The investment world is changing fast. Historically, high-value assets such as real estate, and gold could only be accessed by wealthy individuals and institutions. Today, we are witnessing a noticeable shift. Thanks to the tokenization of Real-World Assets (RWAs) even small investors can own fractional shares of these assets, and trade them like cryptocurrencies. From tokenized shares in a Manhattan apartment to ownership of a vintage car collection, tokenization is bringing new opportunities to invest.
Key Takeaways
- Real-world assets are physical assets outside of the scope of digital environments, that can be represented as blockchain tokens, and become tradable online.
- RWA tokenization enhances liquidity, transparency, and access, including enabling participation by a broader range of people in otherwise exclusive markets.
- While the advantages of RWAs are clear, there are still obstacles including a heavy regulatory burden and some serious security issues.
How Real-World Assets Are Tokenized
So, what is RWA in crypto? RWA tokenization means transferring physical (or traditional financial) assets such as real estate, commodities, stocks, artwork, etc., onto the blockchain, in the form of a digital token. These tokens are a symbol of ownership, share, or a right to assets and can be sold, bought, or traded digitally.
Here’s a breakdown of how RWAs are tokenized in practice, step by step:
- Asset recognition and legal structure. The first thing is to choose a real-world asset. The asset may be held by a legal entity that is formed specifically for that purpose. This allows the token to track a valid claim/ownership of the asset.
- Valuation and documentation of the asset. Then comes the valuation of the asset. The ownership and rights of the token holders are described in legal papers as well as the governance process.
- Token creation (minting). Tokens are formed on a blockchain (e.g., Ethereum, Polygon, Solana) using smart contracts. These tokenized real-world assets represent the part of some good (i.e., 1 token is equal to 0.1% of a real estate asset).
- Offer and distribution of tokens. Tokens are distributed to investors, raising through token sales, crowdfunding, or private placement. They can also be distributed via tokenization platforms, including Securitize, Polymath, RealT, or tZero.
- Trading and liquidity. Tokens can be turned over to trade on decentralized exchanges (DEXs), security token exchanges (like INX, tZero), and peer-to-peer platforms. Smart contracts may have transferability restrictions, lockups, and restrictive covenants.
- Asset management and payouts. When purchasing tokens, token holders may enjoy revenues or rental incomes (like property), have voting rights (like equity tokens), and become beneficiaries of profits or proceeds of sale. Payouts as well as governance could be automated through smart contracts.
Fractional Ownership Model
To put it simply, fractional ownership refers to a system where various individuals or businesses collectively own and possess the rights to a relatively high-cost item, like a house or a jet. So instead of one person paying for the entire cost, everyone who uses the resource owns some fraction of it by the right, which gives the right-holders a claim to their share of the costs of the asset as well as their share of the asset's use and benefits.
On‑chain Collateral & Asset Baskets
Real-world assets on a chain are staked in a blockchain network as collateral for financial obligations. There exist on-chain assets made up of various of these crypto-dollars, which are called asset baskets, aiming to lower risk and improve the amount of collateral that is reliable. This is done in decentralized finance (DeFi), allowing for novel risk management and wider access to financial services.
Which Assets Can Be Tokenized?
Anything of value can be tokenized, owned, and legally transferred. Tokenization is the process of converting the rights to ownership, or rights to claim ownership, of these assets into digital tokens placed on a blockchain. Here’s a RWAs crypto list with the main categories of goods that can be tokenized:
- Property (Dwellings or commercial structures, Land or REITs, Rents);
- Financial instruments (Shares, Bonds, ETFs, Shares in private equity funds, Derivatives, or structured products);
- Physical claims to reserves in custody (gold, silver, oil, diamonds);
- Collectibles and art (Paintings, sculptures, other objects), digital art & NFTs (e.g., music rights, videos);
- Consumer discretionary/luxury shipping (Watches, automobiles, wine, jewelry);
- IP and royalties (Music rights, patents, trademarks);
- Infrastructure and energy assets (solar farms, power plants telecom towers);
- Virtual assets and digital items (Game skins, virtual world land, avatars).
Leading RWA Crypto Projects
The RWA crypto space is experiencing explosive growth, driven by ambitious initiatives that are redefining the tokenization of real estate, securities, IP, and more. Here are some of the best RWA crypto projects that investors should be monitoring, all of which have some unique properties, strong recent performance, and a great strategy for bridging real-world assets to the blockchain:
Centrifuge & RealT (Real Estate)
Centrifuge is an RWA crypto project, the decentralized protocol that makes real-world assets such as invoices, real estate, and royalties to DeFi enabling businesses to turn them into RWA coins and use them as collateral for borrowing. It can be used in conjunction with protocols such as MakerDAO and Aave.
RealT provides fractionalized ownership of U.S. real estate by tokenizing shares of the properties on Ethereum and Gnosis chains. Token holders will receive rental income in the form of stablecoins and can exchange their shares on secondary markets.
Ondo Finance & Maple Finance (Debt)
Ondo Finance builds tokenized fixed-income products (i.e., US Treasuries) for DeFi so that users can access yield from traditional finance compliantly. It acts as a bridge between institutional capital and DeFi liquidity.
Maple Finance is an institutional lending protocol providing credit to businesses and creditworthy individuals using liquidity pools and replicating traditional debt capital markets on the blockchain.
Paxos (PAXG)
Paxos Gold (PAXG) is a gold-backed Ethereum token, each unit representing one fine troy ounce of a gold bar, stored in professional vault facilities in London. It offers the advantages of physical gold with the accessibility of cryptocurrency.
Securitize & Redbelly (Regulated Tokens)
Securitize is the leading platform for issuing and managing compliant digital securities (security tokens) in a scalable, secure, and efficient way. It offers solutions for investor onboarding, KYC/AML, and secondary trading.
Redbelly provides blockchain infrastructure to tokenize regulated assets at scale and in a highly secure environment, designed by the Scientific and Industrial Research Organisation (CSIRO) for enterprise-grade financial markets.
Paraverse (PVS)
PARAVERSE (PVS) is a new ecosystem focused on real-world assets in crypto to tokenize and incorporate a diverse selection of RWA assets such as real estate and carbon credits into a metaverse-style platform that offers a blend of DeFi, AI, and Asset utility in a digital setting.
ADDX
ADDX is a regulated private market platform headquartered in Singapore, which tokenizes private equity, hedge funds, and bonds for fractional ownership by accredited investors. It’s using blockchain to lower the minimum investment size and allow secondary trading.
Benefits of Tokenizing Real-World Assets
There are several advantages of real world tokenization. Unlike traditional markets that follow certain hours, blockchain tokens are traded 24/7, and as a result, investors get more time and freedom to trade when they want.
Moreover, thanks to blockchain’s in-built transparency, trust is driven by the fact that the risk of fraud is reduced and the proof of ownership is simplified. It also alleviates the fees often associated with asset management, like paperwork, legal services, and intermediaries by making processes less cumbersome and minimizing barriers to entry in the traditional financial world.
Liquidity
Tokenization vastly enhances liquidity, in particular for assets that have traditionally been very illiquid such as real estate or fine art. When these assets are turned into digital tokens, they are easier to trade and can underpin fractional ownership. A property worth $1 million, for example, might be split into 1,000 tokens, each worth $1,000. Such a fractional model would enable high-worth investments by a wider spectrum of investors.
Transparency
Through its unchangeable ledger, blockchain enables transparency, ensuring every transaction can be trusted and there is no need for trustful intermediaries. This amount of accountability provides an attractive value proposition to businesses that want to sell secure, tamper-resistant investment products to their customers.
Accessibility
With tokenization, the entry barrier for investing in high-value assets is lower. For example, a $5.6 million Andy Warhol painting was tokenized, meaning that investors could buy its small part for $5,000. This allows smaller investors to diversify their holdings and invest in markets that were previously closed to them.
Potential Challenges and Risks
No doubt that RWAs provide new opportunities, but they also bring several challenges that must be solved for mainstream adoption.
- The market isn’t very well accessible, especially for a real asset that is physically situated in multiple jurisdictions.
- Non-interoperability between different blockchain platforms blocks the frictionless transactions and trade of tokenized assets, hampering market development.
- There’s also major regulatory uncertainty. The variance in countries’ rules and definitions of digital assets also makes it very difficult to formulate a cohesive global framework.
Dealing with these challenges will be very important for RWA tokenization going forward. A collaborative effort is required to establish standards and solutions that ensure innovation, growth, and trust in this nascent area.
How to Participate in RWA Projects
The way you get involved with Real-World Asset (RWA) projects depends on what kind of asset you are dealing with, what platforms you use, and whether you are a retail or accredited investor. Here is a general sequence of actions for a beginner:
- Select the type of RWA;
- Select the platform and sign up;
- Purchase tokens;
- Earn yield or hold for value;
- Sell it and exit.
There are multiple risks, including regulatory uncertainty, illiquidity, smart contract risk, and custodial risk, but fundamentally new opportunities for small investors and the great potential benefit justify them.
Why RWA Tokens Are Important
Assets, such as real estate and commodities, are illiquid, they’re not easy to sell in a hurry. For investors who want to get quick cash, the buying process can be time-consuming and frustrating.
RWA tokens can circumvent such issues by permitting fractional ownership. By tokenizing investments, investors can buy small denominations of assets like real estate or bonds, allowing far more people to get involved in markets that were once out of reach for them.
Blockchain technology further eliminates geographical and regulatory limitations, bringing such investment opportunities to the world instead of just to a few regions.
Future of RWA Crypto
The future of real world assets in DeFi appears increasingly bright, thanks to its ability to combine traditional finance and blockchain, while unlocking trillions of dollars in illiquid or siloed assets. Here are the things likely to be expected in the upcoming years:
