Tokenization of Real-world Assets: Upgrading a $950tn Market

EQT Ventures

Published in

eqtventures

11 min readDec 10, 2024

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By: Daniel Fraai, Kaushik Subramanian, Marnix van der Ploeg, Tom Mendoza, Alexandre Pons

Imagine a future where all types of assets are digitised. A world where even the smallest asset managers could turn any asset or creative investment strategy into a digital, bankable security that anyone could invest in.

Real-world asset (RWA) tokenization makes it a reality. By bringing assets onto blockchains, it offers a path to a more efficient and real-time financial ecosystem, where new financial products can be created and invested in without the need for intermediaries like banks.

Stablecoins have already proven it works — processing over $8.5tn in transactions in Q2 2024 alone. As blockchain infrastructure improves and scales to rival traditional payment rails, enterprise adoption is accelerating. And this is just the start. The success of stablecoins highlights the demand-driven adoption path ahead, starting with simpler assets like treasury bills before advancing to more complex instruments.

We don’t know exactly what the future will look like, but we believe all assets will settle on the blockchain. RWA tokenization bridges traditional finance and DeFi, unlocking trillions in trapped value, making money more efficient, and opening new doors for people to invest in what they believe in. This is the next chapter of financial innovation.

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Traditional finance needs an upgrade.

The vast majority of assets, approximately $950tn, are still managed with paper, spreadsheets, and man-hours. And the record-keeping process that supports the entire global financial system only runs eight hours a day, five days a week. This way of doing things has stood the test of time, but it is showing its age, weighed down by inefficiencies that slow down transactions, increase costs, and stifle innovation.

Beyond these operational bottlenecks, traditional finance also remains largely exclusionary. Regulatory barriers and large ticket sizes restrict participation to wealthy individuals and institutional investors, leaving millions of potential investors unable to access many of the more interesting and lucrative investment opportunities.

This status quo means a significant portion of the world’s wealth is trapped in inaccessible, illiquid assets. The investable world has been limited by the existing banking and financial system, and a lack of imagination: an overly narrow view of what types of things can be considered assets, and where potential value might be hiding.

The story of innovation in finance is one of reducing friction. From money to stock markets to mutual funds and ETFs, each step has increased access to the market and made transactions more efficient. We believe real-world asset (RWA) tokenization is the next step on that journey.

The promise of RWA tokenization

Real-world asset tokenization is the process of representing real-world assets as digital tokens that exist on a blockchain. These tokens represent the ownership and legal rights to the asset, whether tangible — like real estate, fine art, or wine — or intangible — such as patents or copyrights.

By bringing these assets on-chain, they can benefit from the inherent benefits of blockchain technology: programmability, autonomy, efficiency, and transparency. They could be broken down into smaller units, allowing for fractional ownership: individual investors would be able to participate in high-ticket investments they previously could not afford.

You can think of tokenization as the natural evolution of securitisation. Just as securitisation transformed illiquid assets into tradable securities, making more types of investable assets available to more kinds of investors and providing new avenues for companies to raise capital, so tokenization can do that for the 21st century. But, unlike traditional securitisation, which is still limited to high-volume transactions and fairly standardised underlying assets, exclusively handled by large banks and specialist firms, tokenization democratises it. It puts the tools of securitisation in the hands of smaller asset managers and individuals, allowing them to unlock the value of virtually any asset, regardless of scale.

At its core, tokenization offers a path to a more efficient and real-time financial ecosystem, where new financial products can be created and invested in without the need for intermediaries like banks. Because the messaging and actual asset transfer is verified all in one, rather than separated as it is today, the time to trust and asset transfer can be faster. And this is only becoming more true. Blockchains are processing more than 50 times as many transactions per second as they were just four years ago thanks to the rise of Ethereum L2 networks and other high-throughput blockchains. In so doing, it addresses the illiquidity problem plaguing many assets — from private equity and real estate to fine wine and vintage cars — allowing more investors to tap into wealth that has been locked away due to the high cost of entry or lack of accessible platforms.

Climbing the higher hill

The problem is that, right now, DeFi and TradFi exist in two completely separate worlds. Crypto, originally envisioned as an alternative to the existing financial system, operates largely in isolation from traditional finance, limiting its potential.

Continuing to operate DeFi in isolation is like climbing the wrong hill. The crypto market is valued at around $2tn, while traditional finance oversees assets worth $950tn. Even with a lot of generous assumptions, it would take centuries for crypto to overtake that alone — if it is even possible. DeFi has great technology, automation and transparency, but lacks the scale that TradFi has built over centuries. TradFi operates on outdated, manual systems but boasts the weight of tradition and size.

Today’s situation is reminiscent of the early days of cloud adoption. Back then, companies were hesitant to move away from on-premise systems. Many paid double to run both on-premise and cloud systems side by side, testing capabilities and managing risks. Today, moving to the cloud seems obvious, but at the time, it was a non-obvious and challenging choice.

DeFi faces similar hurdles. High initial costs, especially unpredictable gas fees, create barriers to mainstream adoption, particularly for institutions. These expenses make it hard for enterprises to justify the switch when TradFi offers predictable and lower operational costs. On the positive front, crypto activity and usage have recently hit all-time highs. In September of this year, 220 million addresses interacted with a blockchain at least once — more than tripling since the end of 2023 — largely driven by the activity on more cost efficient blockchains, like Solana (which alone accounted for about 100 million active addresses), Stellar and TRON. They can handle high transaction volumes with minimal fees. These platforms as well need early adopters willing to scale them up to realize their full potential. TradFi benefits from sheer path dependency and lock-in effect having spent years optimizing operations to keep expenses low. In contrast, DeFi asks institutions to adopt an entirely new set of tools and infrastructure — like wallets, custodial services, and compliance measures — sometimes at a premium cost. For many enterprises, the value proposition of DeFi doesn’t yet surpass the familiarity and reliability of TradFi’s established systems. Buying decisions at enterprises are rarely straightforward rational decisions, and if we lived in a utilitarian world, permissionless blockchains may have been more pervasive. Nonetheless, we strongly believe that to unlock the true potential of tokenization, both TradFi and DeFi must interoperate.

Bridging the gap

RWA tokenization bridges the gap between these two worlds. And there are two approaches for how we think this could work.

First, tokenize funds and move capital on-chain. Superstate, for example, focuses on tokenizing public funds and government-backed assets for institutional investors. Their first product, the Superstate Short Duration U.S. Government Securities Fund (USTB), tokenizes US Treasury and Agency securities on the Ethereum blockchain.

Alternatively, you allow investors to tokenize their own funds. Securitize, for instance, tokenizes a variety of assets to create digital securities, making it easier for institutions to create and manage their own tokenised funds, and for both institutional and retail investors to access them.

This transition would dramatically expand the scope of DeFi, which currently holds only around $1.1 trillion worth of assets on-chain. By migrating the vast pool of off-chain assets to blockchain, DeFi can unlock unprecedented opportunities for both investors and asset managers.

Boring first

Stablecoins have already made this a reality. They amounted to $8.5tn in transaction volume across 1.1 billion transactions in the second quarter of 2024 — more than double Visa’s $3.9tn in transactions over the same period. Stablecoins have found product market fit, showing that digital real-world assets can succeed, providing stability, instant transactions, and global reach. But stablecoins are just the beginning. Even within the stablecoin space, dollars have dominated so far; there is still a big opportunity for non-dollar denominated stablecoins, and new regulation which should legitimise stablecoins as a means of payment.

So what is next?

One of the next frontier lies in DeFi adoption by corporates and merchants. As blockchain transaction costs decline and throughput capacity rises, enterprise-level merchants and payment service providers (PSPs) are getting comfortable approving stablecoins like USDC as treasury assets. And they are looking for partners who can help them interact with blockchains by abstracting away the complexity. People are realising that a lot of blockchain’s early promises weren’t wrong, but just too early. For example, Solana is getting transactions per second closer to a high-performant payment system like Visa, making the rails viable for large-scale use.

This progress in the underlying infrastructure over the last couple of years is enabling DeFi companies, like Bridge and BVNK, to build enterprise-grade platforms tailored to merchants and PSPs that abstract away the complexity of blockchain transactions, making them as seamless as traditional banking payments. The orchestration layers being built on top of an increasingly performant infrastructure are enabling merchants to feel comfortable with stablecoin payments — acting as a wedge for further innovation.

A lot of work is also being done on tokenizing yield-bearing money market instruments, like treasury bills, which are a step up in complexity, because you have to account for the yield and reflect that in DeFi systems. The UK is already exploring the tokenization of money market funds so they can be used as collateral for repo and margin calls, which could potentially reduce liquidity-related market stresses.

But we are still very early. The total RWA market cap for tokenised treasury bills today is around $1.2bn, compared to $130bn of stablecoins. And cryptocurrency’s total market cap ($2.35tn) is a fraction of equities’ ($122tn).

This will be how tokenization progresses — “Boring is what’s going to be first”. We’ve started with the less complex, but high demand, products (like dollars), before moving on to more complex products (like equities). Over time, as demand grows, the infrastructure and systems to support more complex assets will follow.

Challenges and a path forward

But there are challenges in getting there.

Real-world assets do not exist in a vacuum. Take equities: they encompass cash flows, dividends, tax structures, and ownership and governance rules that differ by jurisdiction. Bringing these assets on-chain requires not only technical solutions, but an understanding of the legal, financial, and regulatory frameworks in which they exist.

Think about private equity. The supposed bugs of private markets — lack of liquidity and poor price discovery — might actually be features of the system. They benefit private companies by protecting them from volatility and allowing for more controlled growth. It’s like Chesteron’s Fence: “Do not remove a fence until you know why it was put up in the first place.” The opacity and lack of liquidity in traditional finance can sometimes be a benefit.

What is more, DeFi protocols were built assuming that all assets are freely transferable, but many RWAs have restrictions or permissions that do not align with this model. For RWAs to be fully integrated into DeFi, systems need to evolve to accommodate both permissioned assets and blockchain-native assets.

Some also argue that making traditionally illiquid assets more accessible exposes unsophisticated retail investors to risky assets that they do not fully understand. Yet, almost anyone can get a credit card, a pay-day loan, a mortgage — instruments that can saddle individuals with massive, potentially life-changing debt. Why are we happy for people to take on the risk of definite debt, but not potential unrealised losses?

The other big challenge is demand. Stablecoins have been successful because of their utility — there is a lot of demand for digital dollars. But it is unclear how much demand exists for more complex, esoteric assets. It is demand that pulls an asset on-chain, not the other way around.

This is why user incentives and real-world utility must drive tokenization. Banks today do not entice customers by talking about SWIFT or BACS. People use banks because it is a convenient and trusted way to store, access, manage, and earn interest on their money. The same principle applies to tokenised assets. Look at the LatAm neobank, DolarApp. Its model is built on stablecoins, but it does not mention it anywhere on its website. What draws customers is the ability to spend abroad and transfer cash across borders without the crazy fees.

Making tokenization real

We do not know exactly what the future will look like, but we are optimistic. We have high conviction that all assets will settle on the blockchain.

By bridging the gap between traditional finance and DeFi, RWA tokenization can unlock trillions of dollars of value currently trapped in illiquid or inaccessible assets. But it is not just about making money and markets more efficient; it is about democratising the creation of, and access to, financial products and allowing people to invest in what they believe in. As tokenization progresses, it has the potential to reshape the financial landscape, unlocking new forms of value, wealth, and opportunity for generations to come.

We would love to hear from people building in this space. We are here to support, partner or just to chat. If what you’ve read resonates with you, reach out to fintech@eqtventures.com.