May 14, 2024
Real World Assets (RWA) is a topic that you have probably seen a lot of discussion about online. It is an interesting topic and one that is part of the cryptocurrency market puzzle.
RWA is a trend, a market with enormous potential, and it will undoubtedly become a very hot topic in the near future.
Real World Assets (RWA) and blockchain technology integration is a significant technological advancement and a revolution in the making of finance more open, transparent, and connected.
What exactly is a Real World Asset (RWA), then? How does it operate?
I’ll delve further into the subject of RWA so that everyone can grasp it better. (Throughout the article, I’ll refer to RWA by its acronym).
We must first comprehend the idea of what RWA is.
Physical or tangible assets with intrinsic value in the real world are referred to as real world assets (RWAs). includes financial instruments like loans and insurance contracts, as well as assets like commodities and real estate.
RWA is a blockchain-based tokenized version of these assets that makes it easier to use them in online transactions and investments.
>> Liquidity: Tokenization can increase market liquidity by converting formerly illiquid assets, such as real estate, into divisible and easily traded tokens.
>> Accessibility: RWAs on blockchain enable a larger audience to invest in high-value assets by lowering minimum investments and threshold entry barriers.
>> Transparency and Security: Asset management is made more secure and transparent by blockchain, which offers a tamper-proof ledger of ownership and transaction history.
>> Innovation in Financial Products: RWAs open the door for cutting-edge financial products that can result in more dynamic financial markets, like fractional ownership and asset-backed loans.
Conventional RWAs:
Definition: Conventional RWAs consist of material assets like machinery, real estate, or commodities like gold and oil. These resources are employed in economic activity and have intrinsic value.
Ownership and Trading: Ownership is frequently recorded in a central database or through paper certificates. These assets are usually traded through a number of middlemen, which increases transaction costs and delays.
Liquidity: In comparison to digital assets, traditional RWAs are typically less liquid. Due to the requirement for physical assessments, legal checks, and locating willing buyers, the process of selling these assets can be drawn out and complicated.
RWAs with tokens:
Definition: Tokenized RWAs are blockchain-based digital representations of conventional real-world assets. A stake, share, or ownership in the underlying asset is represented by each token.
Ownership and Trading: Tokenized RWA ownership is represented on the blockchain by digital tokens, which provide immutability and transparency. This makes trading simpler, quicker, and requires fewer middlemen.
Liquidity: By permitting fractional ownership and removing obstacles to entry for investors, tokenization raises the liquidity of RWAs. For example, an investor can buy tokens that represent a portion of the property rather than the entire asset.
Example:
Think about a $10 million commercial building. In the past, this would be purchased or sold as a whole, frequently involving a large amount of capital and a number of parties like banks, brokers, and attorneys.This building could be represented by one million tokens, each valued at $10, thanks to tokenization. Tokens, which indicate a portion of the building’s ownership, are available for purchase by investors in any quantity. A wider audience can now take advantage of investment opportunities as this process streamlines transactions.
1. Real estate
One of the most well-liked assets to tokenize is real estate, which gives users the chance to own both commercial and residential real estate.
This asset class has the potential to have much higher liquidity, which would open up investment opportunities and streamline the administration of rental yields and other income through smart contracts.
2. Commodities:
Goods like gold, oil, and farm products are examples of commodities. More open pricing and simpler access to markets with frequently high entry barriers are two benefits of tokenization.
3. Artwork:
Consists of sculptures, paintings, and other priceless artwork…
Affordable art can become more widely owned and profitable with the use of art tokens. In addition, artists are still able to keep ownership and profit from partial sales.
4. Intellectual property:
Including software code, copyrights, and patents…
Facilitate the licensing and commercialization of intellectual property. In order to raise money and maintain some degree of control over their creations, artists can choose to sell partial interest in their works.
Increased liquidity, lower transaction costs, and easier access to investment opportunities are the advantages of asset tokenization.
However, RWA’s current state lacks clear regulations, there may be cybersecurity risks, and a robust technical system is needed throughout to process these asset transactions safely.
Tokenization is a blockchain technology that addresses the issue of transferring ownership of physical assets into digital tokens.
An asset is made easier to trade, transfer, and manage by each token representing a part or fraction of the asset.
Consider the following scenario: You own a $400,000 home. With the token, you can produce 400,000 tokens, each valued at $1. On the blockchain platform, these tokens can then be bought, sold, or traded.
Blockchain technology’s significance for the tokenization process
Tokens are issued, tracked, and traded on a decentralized, transparent, and safe ledger made possible by blockchain technology.
Blockchain’s efficiency:
>> Blockchain guarantees tamper-proof and secure transactions.
>> Transparency is ensured by the public ledger, which records every transaction.
>> Cut expenses, boost productivity, and do away with middlemen.
Examples of blockchain technology in action:
Throughout 2023, the Ethereum blockchain handled over a million transactions every day without experiencing any outages.
With thousands of nodes verifying every transaction on public blockchains, record-changing is practically impossible.
Eliminating middlemen in financial transactions could result in annual savings of up to $20 billion, according to a Deloitte report.
To make the RWA tokenization process easier to understand, let’s look at a more practical example:
A commercial asset with a $100,000 value exists. It is required to first establish the asset’s legality in order for it to be tokenized and traded legally.
100,000 tokens, each worth $1, will be produced during the token creation process.
In this case, the asset for token issuance and management is chosen and constructed on the Ethereum blockchain. (There are numerous varieties of blockchains, including Ethereum, Solana, BSC, and so on.)
An Initial Token Offering (ITO) is then used to distribute the tokens to investors.
The tokens can be exchanged on the secondary market after they are distributed.
Each token will be worth 2 dollars during the transaction if the asset value rises to $200,000.
This process improves liquidity for illiquid assets while also democratizing investment opportunities.
The tokenized asset market could reach 24 trillion USD by 2027, according to a Deloitte report, as cryptocurrency gains popularity and opens up new avenues for RWA.
As a result of the tokens’ decentralized nature and proportionate ownership, small investors now have more opportunities to participate in the market, resulting in increased liquidity. Compared to traditional stocks, this segment can be traded on the secondary market with greater ease.
Efficiency and transparency in transactions
Blockchain technology has proven particularly helpful in industries like real estate and supply chain management because it offers an immutable, transparent ledger for all transactions.
Numerous organizations have examined the following figures regarding the efficacy of blockchain technology:
>> A Santander FinTech study estimates that distributed ledger technology could save the annual cost of financial services infrastructure by $15–20 billion (by 2022)
>> PwC research indicates that by 2022, companies using blockchain technology could save up to $20 billion annually.
>> According to a McKinsey study, using blockchain could increase trade finance efficiency by about 30%.
>> According to research conducted by the World Economic Forum, blockchain could create up to 21 million new jobs by 2025.
>> Blockchain technology has the potential to save the insurance sector up to $10 billion yearly by 2025, according to a Capgemini study.
>> According to Deloitte’s research, the securities industry could save up to 60% on clearing and settlement expenses by implementing blockchain technology.
>> According to an IBM study, using blockchain technology could save fraud detection costs in the healthcare sector by up to 50%.
>> According to a PwC study, blockchain technology could save up to 50% of the costs associated with compliance, auditing, and reconciliation.
>> Blockchain technology has the potential to cut the typical property transaction time in the United States from the current 30 to 60 days down to a few hours.
In the near future, there will be a lot of incredible outcomes from the efficiency that blockchain provides when tokenizing RWA.
Future heavy tokenization of assets and items, including valuable real estate, fine art, and even exotic assets like wine or rare collectibles, is a current trend.
2023, sites such as Securitize will have tokenized assets valued at over $500 million, including private equity and real estate.
On websites like Masterworks, investors can purchase shares of famous artwork for as little as $20.
The aforementioned data emphasizes the numerous benefits of implementing the RWA token.
But what are the issues that are creating problems and impeding RWA’s development?
Uncertainty in regulations pertaining to tokenized securities
The legal risks associated with offering unregistered digital asset securities were brought to light by the SEC’s lawsuits against numerous companies in 2023.
The adoption of digital assets could be slowed by regulatory uncertainty, the World Economic Forum claims, which could limit market growth by as much as 20% annually.
For RWA to flourish in the cryptocurrency space, regulatory clarity is essential. Tokenized securities are still being categorized and managed by regulators.
Legal and compliance barriers are crucial because of this.
Technical flaws and the possibility of fraud.
Since blockchain technology is still relatively new, there will inevitably be many hacks and technical vulnerabilities.
Some hacks that the crypto community was shocked by:
A hacking incident on the Ronin Network in 2022 cost $625 million in total.
According to Chainalysis, fraud and hacks in 2022 resulted in the theft of cryptocurrency valued at about $3.8 billion.
According to the Defillama website, since 2016, hackers have stolen $7.82 billion. (A substantial quantity)
Although blockchain increases transparency, there are new risks involved.
Mitigating these vulnerabilities and safeguarding investor assets requires investments in and construction of security infrastructure.
This is a totally new market, and a sizable portion of investors do not understand RWA or cryptocurrency trading. The increasing interest of cryptocurrency investors is evidence of their willingness to take risks. But it’s crucial for investors to comprehend the advantages and dangers of RWA in cryptocurrencies.
I’ll list the noteworthy RWA Tokens for each asset class at the conclusion.
>> The market for tokenized real estate is still relatively new, but a lot of organizations estimate that by 2027, it could reach $1.4 billion.
>> Trade finance and supply chain management involve numerous middlemen and are intricate procedures. Blockchain can streamline these procedures, lower fraud, and increase openness.
Trade finance and supply chain management are intricate processes involving numerous middlemen. Blockchain can increase transparency, decrease fraud, and streamline these procedures.
>> Blockchain-based trade finance solutions are projected to grow at a Compound Annual Growth Rate (CAGR) of 20% from 2022 to 2030, with a market valuation of approximately $9 trillion USD in 2021.
>> The global art market in 2022 will be 65 billion USD.
>> Defillama data indicates that as of May 2024, the total value locked (TVL) of the Defi market was $90.8 billion, with the RWA network accounting for $6.57 billion of that amount. It is anticipated that RWA integration projects will gain a substantial portion of the market and that the TVL will likely reach $10 billion by 2025.
The following platforms, namely Centrifuge and MakerDAO: Have made the RWA tokenization process easier:
Centrifuge enables companies to tokenize bills or property, which can subsequently be pledged as security for loans.
Lending and Borrowing: The DeFi protocol that permits loans to be made using RWA as collateral.
An instance of this would be the use of a tokenized real estate piece on platforms like “Aave” or “Compound” to obtain financing.
Yield Farming and Staking: Tokenized RWA can be staked into the liquidity pool to generate interest or utilized in yield farming techniques. This gives the owner of the asset a second source of income.
The validity of RWA projects depends on regulatory compliance, particularly Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance.
Tokenized assets are subject to various regulations in different countries:
The definition of a security token is governed by stringent regulations set forth by the US Securities and Exchange Commission (SEC).
In order to provide a thorough framework for cryptoassets, including RWA, the European Union is working on regulating markets for cryptoassets, or MiCA.
We can plainly see this market’s enormous potential.
In closing, I enumerate a few RWA projects that I believe hold promise for the future.
I learned that coins with reasonable market caps attract whales and sharks more than low-cap projects when I invested in cryptocurrency.
Fish are more attracted to projects with larger mcap markets. Liquidity is everything.
1. Ondo Finance ($ONDO): Finance/Structured Products — The primary goal of Ondo Finance is to develop structured financial products that provide opportunities for high yields along with consistent returns. It offers a range of investment options catered to varying risk appetites in an effort to bridge the gap between traditional finance and DeFi.
2. Pendle ($Pendle): Finance — Pendle is a financial asset that specializes in tokenizing and trading future yield.
3. Polymesh ($POLYX): Finance/Blockchain Infrastructure — Security tokens are used in regulated financial markets, and Polymesh is made for them.
4. Centrifuge ($CFG): Finance/Real World Assets (RWAs) — Centrifuge links decentralized finance (DeFi) with tangible assets such as invoices.
5. Goldfinch ($GFI): Finance — Goldfinch focuses on real-world lending and offers decentralized credit protocols.
6. Creditcoin ($CTC): Finance — Creditcoin uses blockchain technology to enhance credit history and lending market trust.
7. Propy ($PRO): Real Estate — Propy makes ownership and transactions in real estate easier by utilizing blockchain technology.
8. AllianceBlock Nexera ($NXRA): Finance — Decentralized finance (DeFi) and traditional finance are connected by AllianceBlock Nexera.
9. CANTO ($CANTO): Blockchain Infrastructure — CANTO offers platforms and tools for decentralized applications (dApps) as part of its DeFi infrastructure.
10. Polymath ($POLY): Finance/Blockchain Infrastructure — Security token creation, issuance, and management are made easier with Polymath.
11. LEOX ($LEOX): Finance/DeFi — LEOX is a decentralized finance company that specializes in different financial services.
12. Stobox ($STBU): Finance/Tokenization — Tokenization services are offered by Stobox, allowing securities and assets to be digitalized.
13. LandX Governance Token ($LNDX): Real Estate/Agriculture — LandX connects investments in agricultural land to blockchain-based governance.
14.Realio ($RIO): Real Estate/Finance — Realio enhances transparency and liquidity by fusing blockchain technology with real estate investment.
15. Wadzpay ($WTK): Payments/Finance — Wadzpay wants to use blockchain technology to update payment systems so that transactions are quicker and more secure.
For more than a year, I have been closely following and analyzing $WTK as well as other projects on Twitter. Here is where you can find my X (Twitter).
I am not in any way involved with any of your investments; the information and examples above are not investment advice. You are responsible for your own research and decisions.
