Asset management, whether physical or digital, is considered one of the most promising use cases for blockchain technology. We have seen many applications for digital asset management, especially with financial instruments. On the other hand, the most notable application for physical asset management is Real World Assets (RWA )tokenization.
This particular use case is becoming increasingly popular in the cryptocurrency industry because it provides access to a billion-dollar market of assets and liquidity that is not typically available in traditional markets.
According to DefiLlama data, the Total Value Locked (TVL) ranking of RWA projects has exceeded $6 billion as at October 2023.
What Are Real World Assets (RWA)?
Real-world assets (RWA) are digital investment vehicles on the blockchain linked to physical assets like real estate, cars, gold, art, etc.
These tokens, representing ownership or a share in the assets, offer enhanced security and stability, setting them apart from traditional cryptocurrencies.
The advent of blockchain and smart contracts enables the efficient creation and management of these tokens, facilitating the tokenization of real-world assets. Turning real-world assets into digital tokens not only provides a fresh outlook on ownership but also enhances exchange efficiency.
These tokens streamline liquidity, optimize asset management, and cut down on paperwork, ultimately reducing expenses.
What Possibilities Do Real World Assets Open Up?
RWAs are potential game-changers. This connection between the real world and blockchain ecosystems unlocks various possibilities and advantages previously unattainable in the asset management space. Some of the benefits include:
Improved transparency and accountability
RWAs on the blockchain make ownership records and transactions transparent for everyone. Blockchain’s transparency and immutability guarantee that investors can verify the authenticity and existence of tokenized assets.
Fractional Ownership
RWAs introduce the concept of fractional ownership, breaking down assets into smaller portions. This broadens global investor access to high-value assets that were once financially prohibitive. Fractional ownership facilitates portfolio diversification, allowing investors to hold shares in diverse assets.
Cost Reduction in Asset Management
RWA contributes to substantial cost savings by simplifying the traditional structure and eliminating intermediary parties such as lawyers, brokers, banks, and traditional financial institutions. Smart contracts take on crucial functions like ownership rules, revenue distribution, and the execution of predefined asset management conditions.
New Markets and More Participants
Bringing real-world assets on-chain makes previously illiquid assets flow smoothly in DeFi, creating new markets and financial products. RWAs offer both new and existing participants access to stable returns that were not available before. They remove barriers inherent in traditional asset investments, such as high capital requirements and regional limitations, enabling global investors to access and invest in once-exclusive real-world assets.
Increased liquidity
RWA boosts liquidity, making them more trade-friendly than physical assets. Investors can easily buy or sell without the hassle of converting assets to cash or dealing with the logistics of delivering and storing physical items.
What Types Of Assets Can Be Converted Into Real World Assets (RWA)?
Real-world asset tokenization extends to various asset classes, offering global accessibility and innovative investment opportunities. Here are some types of assets that can be transformed into Real-World Assets:
Real Estate
Tokenizing real estate as a real-world asset enables global access to property investment through fractional ownership. Platforms like Lofty and SliceSpace specialize in residential property tokens and commercial real estate. Smart contracts are used to handle rental income and property expenses efficiently, ensuring fair distribution of profits to token holders.
Art and Collectibles
Blockchain enables tokenizing art and collectibles through non-fungible tokens (NFTs), establishing digital provenance and maintaining scarcity. Platforms like Artory move artwork and collectibles to the blockchain, allowing ownership to be divided and reducing the cost of entering high-value investments.
Commodities and Precious Metals
Tokenizing real-world assets like commodities and precious metals makes it possible to invest in physical assets like gold or agricultural products in a digital form. Meld facilitates gold ownership through blockchain, and Agrotoken empowers farmers to tokenize their crops for trade, purchases, or as collateral for loans.
Books and Music
Tokenizing real-world cultural assets, such as books and music, offers significant opportunities. Platforms like Book.io issue tokens for ebooks and audiobooks, guaranteeing real ownership. Opulous supports ownership tokens for musical works, providing benefits for both artists and fans.
Intellectual property
Creators can tokenize their creations, offer digital shares to interested parties, and guarantee future earnings on their creations in that way. Platforms like ANote Music allow investors to buy a stake in music royalties, and Dequency enables the sale of usage rights for musical works, with transactions recorded on the blockchain.
The Limitations of Real World Assets
While RWA offers notable benefits, they come with a set of challenges and limitations that must be addressed so that they can reach their full potential.
1. Uncertain Regulations and Compliance Concerns
The regulatory landscape for RWAs varies based on asset type, location, jurisdiction, and tokenization platform. This lack of clarity and consistency can introduce legal ambiguity and complexity, with regulations subject to change over time or differing across regions.
2. Challenges with Scalability and Trust
The success of RWAs relies on the presence of reliable and scalable tokenization platforms. These platforms must possess sufficient capacity, speed, and security to manage the intricacies and volume of transactions and data involved.
Trust and reputation play a pivotal role among all stakeholders in the tokenization process, including the platform, originator, custodian, and auditor. Ensuring accurate representation, fair pricing, and secure transfers of RWAs can be challenging to resolve or verify, potentially posing hurdles in scalability and trust.
Prominent Real World Asset (RWA) Projects in the Crypto Space
Various RWA projects in the cryptocurrency domain showcase diverse visions, strategies, and niches. Here are some noteworthy RWA projects to watch out for.
Unikura
Unikura is a Web3 marketplace on Ethereum connecting global collectors with Japan’s unique collectibles. It uses blockchain for Real-World Asset (RWA) tokenization, providing each item with a unique digital identity on the blockchain and secure real-world storage solutions using Web3 technology.
In this marketplace, most transactions involve secondary distribution. The platform encourages users to opt for Unikura over physical item handovers with benefits so it could expedite secondary distribution.
The marketplace has a system where both recent and past sellers receive rewards based on Ethereum transaction history. This encourages sellers to see the advantages of using the marketplace compared to in-person transactions.
The project is currently in a closed beta. It offers special discounts on its NFTs and maintains a Discord community for user engagement.
Centrifuge
Centrifuge is a decentralized protocol for financing assets with the aim of making real-world assets more liquid. The protocol enables the transformation of physical assets into NFTs, thus facilitating various opportunities for token holders within the Polkadot ecosystem, including stablecoin conversion, DeFi investment, lending through MakerDAO, and yield farming. This not only boosts liquidity for the users but also allows them access to the full range of DeFi offerings.
By allowing borrowers to finance assets without intermediaries, Centrifuge aims to lower capital costs for small and medium-sized enterprises, providing stable returns to DeFi investors.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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