Real World Assets (RWA) in Crypto: Everything You Need to Know

7 min readJul 4, 2024

What Are Real-World Assets (RWAs)?

Digital tokens on the blockchain, known as tokenized real-world assets (RWAs), are a representation of physical and traditional financial assets like cash, commodities, stocks, bonds, credit, art, and intellectual property. Tokenizing RWAs represents a major change in how these assets can be utilized, traded, and controlled, opening up a range of fresh possibilities for both blockchain-based financial services and various non-financial applications supported by cryptography and decentralized agreement.

Tokenizing assets is seen as one of the most hopeful applications of blockchain technology, with the potential market covering almost all economic activities done by humans. The finance industry’s future is moving towards on-chain technology, with numerous blockchains expected to support trillions of dollars in tokenized RWAs on a shared foundation made up of interconnected blockchain and distributed ledger technology networks, all linked by a universal interoperability standard.

How RWAs Work

To understand how Real World Assets (RWAs) function within the realm of Decentralized Finance (DeFi), it’s essential to grasp the intricacies of their operation, which can be broken down into three key stages:

Off-chain formalization: This initial step involves establishing the value, ownership details, and legal status of the real-world asset before it is integrated into a digital ledger. Various factors come into play here, including the asset’s market price, historical performance, and physical condition. Additionally, official ownership documentation is required to verify the asset’s legitimacy. Through this process, the approximate value of the RWA is determined, laying the foundation for its digital representation.
Linking information: Once the off-chain formalization is complete, the asset undergoes tokenization, wherein its information is translated into a digital token. This token includes crucial metadata such as the asset’s value and ownership details, which are embedded within the token. Utilizing blockchain technology ensures transparency, allowing anyone to validate the authenticity of the token based on its metadata. In cases where the assets are regulated or classified as securities, compliance with regulatory standards is imperative. This involves engaging licensed issuers of security tokens, adhering to (KYC) and (KYB) protocols, and leveraging reputable security token exchanges to ensure regulatory compliance and investor protection.
Supply and Demand for the RWA Protocol: The final stage revolves around the supply and demand dynamics facilitated by DeFi protocols specializing in RWAs. These protocols serve dual purposes: facilitating the creation of new RWAs and incentivizing investors to engage in buying and trading these assets within the decentralized ecosystem. By providing liquidity and market access, these protocols contribute to the liquidity and viability of RWAs within the DeFi space.

Through this comprehensive three-step approach, RWAs evolve from abstract concepts into practical and sought-after components of the DeFi landscape. By adhering to regulatory frameworks and leveraging blockchain technology, RWAs bring tangible value to the decentralized digital environment while ensuring compliance and investor trust.

What Are Real World Assets (RWA) in Crypto?

Tokenized RWAs could completely transform the decentralized finance sector. DeFi has proven to be the superior technological layer for enabling financial and economic activity, serving as a proof of concept for on-chain finance. Nonetheless, most assets exist beyond the blockchain ecosystem but still have the potential to leverage the benefits of this technology. Tokenized RWAs are crucial for significantly expanding the digital asset sector as they enable the utilization of numerous assets not yet on the blockchain through blockchain infrastructure.

Enabling blockchain technology for assets currently not in the digital asset ecosystem will improve liquidity, and transparency, and reduce systemic risks, creating a fairer financial system that prevents conflicts of interest and exploitation by a few individuals.

Tokenized assets based on real-world assets have become an increasingly popular part of the DeFi ecosystem, with the total value of locked RWA reaching approximately $5 billion in December 2023, as reported by DefiLlama. Real-life assets can also facilitate the creation of innovative financial products. One of the top DeFi protocols, MakerDAO, employs real-world asset collateral to back the stablecoin DAI, resulting in an innovative approach to generating financial assets by combining traditional and blockchain assets and technology.

How RWAs Changed DeFi

One of the key indicators in DeFi is the total value locked (TVL). It calculates the capital tied up in different DeFi protocols. The greater the Total Value Locked (TVL), the greater the project’s advantages and possible uses. During November 2021, as the “Summer of DeFi” trend gained momentum, the total TVL volume reached approximately $180 billion at its peak.

Nevertheless, with the decrease in trading activity, the DeFi Total Value Locked dropped to $49.87 billion by June 2022. They dropped by 72.3% over the course of 7 months! Some DeFi protocols allowed for a liquidity leak due to a lack of real-world usage and ineffective tokenomics.

Moreover, the mindset of the average DeFi investor has experienced substantial transformations. An increasing number of individuals are focusing on stable and enduring opportunities rather than pursuing immediate gains. This pattern has become especially noticeable since 2021, with a rise in interest in more secure asset types like RWA.

Let’s examine particular details and signs in the RWA market that show an increasing interest in this field.

In the year 2023, the on-chain value of RWA (not including stablecoins) experienced a $1.05 billion growth.
$855.7 million (82%) was generated from assets like Treasury bonds, real estate, and private loans.

During the timeframe of January 1 to September 30, 2023, findings from analyst studies indicate that:

The amount of on-chain private loans increased by $210.5 million in activity.
Treasury bonds, along with other bonds, saw an increase of $557 million.

Benefits of Real-World Asset Tokenization

Tokenized assets in the real world provide a multitude of advantages, such as:

Liquidity is enhanced for typically illiquid assets with tokenized RWAs, leveraging global liquidity conditions on a unified blockchain ecosystem backed by Chainlink CCIP for cross-chain activity support.

Transparency is guaranteed as tokenized assets are onchain, enabling auditable asset management to reduce systemic risks by accurately determining leverage and risk in the system.

Tokenized RWAs have the ability to expand the range of users for specific asset categories by making it easier to reach through blockchain applications, thus enabling a wider range of users to access assets that would otherwise be out of reach through ownership fractions.

Navigating the Risks of RWA Tokenization

RWAs provide a novel method for incorporating tangible assets into digital financial systems. Nevertheless, RWA does come with its disadvantages.

Challenges in Regulation:

RWAs and DeFi encounter intricate regulatory demands. The variability of these factors includes the asset, location, laws, and the blockchain platform for tokenizing.
Security Concerns: It is crucial in the realm of RWA to uphold the link between tangible assets and digital tokens. This link needs to be safeguarded effectively against fraud and legal conflicts.
Scalability is essential for RWA tokenization platforms to manage high quantities of transactions and data effectively.

Who Are the Issuers of RWA?

Issuers play a crucial role in bringing RWAs onto the blockchain by completing three essential actions:

Obtain tangible resources in the physical realm.
Tokenization is the process of converting these assets into tokens.
Distribute tokens among users within the blockchain network.

Included in the RWA issuers are:

Centrifuge is a major provider of private loans on the blockchain.
Franklin Templeton a major traditional finance initiative established in 1947. The total value of assets that it manages is over $1.5 trillion. Franklin Templeton recently started releasing tokenized treasury tokens.
WisdomTree is the top player in exchange-traded products, managing close to $96 billion in assets.

In Conclusion

In conclusion, the emergence of Real World Asset (RWA) tokenization represents a pivotal development in the intersection of traditional finance and blockchain technology. By digitizing tangible assets like real estate, bonds, and private loans, RWAs offer enhanced liquidity, transparency, and accessibility within the decentralized finance (DeFi) ecosystem. Despite the promising potential of RWA tokenization, challenges such as regulatory compliance, security concerns, and scalability issues must be addressed to realize its full benefits. With major players like Centrifuge, Franklin Templeton, and WisdomTree entering the space, RWA tokenization is poised to reshape the financial landscape by democratizing asset ownership and revolutionizing transactional processes. As the adoption of blockchain technology continues to accelerate, RWA tokenization stands as a significant trend driving innovation and efficiency in the financial industry.

FAQs About Digital Asset Tokenization and RWAs

What Does Digital Asset Tokenization Entail?

Digital asset tokenization is the action of transforming ownership rights of a physical asset into a digital token on a blockchain platform. These tokens can be effortlessly exchanged, stored, and monitored on a secure and transparent network.

What do Real World Assets Refer to?

RWAs are physical or tangible assets present in the physical world. This may involve assets such as property, art pieces, goods, bills, and creativity rights.

What is The Purpose of Tokenizing Assets in the Real World?

Tokenizing RWAs provides a variety of benefits, such as fractional ownership and improved asset liquidity, which ultimately make these assets more accessible to a wider audience and simplify transactions in the financial system.

What is the Process of Tokenizing RWAs?

There are various methods of tokenizing RWAs. There are two main methods: on-chain tokenization, which directly represents the asset on the blockchain, and off-chain tokenization, where ownership rights are stored on a digital ledger outside the blockchain, with the tokens still on the blockchain.

Could RWA Tokenization be the Upcoming Trend in the Financial Industry?

Tokenization of assets using RWA can transform the methods of owning, exchanging, and overseeing assets. Despite facing obstacles, the tool provides substantial advantages in terms of effectiveness, clarity, and availability.

…

Originally published on www.cyberscope.io