What is RWA Tokenization? Real-World Assets Explained

What are Real World Assets (RWA)?

The crypto industry is inherently virtual. Its medium of transaction, cryptocurrency, and any other items used across blockchain are all virtual assets. Hence, traditional and physical assets like real estate properties, artworks, commodities are often referred to as real world assets (RWA) in the crypto and blockchain language.

Unlike Bitcoin and Ethereum, real world assets are tangible in nature. We can physically see, touch, and even exchange them from one person to another. But, when it comes to virtual goods and services, for example weapons in blockchain-based games, they only exist virtually on blockchain networks.

As the core concept took off, several real world asset tokens are already trading on open markets. As per DeFiLama, the total volume locked in RWA tokens crossed $38 billion as of February 2024. Some of the best RWA tokens that you can invest this year are Centrifuge, Landshare, Polymesh, Pendle, etc.

What is RWA Tokenization?

The process of converting real world assets into virtual tokens that exist on the blockchain is called Real World Asset tokenization or Real World Asset tokenization. It makes real world assets to be easily traded without any geographical or high-initial investment limitations.

Asset tokenization is the new concept made possible by the blockchain technology. Whenever an investor would like to acquire a traditional asset like real estate properties, there are numerous challenges. While the geographical limitation is the major one, others like high initial investment can also be a hindrance in making the investment.

However, the asset tokenization technology allows investors to easily purchase a part of the real world asset without any hassle. The decentralization characteristic of blockchain connects buyers and sellers across the globe, increasing the accessibility of RWA investment. Additionally, fractionalizing real world assets increases the liquidity of RWA trading.

From NFTs and Stablecoins to Real-World Assets

The evolution of blockchain is remarkable throughout the years. While Bitcoin enabled electronic peer-to-peer transactions, Ethereum opened gates for innumerable applications. From enabling the development of decentralized applications to blockchain-based games, non-fungible tokens, DeFi, blockchain has come a long way.

However, in the initial years, tokenization was only limited to digital assets like non-fungible tokens. Another concept called stablecoins made it possible to represent a stable unit of value on the blockchain. USDC and USDT are the best examples for it, each token representing the value of 1 US dollar at any given time.

With the ever-increasing innovation and development of blockchain, the real world asset tokenization concept emerged. It brought the asset tokenization concept to real world assets and brokedown the limitation of investment in traditional assets. Today, we can convert any physical asset, whether it is stocks, shares, investment funds, real estate, artworks, commodities, into digital tokens that live on the blockchain.

How are Real World Assets Tokenized?

It is intriguing to think about the process of representing real world assets on blockchain networks. Let us look at the step by step process of tokenizing real world assets here.

Asset Evaluation

The first thing is to select a real world asset and evaluate its viability to turn into digital tokens. We can select real estate, gold, securities, bonds, or anything based on the requirement. Evaluating the current market value of the asset is an important step for pricing the digital tokens later.

Legal Framework

Legal framework helps you to stay compliant with the regulatory policies and avoids potential issues in the future. Special Purpose Vehicles (SPV) are created to fractionalize and tokenize an asset. They help in holding and managing an asset while reducing risks at the same time.

Fractionalization

The next step in tokenization is to fractionalize the real world asset into a certain predefined number of tokens. However, before that the project heads would need to choose a blockchain platform and develop smart contracts with predefined conditions of tokenization. Smart contracts help in automating multiple processes and avoiding human errors.

Token Creation

In order to represent the real world asset in terms of digital tokens on the blockchain, developers create tokens on the previously selected blockchain network. Tokens are created in such a way that each token represents a small portion of the asset. If developers choose Ethereum blockchain, the tokens will be based on the ERC-20 tokens. The value of each token is determined by the actual real world asset price and the number of tokens it is divided into.

Distribution & Trading

Once the tokenization of a real world asset takes place successfully, project heads are ready to distribute tokens to potential investors. While the initial distribution usually happens through private sales or public offerings like ICOs, later tokens will be listed on specified marketplaces to enable trading.

Asset Management

RWA tokenization is not a one-time process. Once an asset is converted into digital tokens, it keeps living on the blockchain. Investors of RWA tokens hold rights to a portion of the asset and receive all the benefits of token holders. When an investor is ready to redeem their token or sell it to another investor, they will receive proportionate value in predefined digital currency, as per the smart contract agreement.

Advantages of Turning Real World Assets Into Digital Tokens

Real world asset tokenization offers innumerable benefits to traditional asset investment. The following are the most profound ones among them.

• They increase accessibility by lowering the barriers of entry to make an investment into a traditional asset.
• Without any geographical constraints, sellers can connect with buyers across the world to execute a purchase transaction. This is possible with the digital and decentralized nature of blockchain technology.
• It eliminates intermediaries, which means it reduces the costs involved in making an investment.
• Unlike traditional markets, buying and selling or digital tokens can be carried around the clock.
• With the help of fractionalization and tokenization of a real world asset, liquidity increases in the market, streamlining the trading process.
• The immutable and secure nature of blockchain ensures transparency and security.
• RWA tokens allow investors to diversify their investment portfolio by making asset investment affordable.

What the Future Holds for RWA Tokenization?

Major financial organizations have already started exploring the concept. Top companies like BackRock, BNY Mellon, JP Morgan, Goldman Sachs, and HSBC started using blockchain to tokenize traditional assets. The involvement of these companies demonstrates the growth potential of real world assets and their investments in traditional finance. In accordance with the market statistics and reports, the future of RWA assets looks bright, developing into a trillion dollar market.