What Are Real-World Assets (RWAs) in Crypto?

06/27/2024, 05:04 PM

What Are Real-World Assets (RWAs) in Crypto?

Real-World Assets (RWAs) are tangible and intangible assets that exist in the physical world and have inherent value. RWAs can be owned, traded, and used within the traditional financial system, but when integrated into the blockchain ecosystem, they undergo a process called tokenization.

Imagine a prestigious art museum. Inside this museum, there are various valuable items like paintings, sculptures, and rare artifacts.

These items represent real-world assets (RWAs).

Just like the artworks and sculptures you can physically see and touch in the museum, RWAs often have a physical presence, such as real estate or gold.

Now, imagine the museum decides to create a digital version of itself in a virtual world.

To do this, they scan each piece of art and create a digital copy.

This process is similar to tokenization, where real-world assets are represented digitally on a blockchain.

What Are The Types of Real-World Assets?

Real-world assets (RWAs) include various types of valuable items, both physical and intangible, that can be owned, traded, and used in the traditional financial system.

When these assets are converted into digital tokens and integrated into the cryptocurrency and blockchain world, they become easier to access and trade.

We already have examples of a tokenized asset on the blockchain and those are Tether (USDT), USDC Coin (USDC), Multi-Collateral DAI (DAI) and other stablecoins.

In these cases, the RWA is the American Dollar and its tokenized versions are stablecoins.

So what are these real-world assets that can be tokenized and put on the blockchain?

Basically, anything valuable can be tokenized but we are going to list some of the most popular assets that people can put on a blockchain.

Here are the primary types of real-world assets in crypto:

  • Real estate: houses, apartments, office buildings, retail spaces and land
  • Commodities: gold, silver, platinum, oil, natural gas, agricultural goods
  • Financial instruments: bonds, stocks, options
  • Art and collectibles: paintings, sculptures, stamps, coins
  • Vehicles: cars, trucks, airplanes, boats
Image shows examples of real-world assets that can be tokenized

For example, imagine you want to tokenize a building valued at 20 million USD and place it on the blockchain.

By splitting the asset into tokens, you could create 20,000 tokens, each worth 1,000 USD.

This approach allows smaller investors to participate, especially in rental properties, enabling them to earn rental income based on the number of tokens they hold.

What does the process of tokenizing a RWA look like?

The tokenization process involves converting the ownership rights of a real-world asset into blockchain tokens.

This is achieved by using distributed ledger technology to track the assets and their real-world attributes, such as performance and valuation, based on information from outside the blockchain.

Just like other crypto tokens, real-world asset tokens can be programmed with special features, such as lockup periods and specific investor requirements.

The image shows the process of RWA tokenization

Benefits of Integrating Real-World Assets into Crypto

One of the most significant advantages is for sure increased liquidity.

What does this mean?

Tokenizing assets such as real estate, commodities, or art allows them to be easily bought, sold, or traded on blockchain platforms, opening up markets to a broader range of investors.

This democratization of access means that smaller investors can now participate in high-value markets that were previously out of reach.

Blockchain technology makes transactions secure and transparent, which helps reduce fraud. It also makes asset transfers faster and cheaper.

Tokenization, or turning real-world assets into digital tokens, allows for fractional ownership. This means investors can spread their money across different assets, lowering risk.

For example, HomebaseDAO, a startup specializing in real estate tokenization, allows people to invest in real estate starting with just 100 USD.

You can purchase fractional shares of properties you choose and become a property owner.

Each month, you receive rental income directly into your account. You then have the option to reinvest your earnings or withdraw them.

What Are The Challenges and Risks of Real-World Assets in Crypto?

However, tokenizing real-world assets can encounter some obstacles.

Firstly, these challenges are often regulatory and legal in nature, such as issues with compliance and the lack of standardization.

Let’s say a company in the United States wants to tokenize real estate properties and offer tokens to investors worldwide.

The company must comply with U.S. securities laws, which might include registering the tokens with the Securities and Exchange Commission (SEC) or ensuring they qualify for an exemption.

Additionally, the company needs to understand and stick to the securities regulations of each country where it intends to sell the tokens.

For instance, European countries follow different regulatory frameworks, and offering tokens in Germany might require compliance with BaFin regulations, whereas the United Kingdom might have its own set of rules under the Financial Conduct Authority (FCA).

Another major hurdle is valuation and pricing, i.e. anchoring the token price to the real-world price.

Real-world assets like real estate, art, and commodities have intrinsic values influenced by various factors such as location, condition, market demand, and economic conditions.

And in the decentralized crypto world there are no such factors.

So, accurately assessing these factors and translating them into a fair market value for the tokenized version of the asset can be a complex task.

What Are The Platforms That Facilitate RWA Tokenization?

Several platforms facilitate the tokenization of real-world assets (RWAs), making it easier to invest in and trade these assets on the blockchain.

Besides the already mentioned HomebaseDAO, here are some other notable platforms:

Polymath

  • Specializes in tokenizing securities and compliant assets.
  • Provides tools for creating, issuing, and managing security tokens.

Securitize

  • Offers a comprehensive platform for issuing and managing digital securities.
  • Ensures compliance with regulatory requirements.

RealT

  • Focuses on real estate tokenization.
  • Allows investors to buy fractional shares of real estate properties and receive rental income.

Harbor

  • Provides an end-to-end platform for tokenizing private securities and other illiquid assets.
  • Ensures compliance and regulatory adherence.

tZERO

  • A blockchain-based platform for trading security tokens and other digital assets.
  • Offers a regulated marketplace for tokenized securities.

The Future of Real-World Assets (RWAs) in Crypto

The future of real-world assets (RWAs) in crypto definitely looks bright.

We can expect more people to adopt this technology, clearer regulations, better technology, and a wider range of assets being tokenized.

For example, tokenized real estate will let everyday investors own parts of high-value properties. Improved regulations will help platforms like Securitize build trust and ensure compliance.

Advances in blockchain technology will make transactions easier and faster.

Additionally, new types of assets, like tokenized intellectual property, will offer more investment options.

In conclusion, all of these changes will make investing more accessible, transparent, and secure, creating a more inclusive and efficient financial system for everyone.