Tokenization: Real World Assets on the Blockchain

Real World Assets on the Blockchain

The process of tokenizing real-world assets (RWA) is a significant area where blockchain can contribute to addressing real-world issues. While RWAs are often considered as purely investment assets, they are closely tied to concerns such as social progress, housing, the environment, and more.

By tokenizing off-chain assets like currencies, commodities, stocks, carbon offsets, real estate, bonds, and artworks, a more transparent global trading market can be established to help tackle these challenges.

The purpose of cryptocurrency assets is to build a valuable, cryptography-encoded storage or reward system in the digital realm. Cryptocurrency assets are easy to develop and monitor on the blockchain, and they can be divided according to usage or purpose.

However, their drawback lies in their intrinsic value, resulting in considerable price volatility. On the other hand, RWAs are related to and serve a purpose in the physical world, which gives them the advantage of having intrinsic value and relatively stable prices when tied to real-world value.

Tokenized RWAs can contribute to increasing the Total Value Locked (TVL) and on-chain transactions as on-chain assets. Furthermore, they can foster ecosystem expansion by developing communities, increasing on-chain liquidity, and expanding businesses.

This is a significant concern for the entire blockchain industry.

How Does Tokenization Enhance Asset Availability for Buyers?

It offers a digital representation of tangible assets using digital tokens. In today’s world, buying a plane ticket or a new sweater only takes a click, but purchasing stocks or mortgages requires much more time.

Many transactions don’t occur instantly, as they require document processing or settlement. Assets like gold, real estate, artwork, and carbon credits are some of the hardest to transfer, demanding both buyers and sellers to endure mountains of paperwork and lengthy procedures.

By representing real-world assets as digital currency on a distributed ledger or blockchain, their value can be unlocked and exchanged in real-time.

Using Blockchain to Expedite Value Transfer

Cross-border payment procedures today are inefficient, complex, and slow. Payments serve as the foundation for global trade, but real-time payments are yet to be achieved.

Be it asset trading or other types of assets, the ability to transfer tangible assets within a blockchain introduces benefits for digitally secured platforms while still maintaining asset characteristics.

Tokenization is the process of synthesizing enforceable agreements, such as collateral, car loans, consumer debt, payables, and revenue generated, and selling them to investors in standardized units.

Since the early 1970s, this practice has become more popular and widespread. However, “tokenization” takes it a step further by encoding real-world assets. Instead of restructuring cash flow as securitization does, real-world asset tokenization focuses on the “token.”

An Economy Centered Around Tokenized Assets

Asset-backed tokens are becoming significantly popular. Initial Coin Offerings (ICOs) are an example. This novel crowd-funding method has recently raised over $4 billion worldwide.

To fund projects, ICOs require creating and selling cryptocurrencies or tokens. With ICOs, an idea has a feasible alternative to conventional funding methods, such as banks or venture capitalists, which usually demand a substantial amount of time and a transfer of control.

Why Tokenize Real-World Assets?

Our world is filled with assets, including stocks, real estate, precious metals, carbon credits, and hydrocarbons. Many of these items are challenging to transfer or divide physically, so buyers and sellers exchange documents representing a portion or the entirety of the object.

Nevertheless, paperwork and complex legal procedures are posing challenges in transferring and monitoring assets. A feasible approach is to apply a digital system similar to Bitcoin to real-world assets.

Electronic transactions and standardized agreements have largely replaced physical documents in commodity exchange, but the administrative costs of these systems are extensive, and they often rely on the involvement of trusted intermediaries.

Startups and prominent financial institutions worldwide are urgently developing systems for this next phase of development, which involves asset tokenization.

Specific Rights Transfers vs. Ownership Transfers

There are many forms of asset transfers and ownership rights. Sometimes, only limited rights related to a new asset are transferred, such as a time-bound land use agreement rather than ownership of the property.

Over thousands of years, real estate ownership has led to various forms of ownership structures and control mechanisms, such as “trust” (property ownership on behalf of another).

Specific details depend on the applicable jurisdiction, the form of law (common law versus civil law), the asset, and the rights that need to be transferred.

Some intangible assets, such as music copyrights, can be licensed simultaneously to millions of individuals.

When customers “buy” a recording from iTunes, they don’t acquire ownership (alteration of ownership); instead, they are purchasing a right, a license, to listen to the music under certain circumstances.

In general, blockchain projects can be categorized into partially rights-based projects, such as music licenses, and entirely ownership-based projects, such as selling real estate.

Tokenizing Real-World Assets Requires Creating a Virtual Investment Vehicle

That is based on blockchain and supported by tangible assets like real estate, precious metals, artworks, and antiquities. Instead of a tangible title, ownership rights are recorded on the blockchain. This can be traded directly between two parties or split and sold to a large number of individuals.

There are numerous advantages to maintaining ownership rights of tangible objects on the blockchain:

• It reduces costs by eliminating intermediaries like lawyers, brokers, banks, etc.
• It allows product transactions to be quick and efficient, previously only doable within “business hours.”
• It lowers entry barriers and increases liquidity.
• Its straightforward process increases the confidence and responsibility of traders.

>>> The Significant Developments of Real World Assets

The Future of Tokenized RWAs

Traditional financial institutions are keen on tokenizing assets such as gold, stocks, and commodities that they have been trading. Franklin Templeton, an investment fund, launched the Franklin OnChain U.S. Government Money Fund on Stellar in 2021 and expanded to Polygon in 2023.

This investment fund is the first registered mutual fund in the United States to process and record stock ownership by using a public blockchain.

Banks in the United States have recently called tokenized RWAs the “main driver for the adoption of digital assets.” According to their report, over $1 billion has been invested in the tokenized gold market.

Demand for tokenized U.S. Treasury bonds is also on the rise, with an accumulated market cap of nearly $500 million for cryptocurrency market funds.

A leading international business consulting firm predicts that global demand for tokenized real-world assets will increase to $16 trillion by 2030, indicating a promising future for tokenization.