by Jacek Korneluk

While crafting another article, I spontaneously found myself gravitating towards a subject that I believe deserves a prominent spot on my blog, as I am an ambassador for one of the RWA projects. RWA is as mysterious as it looks and sounds, so I decided to simplify it and write about it.

For me, it’s a fascinating topic, and I hope you find it similarly intriguing. Even if you don’t tokenise anything, it is certainly worth familiarising yourself with the term and concept now. Who knows? Shortly, you might invest in some RWA tokens or even tokenise something yourself.

There is no better time to inquire into it as it gains recognition and momentum in both corporate and less-commercial scenarios.

More and more digital asset explorers, cryptocurrency enthusiasts, and blockchain native investors (big players like BlackRock included) begin to focus on RWA tokenisation. So, it is essential to explore its potential impact and understand its inner workings IMO.

Real World Assets (RWAs) are digital tokens that represent tangible assets existing outside the digital world, such as physical and traditional financial asset

In simple terms, it refers to the process of transforming real-world assets – such as real estate, art, commodities, or intellectual property – into digital tokens that can be stored and traded on blockchain platforms.

A digital token is a digital representation of value or rights, often associated with blockchain technology. It can serve various purposes, including facilitating access to a distributed ledger, raising capital, or granting specific rights within a decentralised organisation. Digital tokens are sometimes referred to as crypto tokens or utility tokens.

In general, by merging physical assets and the digital domain, tokenisation offers numerous benefits that can completely change the way we perceive and manage assets.

As a few examples of real-world use cases, RWA tokenisation is being applied to assets such as real estate, art, luxury goods, and even carbon credits (if you can imagine such an asset and are a fan).

Tokenising real-world assets (RWAs) is writing a new chapter in the financial sector by combining tangible assets with blockchain technology. This innovation allows assets to be digitally represented, significantly enhancing liquidity, accessibility, and efficiency.

As I mentioned a couple of times, tokenisation involves creating digital tokens on a blockchain that represent ownership or a share of a physical asset. This makes it possible to buy, sell, and trade fractions of high-value assets, broadening access to investments that were previously limited to wealthy individuals or large institutions.

One of the key advantages of RWA tokenisation is increased liquidity. By converting assets into tradable tokens, investors can easily buy and sell fractions of an asset without having to invest large sums of money upfront. This opens the door to a broader range of investors and enables asset owners to benefit from the more universal value of their holdings.

Transparency is another crucial aspect that tokenisation brings to the table. By leveraging blockchain technology, all transactions involving the tokenised asset are recorded on an immutable and publicly accessible ledger. This ensures a higher level of accountability and reduces the risk of fraud or mismanagement.

Furthermore, RWA tokenisation democratises access to assets that were previously inaccessible to the average investor.

For instance, tokenising real estate allows people to invest in properties without having to purchase an entire building or land parcel. This not only diversifies investment portfolios but also authorise individuals to participate in wealth-building opportunities that were once reserved for institutional investors or high-net-worth individuals (super wealthy).

In the real estate sector, RWA tokenisation is already making waves. By minimising intermediaries, streamlining property transactions, and reducing costs, it has the potential to reshape the industry and create new opportunities for investors and property owners alike. However, it’s essential to recognise that tokenisation is not limited to real estate alone. Its potential extends to various industries and asset classes, offering a view into a future where the lines between physical and digital ownership continue to blur.

As this can be a bit murky for everyone, I will try to clarify it.

Digital tokens represent different types, and they are designed and built to specific standards.

Key types include:

Payment Tokens: Cryptocurrencies like Bitcoin and Ether, are used for transactions and as a store of value.

Utility Tokens: Provide access to products/services within a blockchain ecosystem.

Security Tokens: Represent ownership in assets and provide rights like dividends, regulated like traditional securities.

Equity Tokens: A subset of security tokens that represent ownership in an underlying asset, typically shares in a company.

Non-Fungible Tokens (NFTs): Unique digital assets, can represent both digital and real-world items, such as artwork, real estate, and collectibles. Tokenising these assets on a blockchain can make trading more efficient and reduce the risk of fraud.

Stablecoins: Pegged to stable assets, minimising price volatility.

Governance Tokens: Grant voting rights in decentralised projects.

Privacy Tokens: Enhance transaction privacy.

Examples of Standards include:

ERC-20 (Ethereum), ERC-721 (NFTs), BEP-20 (Binance Smart Chain), and TRC-20 (TRON), ensuring token interoperability and functionality across platforms.

There are many more standards. I have mentioned only a few examples. The topic is too extensive to cover here.

ERC-20 Tokens vs. NFTs – Choosing the Right Token Standard for Real-World Asset Tokenisation.

ERC-20 tokens and Non-Fungible Tokens (NFTs) both play crucial roles in the tokenisation of Real-World Assets (RWAs). Understanding their characteristics and differences can help you decide which type of token is most suitable for your specific RWA use case.

ERC-20 Tokens

ERC-20 tokens are fungible, meaning each token has the same value and can be easily exchanged for another token of the same type. These tokens are commonly used to represent assets that are divisible and interchangeable, such as commodities, currency, or shares in a real estate project.

Using ERC-20 tokens for RWA allows fractional ownership and improves liquidity in the market.

Non-Fungible Tokens (NFTs)

NFTs, on the other hand, are unique, and non-interchangeable. Each NFT represents a specific asset, such as a piece of art, a collectable, or a specific real estate property title.

Tokenising RWAs as NFTs enables the creation of digital certificates of ownership and provenance, which enhances transparency and trust in the market.

The choice between ERC-20 tokens and NFTs depends on the nature of the RWA and the desired outcome of tokenisation. If you aim to fractionalise ownership (or economical rights like in the case of Blocksquare) of an asset and improve liquidity, ERC-20 tokens would be more suitable.

However, if your goal is to create unique, verifiable digital representations of assets with specific characteristics, NFTs would be the preferred choice.

You can say, both ERC-20 tokens and NFTs have their merits in the tokenisation of RWAs. But, by considering the nature of the asset and your objectives, you can select the most appropriate token standard to enable the full potential of blockchain technology in the real-world assets market.

Think about “Tokenising the Tangible” as Exploring New Frontiers in Real-World Asset Investment.

As always and you may expect, there are some potential hurdles in RWA tokenisation, such as regulatory compliance, asset valuation, and security concerns.

To highlight a few, I will mention the following:

Regulatory Obstacles – The legal framework for tokenised assets varies by jurisdiction and is still evolving. Manoeuvring these regulations requires careful planning and legal expertise, as compliance can be complex and time-consuming. Considering existing or creating new legal sandboxes may be handy if such an option is possible.

Legal sandboxes are controlled environments that allow legal service providers and technology companies to test innovative legal services, products, or business models under relaxed regulatory conditions.

As a strong advocate of this solution, I always mention it to tech developers, open-minded politicians, and various lobbyists and decision-makers. I first learned about Sandboxes while studying blockchain at RMIT University, and I fell in love with the concept from day one.

Technological Risks – Ensuring the reliability of smart contracts and the accurate representation of physical assets on the blockchain is crucial. This involves robust systems for asset custody and regular external audits to maintain a proper level of trust and desired accuracy.

Market Demand and Liquidity – Despite the potential for increased liquidity, finding buyers for tokenised assets in the early stages of the market can be challenging. The truth is that investors need to understand the relevant aspects of emerging technology, as we all should.

“The more educated the investor is, the wiser investment may be!”.

I always like to say that.

Our lives are becoming more digital every day, so it is no surprise that investing is following suit. Not to mention, the younger generation sees no issue with this shift.

Starting from my personal experience:

I would like to share some of my personal experiences with RWA.

Our local Perth team has been awarded for real asset tokenisation as a part of Blocksquare.  I am proud to be a member of this winning team and eager to share firsthand insights and experiences from following this innovative project.

Blocksquare is a very notable player, specialising in tokenising real estate. Their platform allows property owners to issue tokens representing economical aspect of their real estate, which can then be staked or traded on the blockchain.

This not only increases the liquidity of real estate assets but also opens up investment opportunities to a global audience.

Another platform working in tandem with Blocksquare is  Oceanpoint, which is responsible for the decentralised finance (DeFi) approach to tokenised real estate assets.

The different projects include:

RealT is a well-known platform that allows users to invest in fractional ownership of real estate properties. The platform leverages blockchain technology to tokenise real estate assets, making it easier for investors to buy, sell, and trade property tokens. RealT focuses on properties primarily in the United States.

SolidBlock is a real estate tokenisation development company that transforms property investments by converting real estate assets into digital tokens. This company is known for its innovative approach and commitment to regulatory compliance, making real estate investments more accessible, liquid, and secure.

Roofstock is another key player in the real estate tokenisation space. It specialises in tokenising single-family rental properties, allowing investors to buy fractional shares of rental homes. The platform provides a marketplace for trading these tokens, offering enhanced liquidity and accessibility to real estate investments.

Additionally, Chainlink as decentralised oracles are entities or services that provide external data to a blockchain. They act as intermediaries that fetch, verify, and relay real-world information to smart contracts, enabling them to execute based on data that is not natively available on the blockchain. Such a system provides critical infrastructure for tokenised RWAs by offering reliable data feeds and proof of reserve, ensuring transparency and security across different blockchain environments.

Tokenisation improves liquidity, transparency, accessibility, and efficiency in the management and trading of real-world assets.

If you’re brave enough, go ahead and tokenise something – if not, simply follow the topic and observe what happens.

By doing so, you will gain knowledge and add another layer to your understanding of emerging technologies.

RWA tokenisation may soon become as common as traditional investing is today.

Thank you for reading and Cheers as always - The Author.

Oryginally published on August 14, 2024 at:

https://spektrumlab.io/revolutionizing-investment-the-rise-of-real-world-asset-tokenization/