and services: fashion and footwear (physical and in-game items), wearables, and travel privileges.
- Agriculture: land, crops, equipment, and storage facilities.
- Music royalties: albums, royalties, merchandise, and tickets.
Advantages of Real World Assets
Tokenization may streamline, simplify, and consolidate financial processes, reduce counterpart risk, and boost efficiency. This fusion of TradFi and blockchain enhances the experience of both buyers and sellers.
RWAs lower the barriers to traditional assets, such as upfront costs. Instruments used only by the wealthy or limited geographically become dramatically more accessible. Furthermore, retail users may successfully partake in these markets without institutional help.
1. Higher liquidity
Tokenization makes assets, including traditionally illiquid commodities and real estate, easier to buy and sell. RWAs support strategies that are more agile and responsive to market changes.
Tangible assets are not immediately liquid — holders must go through lengthy, complex processes to convert them into cash. With RWAs, they enter and exit positions quickly, thanks to the inherent design of crypto exchanges.
2. Lower entry barriers
Divided into smaller units, tokenized assets become accessible to more buyers. Fractional investment into assets with capital and regulatory restrictions in the physical world democratizes finance.
Thus, RWAs accommodate the needs of a diverse range of people who were previously priced out. Entry thresholds no longer hamper access to bonds or real estate.
3. Transparency
Like all blockchain transactions, RWA movements are public and traceable. The assets are represented on-chain, enabling auditable asset management. The overall systemic risks are lowered, and participants can more accurately determine the amount of leverage and risk.
4. Transcending geographic boundaries
Thanks to blockchain’s global nature, assets are no longer bound by regional or jurisdictional limitations; RWAs unlock opportunities previously denied to people from specific parts of the world. Asset ownership is democratized — distributed in a decentralized, transparent, and structured fashion.
5. Enhanced security
RWA platforms can boost investor confidence and trust, promoting crypto adoption. While blockchain technology is not immune to certain types of interference, it significantly reduces the risk of fraud, as records are immutable and tamper-proof.
6. Diversification options
Variety is key to balanced portfolios. Crypto holders increase the stability of their holdings by hedging them with a mix of tokens linked to the real world. Meanwhile, entities and individuals tapping into crypto get an easy start, leveraging the benefits of blockchain technology.
7. New profit opportunities
Holders have novel ways of generating returns, such as dividends or rent. Versatile tokenization also boosts innovation in DeFi, inspiring the creation of new products and services.
Risks of Real World Assets
The primary risks relate to the custody of physical assets and the connection to the outside world. Furthermore, RWAs are not entirely immune to vulnerabilities or smart contract bugs. Here are five top concerns.
- Initial costs. Creating, launching, and managing RWAs may require substantial capital. Audits and legal compliance add to the startup costs.
- Legal complexity. Real-world tokenization is a developing field without consistent regulation. Issuers navigate a patchwork of laws varying geographically.
- Uneven liquidity. Issuers must ensure sufficient market liquidity and demand for their assets. Lower interest in some RWAs diminishes their sale facility.
- Security risks. Like all their on-chain assets, RWAs may fall prey to security breaches and fraud — from phishing to smart contract exploits. The link between physical and digital assets is particularly vulnerable. Finally, rogue actors may attempt to tokenize non-existent assets or assets they do not legally own.
- Centralization. Being backed by off-chain RWAs makes on-chain products more stable and efficient. However, the reliance on centralized third parties for custody and acquisition of the physical assets brings its own concerns.
For market success to last, security must be robust throughout the tokenization process. As noted by Lossless, developers cannot afford to be reactive. Proactive measures must complement asset verification, compliance, and smart contract audits.
Regulation of Real World Assets
From Europe to Asia, regulators are crafting the landscape for tokenization. Nascent and geographically inconsistent frameworks hinder global adoption. According to Arf, as of February 2024, only a handful of RWA regulation hubs exist.
Switzerland: Innovative hub
The Swiss Financial Market Supervisory Authority (FINMA) monitors the issuance, sale, and trade of RWAs in the country. Risk-based regulations foster competitiveness in the global RWA market, with tailored requirements for each asset type and proportional proactive oversight.
Singapore: Focus on consistency
The Monetary Authority Of Singapore (MAS) applies its regulatory principles consistently based on the “same activity, same risk, same regulation” principle. However, it also promotes a global market, collaborating with foreign regulators and organizations like Switzerland’s Financial Stability Board (FSB).
United States: Clash of approaches
US regulators have treaded cautiously, with the SEC (Securities and Exchange Commission) intending to apply the current securities laws. The absence of formal guidance and tailored laws creates uncertainty in the industry, as issuers must also navigate standard CFTC guidelines.
United Kingdom: Applying existing laws
The Financial Conduct Authority (FCA) also refers to existing securities laws but remains open to novel approaches. The applicable regulations focus on disclosure, investor protection, and AML requirements.
Anatomy of RWA fund: BlackRock’s BUILD
In March 2024, the largest wealth manager unveiled its money market fund using RWAs. The BlackRock USD Institutional Digital Liquidity Fund, which is represented by the BUIDL token, was created on Ethereum in collaboration with Coinbase.
BlackRock, boasting $9 trillion in assets under management, is the fund manager and the counterparty for investors. It also invests in the transfer agent (Securitize) and stablecoin issuer (Circle) for the fund. Here are the key facts and figures structure-wise.
- Underlying assets. BUIDL generates yield by investing USD in overnight repos and US Treasury bills (T-bills).
- Transfer agent. Securitize LLC, launched in 2017, is registered with the SEC. This asset tokenization platform is an “on-chain administrator” for BUIDL.
- Blockchain. All BUIDL’s LP shares are issued and managed on Ethereum, with Securitize overseeing and adjusting the cap table based on investment traffic. The yield is issued monthly as new BUIDL tokens on a pro-rata basis.
- Stablecoin issuer. The US-based Circle issues BUIDL’s primary stablecoin, USDC.
- Stablecoin. USDC is the currency of choice for on-chain investments and redemptions to and from Securitize’s accounts; it will soon replace USD. Currently, only the cap table is mirrored onchain.
- Yield instrument. T-bills are the US government’s borrowing instruments. The yield is the interest paid to their holders.
- Borrower. The US Treasury Department is the entity in charge of federal finances. It collects taxes, pays bills, and manages currency, government accounts, and public debt.
Securitize LLC
Launched in 2017, Securitize includes one of the top stock transfer agents in the USA (Securitize Markets). Its rigorous compliance with regulatory standards has earned it the trust of 3,000 clients. At press time, the firm services over 1.2 million investor accounts.
As of April 2024, an impressive $600 million had been invested through the Securitize platform. It provides an all-inclusive suite for digital securities management, with compliance assistance, communication tools, and issuance. Ethereum is the primary blockchain used, but it is not the only one — Securitize is chain-agnostic.
More examples of RWAs
The growth of RWAs is not limited to physical assets brought on-chain. Additionally, protocols issue proprietary capital market products like digital securities. Existing on-chain protocols have also begun integrating RWAs.
Ondo Finance
Ondo Finance boasts the first tokenized US Treasuries product, OUSG. It coexists with the Flux Finance lending protocol, which turns tokenized Treasuries into DeFi loan collateral. Meanwhile, the native ONDO token provides holders with governance rights.
US Treasuries are highly liquid and low-risk products. The platform converts users’ stablecoins into US dollars to buy the assets and deposits newly minted RWA tokens into their wallets. Upon redemption, the tokens are burned, and users receive USDC.
In addition, Ondo USD Yield (USDY) is a tokenized note secured by short-term US treasuries and bank demand deposits. It is overcollateralized, providing access to an institutional-grade structure with enhanced security.
Maple Finance
After moving away from uncollateralized loans, this protocol redefines DeFi lending with RWAs as loan collateral. Borrowers may use invoices, credit instruments, and other assets evaluated by the community or third-party validators.
All Maple Finance loans are provided in stablecoins on Ethereum and Solana. US institutions may also pledge receivables, such as tax rebates, as collateral to USDC loans; liquidity pool investors (accredited entities like institutional asset managers and DAO treasuries) earn a yield once the IRS transfers the credit.
Lenders may fund individual loan requests or contribute to pools to optimize their risk-return ratio. Meanwhile, the native MPL token gives holders a say in governance decisions, including loan approvals and platform adjustments.
Polytrade
Built by professionals from TradFi giants like JPMorgan, Polytrade is an RWA marketplace supporting fractional ownership. Its intuitive investment platform streamlines discovery, tokenization, and liquidity.
Comparison is simplified through standardization, with the asset choice including real estate, collectibles, bonds, watches, and loans. All Polytrade RWAs are custodied with their originators and safeguarded by their “first loss pools.”
The company is credited with launching the ERC-6960 tokenization standard and the first tokenized invoice pool. Sandeep Nailwal, Polygon’s CEO and founder, is a member of the Polytrade Council.
stUSDT
The first RWA platform on TRON is a money market fund product. Users receive RWA tokens for staking USDT, earning over 4% APY at press time. As of April 2024, TRON holds the largest circulating supply of USDT.
stUSDT is proof of users’ RWA investments, and the yields reportedly come from government bonds. JustLend DAO, which oversees the investment and operation, boasts the highest TVL on TRON.
stUSDT bridges TradFi to crypto while empowering users with more options. Leveraging blockchain transparency, security, and immutability, it narrows the gap between retail and institutional investors.
MakerDAO
This prominent credit protocol generates as much as 80% of its fee revenue from RWAs. They are used as collateral for DAI, its native overcollateralized stablecoin. MakerDAO is constantly diversifying its backing.
When DAI is minted, MakerDAO generates revenue through its stability fee — the cost of minting for the end user. In the case of T-bills, this fee equals the yield on the underlying RWAs.
All RWAs in this ecosystem generate yield accruing to the DAO — and this revenue has historically exceeded the share of DAI issued against them. It benefits users indirectly through buybacks in DSR and MKR.
As of January 2024, the exposure to RWAs has grown by 267% YoY, reaching $2.4 billion. Yet the DeFi protocol is non-RWA focused; it has incorporated off-chain assets into its offerings. Aave and Frax Finance are other examples of protocols leaning on RWAs.
Swarm Markets
The Swarm platform tokenizes various assets beyond blockchain: cryptos, carbon credits, securities, real estate, and more. Its appeal to TradFi market players is based on regulatory compliance. According to the official website, as of April 2024, Swarm has a TVL of nearly $20 million.
Tokenized stocks, issued by the SwarmX GmbH subsidiary, are fully backed by real equities, assigned ISIN numbers, and monitored by a global auditing firm. As of April 2024, these are the only prospectus-based stock tokens, which means they comply with the Securities and Exchange Commission (SEC) requirements.
Swarm Capital GmbH publishes monthly disclosures of the underlying assets. Users tokenize and trade assets in a compliant environment and embed custom marketplaces into their ecosystems via a white-label solution.
Wrapping up: RWAs in 2024 and beyond
RWAs are incredibly diverse, bringing assets from real estate to royalties on-chain. They make asset ownership more democratic, diversified, and inclusive, paving the way for a fairer ownership landscape. Yet, while broadening access to traditional assets, they are not risk-free.
Issuers must navigate inconsistent legal frameworks, ensure reliable custody, conduct valuation and auditing, and mitigate blockchain security risks. As this asset class evolves, global adoption will mark a crucial milestone in humanity’s journey toward a decentralized financial future.
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