From Traditional to Digital:
Exploring the Potential and Power of RWA Tokenization
The web3 industry is rapidly growing, with blockchain pioneering technological advancements across various industries. With continuous development, blockchain holds great potential to drive innovative solutions, including offering access to liquidity traditionally unavailable in conventional markets.
Entering Real World Assets(RWA), the creation of a digital investment instrument on the blockchain tied to physical assets like real estate, cars, gold, art, and more. Ownership is no longer represented by a physical document like a property deed but could now be recorded on the blockchain. This opens the door for blockchain to solve real-world problems by connecting individuals and institutions in the global market. Underrepresented entities could gain access to capital, and investors could access stable investments that aren’t prone to price volatility.
RWA also enables the notion of fractional ownership, giving retail investors the opportunities to invest in assets that were previously exclusive to institutions or ultra-high-net-worth individuals. By tokenizing RWA, we can tap into the billion-dollar market of traditional assets, seizing the largest opportunity within the crypto realm. In this article, we will explore the concept of RWA, their possibilities, how they solve real-world problems, and their potential to transform the financial world.
What does RWA Tokenization mean?
Tokenizing RWAs involves converting traditional assets into digital tokens on the blockchain.
To illustrate this concept, imagine Company A wants to let regular people like you and me become owners of a piece of their company, but they don’t want to give away the whole company. So, what they do is something super cool. Instead of giving out paper certificates like in the traditional stock market world, they utilize the power enabled by the blockchain. They transform their ownership into special digital tokens, for which each token represents a part of the company.
When someone buys one of these tokens, it’s like they’re saying, “Hey, I want to be a part-owner of Company A!” Even though they don’t have a physical certificate, they still have a piece of the company.
With RWA tokenizations, assets can be divided into smaller units known as tokens. Each token represents a proportional share of the digitized asset.
How do blockchain and smart contracts play a crucial role in tokenizing real-world assets?
Blockchain provides the infrastructure and functionality for transparency, security, and decentralization, which are crucial for tokenizing real-world assets. Here are some benefits of utilizing blockchain and smart contracts:
- Token Creation: Smart contracts enable the creation of digital tokens on the blockchain, representing ownership or fractional shares of tangible assets. These tokens can be fungible (interchangeable) or non-fungible (unique and indivisible) based on the nature of the underlying asset.
- Security and Trust: The use of cryptography and digital signatures enhances security and trust in the tokenization process. Only authorized parties can validate transactions or transfer ownership, making it difficult for malicious actors to manipulate or tamper with ownership records.
- Ownership Transfer: Smart contracts facilitate secure and transparent transfer of asset ownership once certain pre-conditions are met. These conditions may include completing payment or meeting regulatory requirements.
- Fractional Ownership: Smart contracts enable fractional ownership by dividing assets into smaller tokens. This allows multiple individuals to collectively own and trade fractions of an asset, making it more accessible and affordable for investors.
- Liquidity and Secondary Markets: Blockchain-based platforms and decentralized applications (dApps) can create secondary markets where tokenized assets can be bought, sold, and traded. These markets enhance liquidity by removing traditional limitations associated with the transfer of physical assets.
RWA in DeFi
Decentralized Finance (DeFi) established the groundwork for a fresh financial ecosystem by replacing traditional intermediaries with code and trust with the security provided by immutable smart contracts. To go beyond “magic internet money”, we look to asset tokenization. As the bridge between conventional financial markets and decentralized finance (DeFi), RWAs may be the key to global adoption of DeFi. One use case for RWAs in DeFi is lending and borrowing. Investors and lending institutions can assess different assets and risks to provide liquidity in exchange for an interest rate and RWA owners can use their illiquid assets as collateral for obtaining loans.
Consider digitizing the ownership of a physical asset like land on the blockchain. By tokenizing the asset into a single NFT that represents our ownership of the property. We can apply for a loan and collateralize it with the real-world value of the land. This process is similar to a mortgage in traditional finance, tokenization allows for the process to be replicated with ease and efficiency.
Benefits of Real World Assets Tokenization
RWA tokenization brings stability to crypto investments by bridging the gap between the real world and blockchain ecosystems. In recent years, crypto assets have experienced a period of price volatility, which has affected the value of digital assets, causing ordinary investors’ faith in cryptocurrencies and decentralized projects to plummet.
A way around this is to create viable blockchain applications and DeFi projects that demonstrate inherent value and are also built to enhance the traditional ecosystem. RWA tokenization could become the game changer needed for creating a seamless connection between the real world and blockchain ecosystems, leveraging their respective benefits, including:
- Increased liquidity: Tokenizing RWAs allows asset owners to unlock liquidity for traditionally illiquid assets. When assets are represented as tokens on the blockchain, fractional ownership becomes possible, enabling individuals to invest in smaller portions of valuable assets and trade these tokens on decentralized exchanges, providing enhanced liquidity and access to a broader range of investors.
- Fractional ownership: RWAs tokenization enables fractional ownership by dividing assets into smaller portions. This opens up opportunities for investors worldwide to own and invest in high-value assets that were previously out of reach due to high capital requirements. Fractional ownership also facilitates portfolio diversification, allowing investors to hold shares in multiple assets.
- Enhanced transparency and accountability: With RWAs on the blockchain, ownership records and transaction histories become transparent to everyone. Blockchain’s inherent transparency and immutability ensure that investors can verify the authenticity and existence of tokenized assets.
- Enables borderless accessibility: RWAs tokenization removes barriers to entry that exist in traditional asset investments, such as high capital requirements and regional constraints. It enables investors from all over the world to access and invest in real world assets that were previously exclusive.
- Reduced transaction costs: Tokenizing RWAs reduces administrative costs associated with traditional markets by eliminating intermediaries. Smart contracts encode all the necessary functionalities, including ownership rules, revenue distribution, and execution of pre-defined asset management conditions.
- Creates new markets and participants: Tokenizing assets on-chain allows once illiquid assets to move seamlessly across DeFi, leading to the creation of new markets, financial products, and offerings. RWAs provide new and existing market participants with access to risk-free and stable returns that were previously unavailable.
The benefits of RWAs are significant, offering opportunities to increase mass adoption of DeFi and enhance traditional markets.
Steps involved in tokenization of RWA
After exploring the advantages of RWA, it is important to understand how these assets are moved and represented on-chain. The following is an overview of the steps in tokenizing an asset. The process of on-chain asset tokenization may vary depending on the asset or platform.
- Identification and evaluation of the asset: First, an asset is selected for tokenization, such as real estate, art, or commodities. Its value, profitability, and legal requirements are critically evaluated.
- Assembling asset structure: Factors are considered to make the asset suitable for tokenization. This includes determining the minimum investment amount, defining rights and benefits for token ownership, and establishing rules for revenue distribution, governance, and decision-making.
- Legal and regulatory compliance: Ensuring the asset complies with relevant laws and regulations. Legal professionals may be involved to obtain necessary licenses and create compliant structures.
- Creation and issuance of tokens: Tokens representing the asset are configured, created, and issued on the blockchain. These tokens can be designed as either fungible or non-fungible, depending on the nature of the asset.
- Investor onboarding: Interested investors can purchase these tokens. Onboarding processes, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) verifications, are implemented to collect essential identification and accreditation information, ensuring compliance with regulatory requirements.
- Asset purchase and trading: Tokens are available for purchase by investors globally. This provides liquidity and allows investors to easily buy, sell, or trade their ownership stakes in the asset.
- Ongoing asset management: After issuance, ongoing asset management is crucial. This involves complying with regulatory changes, conducting periodic audits, addressing governance issues, and managing revenue distribution or profit-sharing mechanisms defined in the smart contract.
Barriers to the Growth of RWA
The tokenization of real-world assets (RWA) has great potential, but several barriers can hinder its widespread adoption and growth. Let’s explore some key barriers:
- Regional regulatory variances: Different regions have yet to finalize regulations for RWA. The lack of clarity and consistency in regulatory frameworks can create barriers and limit the industry’s potential.
- Asset valuation: Valuing illiquid or unique assets accurately can be challenging. Establishing accurate valuations is important for investor confidence and informed investment decisions. Working with trusted service providers to develop robust valuation methodologies is crucial.
- Scalability and interoperability: As RWA increases on-chain, blockchain platforms need to handle high transaction volumes efficiently, and different platforms should be able to communicate and interact seamlessly. Scalability and interoperability solutions are still being developed and refined, posing challenges for widespread adoption of RWAs.
- Investor education and awareness: Bridging the knowledge gap for investors regarding RWA is crucial. Investors need to be aware of the potential benefits and risks associated with RWA. Lack of awareness and confidence among investors is a significant challenge for widespread adoption.
- Technology and platform risks: Various risks pose barriers to the adoption of RWA. These include coding errors in smart contracts, network security, RWA platform risks, asset management risks, and wallet breaches. Mitigating these issues is essential to improve and enhance the global adoption of RWA.
The Future of RWAs
On-chain asset tokenization has the potential to disrupt the traditional finance system and revolutionize the process of matching investors with investment opportunities. While RWAs tokenization is still in its early stages, there are exciting future trends to watch out for in the industry:
- Interoperability and Cross-Chain Transactions: The ability for assets to move seamlessly across different blockchain networks enhances liquidity and accessibility. Cross-chain transfers enable tokenized assets to be freely traded, utilized, or transferred between blockchain ecosystems. This broadens the market for tokenized RWAs and reduces fragmentation in the ecosystem.
- ZKP in RWAs: Zero-Knowledge Proofs (ZKP) plays a vital role in preserving privacy and confidentiality while ensuring trust and compliance in transactions. ZKP allows verification of tokenized assets without revealing sensitive information. This is particularly relevant for asset tokenization as it involves confidential or proprietary data.
- Advancements in Regulatory Frameworks: Clarity in regulatory frameworks and enforcement measures is crucial for the long-term viability and impact of RWAs. Developing robust and clear regulations around RWAs is an important trend to monitor in the space.
- Dedicated RWAs Chains: A significant trend to watch for is the emergence of dedicated RWAs chains. These blockchain networks will have specialized infrastructure designed to cater to the unique needs of RWAs. Dedicated RWAs chains will offer features and functionalities tailored to support seamless tokenization, trading, and management of a wide range of assets. They will bring enhanced security, interoperability, and integration with traditional systems. Dedicated RWAs chains can drive widespread adoption of asset tokenization and unlock new opportunities for investors, asset owners, and the broader financial ecosystem.
Klaytn: Driving positive social change with RWA tokenization
The impact of blockchains in tokenizing real-world assets is significant, and the Klaytn blockchain aims to bring off-chain assets onto the blockchain. As a public foundational layer for tomorrow’s on-chain world, Klaytn focuses on supporting the creation and trading of real-world assets on-chain in the following ways:
Tokenization support system: We are building a support system for tokenizing real-world assets, from product development to token issuance, asset storage, and trading. We will establish a new token standard with functions required for asset tokenization. Additionally, we will strengthen essential ecosystem elements like custody, KYC, oracles, and trading platforms. Partnering with experts in business and legal advice will ensure compliance requirements are met.
Klaytn’s technical advantages: Klaytn offers significant technical advantages, such as predictable gas fees over 2500 times lower than Ethereum’s and the lowest transaction latency among leading EVM blockchains. This provides an optimal environment for on-chain trading of real-world assets. Klaytn’s low gas fees allow complex transactions to be executed as smart contracts without high costs. With a stable 1-second block generation time leading to the immediate finality, transactions can be executed and confirmed almost instantly. Klaytn also provides user-friendly wallets to enhance the user onboarding and trading experience.
Furthermore, the Klaytn Foundation in the meantime will be focusing on Real-World Assets (RWA) to promote widespread adoption and provide support for ecosystem businesses. Consequently, we anticipate the development of a range of RWA applications, both currently and in the near future. The following are the current focus of RWA applications in the Klaytn ecosystem:
Creder, a subsidiary of Korea Gold Exchange, will tokenize physical gold as $GPC for on-chain trading on Klaytn. $GPC will be launched on a DEX, to allow anyone from anywhere in the world to not only easily add gold to their portfolio, but also utilize their $GPC in DeFi protocols to earn yield.
Real Estate Tokenization
ELYSIA, with their ELYFI DeFi, aims to provide an easy and convenient way to tokenize traditional real-world assets for use, offering various RWA-based synthesized products including Real Estate Mortgage Bonds, E-commerce Accounts Receivables, and Real Estate Project Financing. As of the time of this writing, ELYSIA has facilitated the pool of an Accounts Receivable RWA type, and a US Treasury Note pool is currently live on the platform.
To learn more about Klaytn’s efforts in driving change through real-world assets and digital ownership, you can read the provided document.
According to BCG Analysis, the tokenization of global illiquid assets presents a $16 trillion business opportunity by 2030. Tokenizing RWAs allows this billion-dollar business to connect with the DeFi ecosystem, bridging the gap between traditional finance and DeFi.
In this article, we covered the concept of tokenizing real-world assets and the role of blockchain and smart contracts in the process. We explored the benefits, tokenization process, barriers, and the future of RWAs. We also mentioned major industry players and Klaytn’s role in driving mass adoption through real-world assets. For further exploration of the RWAs concept, please refer to the following resources: