The whole world is going digital, and absolutely nothing can be left behind.
Do you still have trouble wrapping your head around NFTs? Everyone agrees, in principle, that non-fungible tokens don’t have any inherent, stand-alone value. Digital art, photos, and even that first-ever tweet are bought, sold, and traded because they represent a cultural moment. Because they’re rare. Because people want to own things, even if they don’t physically exist at all.
NTFs have value solely because we say they do. If you agree that that’s a curious aspect of modern life, try this on for size — your home could be a token on a blockchain somewhere.
That, the other end of the spectrum, is the tokenization of so-called Real-World Assets.
The idea is simple enough. A digital token that represents any hard, physical asset is created for you to manage at will. Sell the asset’s digital counterpart, sell the asset. It is, in theory, a whole lot simpler than transferring a property deed.
So, is tokenizing RWAs the future of sales or just a passing fad? Do you have any assets to tokenize? Why would you want to buy RWA tokens? That and more — coming right up!
What Exactly Are Real-World Assets?
The term “Real-World Asset” is one that could only have been coined in the digital age. It’s defined by what it isn’t — a digital asset. Real-World Assets are assets that live in the offline world, and any physical object could technically be considered one, including the towel you just dried your hands on or the houseplant that sits on your desk as you read this. And the desk itself, of course.
Real-World Assets don’t have to be physical, though. They can be ideas or rights to things, too.
In practice, the things considered to be Real-World Assets in the blockchain space also have to have significant and tradable value — so they can be used to make money, serve as collateral, or represent ownership.
The main physical categories that people talk about in a RWA context are:
- Residential and commercial real estate
- Precious metals and gems
- Energy products like oil, gas, and solar power
- Vehicles
- Art
- Valuable collectibles
As for non-physical RWAs, those include:
- Bonds
- Stocks
- Loans
- Invoices
- Mortgages
- Copyright
- Patents
- Trademarks
- Equity in a business
All of these things can be tokenized and stored on a blockchain — a process that creates a digital representation of the asset, and which then ascertains ownership. While that may sound a little unusual at first, it’s not that far off from more traditional financial instruments. A property deed is also, for example, an abstract representation of a tangible asset that you own, and we usually don’t think twice about the mechanics of that.
How Can RWAs Be Tokenized?
RWA tokenization is the creation of a digital token to represent a Real-World Asset (in full or part), after which it is recorded on a blockchain. These are crypto security tokens, and they can be created and managed on a more general blockchain also used for cryptocurrency (like Ethereum or Solana) or a blockchain designed especially for the purpose.
RWA tokens are very much like a digital version of a deed or certificate of ownership, except they’re on the blockchain — with all the benefits that offers. Blockchains are secure, decentralized, unalterable after the fact, and publicly visible by default. RWA tokens can be programmed for dividend payments, compliance, voting rights, loan repayments, and other contractual actions through smart contracts.
The actual process of tokenizing Real-World Assets is pretty complicated — and not free. That explains why it’s not usually done for low-value assets. It also explains why assets are only tokenized for specific purposes.
OK, How Does That Work?
Good question. Part of the reason RWA tokenization is so interesting is that it can, theoretically, make traditionally non-liquid assets far more liquid. The process of getting there isn’t quick, though. Because we’re talking about high-value items (like equity in a large company or a commercial property), a lot of due diligence, paperwork, and (often) negotiating is on the table before the process reaches the actual tokenization stage.
This is a rough run-through of how it works.
1. Deciding You Want to Tokenize a Real-World Asset
You have an asset. You’ll only consider tokenizing it under very specific circumstances — because you want to sell or trade it in full or part, or because you want to leave the asset to someone in your will, for example. By the time you get to this stage, you may already have a buyer, but you’ll probably at least have a clear plan. Nobody tokenizes Real-World Assets on a whim.
2. Having the Real-World Asset Valued
Before a Real-World Asset can be tokenized, a fair market value should be established for it. That process should involve a professional appraisal. The purpose of a professional appraisal is to determine a sensible initial token price, but also to set yourself up for a fair and transparent trade.
3. Taking the Necessary Legal Steps
This stage is very similar to more traditional ways to buy and sell high-value tangible assets like real estate. Before a token can be created to represent a Real-World Asset, ownership has to be confirmed — and liabilities like liens have to be dealt with.
While tokenization happens in the crypto space, on the blockchain, you still have to comply with any regulations that apply in your jurisdiction. Those vary greatly, and that’s where lawyers enter the picture. Expect the same kinds of legal paperwork and meetings involved in completing similar transactions in a more traditional manner.
4. Getting Ready to Structure the RWA Tokenization
This is where we get to the exciting part — the actual tokenization. One common choice is to create a specialized legal entity for the asset. This entity will be the custodian of the asset and make sure that the rights the tokens confer are implemented correctly. From there, the characteristics of the RWA token can be defined as part of a process called tokenomics.
Possible variables include:
- How many tokens will be issued for the asset in total.
- The opening price per token, which depends on the value of the asset (as per the appraisal) and the number of tokens issued.
- The specific token standard that will be used, like ERC-20 or ERC-721. This decision determines where and how the tokens can be traded.
- The rights and benefits tokens confer — which can include voting rights, dividends, or rental income, among other things.
5. Tokenizing the Real-World Asset
There’s now just a little more to be done before the Real-World Asset can be tokenized. The next steps include choosing the most suitable blockchain and picking the platform that will perform the tokenization.
The process of choosing a blockchain involves similar considerations to those you’d make if you wanted to investigate which cryptocurrency to invest in. Blockchains are chosen for security, scalability, transaction speed, and gas cost, among other things. RWAs can only be tokenized on blockchains that support smart contracts.
Smart contracts are responsible for automating things like creating and distributing RWA tokens, defining rules about trading tokens, and distributing any dividends or other payouts associated with RWA tokens.
6. Auditing Smart Contracts
We’re nearly at the end of the process now, but smart contracts have to be audited by an independent third party before RWA can be distributed. Skipping this step could have catastrophic and immediately obvious consequences — because, in practice, we’re talking about truly high-value assets.
7. Issuing the RWA Tokens
The RWA tokens are now ready to be issued — something that usually happens through an Initial Coin Offering or Security Token Offering. As with many cryptocurrency exchanges, investors will have to create accounts and pass identity verifications before they can buy tokens. When they do, the tokens are sent to investors’ crypto wallets, from which point they’ll usually want to transfer them to cold storage.
This little look sums the process of tokenizing Real-World Assets up, but they’ll require ongoing management from that point forward. Smart contracts will likely have to be updated at some point, for example, and it’s absolutely crucial to audit the process regularly to make sure that everything falls within the regulations that apply to the relevant jurisdiction — which can change very suddenly sometimes.
How Popular Is the Tokenization of Real-World Assets?
That depends on the industry, but tokenizing Real-World Assets is absolutely a growing trend. McKinsey & Company estimates that $2 trillion worth of assets will be tokenized by 2030. They list mutual funds, EFTs, securities, precious metals, and intangible assets as some of the most common assets to be tokenized at the moment.
Actual examples of assets for which you can buy RWA tokens include real estate (residential and commercial), gold, classic cars, art, and carbon credits. RealT tokenizes US residential properties and offers very fractional ownership associated with rental payments, to name one option. Tether Gold tokenizes gold stored in Switzerland. Even Franklin Templeton has entered the blockchain RWA market.
Real-World Asset tokens are here to stay. Tokenization is neither a fad nor a plaything, and here’s why it isn’t going anywhere:
- RWA tokens can be fractionalized to allow people to invest in very small parts of non-liquid assets that would otherwise be out of reach for them.
- Although the process of tokenizing is more than a little involved, as you’ve already seen, that’s a one-time thing. Once tokenized, assets can become far more liquid. Transaction fees can become far lower, and deals can be closed at any time at all.
- RWA tokens can be appealing to regulators, too. The blockchain creates a record that’s far less vulnerable to fraud than traditional processes.
As governments catch up to this relatively new technology, regulatory hurdles are bound to crop up in various places in the near future, but overall, RWA tokenization is set to grow and coexist with the traditional financial system as it matures.
The question is — will you watch this space with interest, or also dip your toes in?
How to Get Started with Real-World Asset Tokens?
Maybe you just wanted to know what Real-World Assets are and how they’re tokenized on the blockchain. In that case, you now have an answer to that question. If your curiosity is piqued, though, and you’re now wondering if you can start investing in RWA tokens, you’d probably appreciate a few pointers toward low-risk places to start.
RealT is a platform that tokenizes US residential rental homes for around $100 per token. You can buy those tokens on their own platform, but also through decentralized exchanges. Once you own a token or several, your portion of the rental income is paid out in USDC.
While RealT is an example of a platform that tokenizes physical assets, tokens for non-physical assets are also available. The Toucan Protocol tokenizes carbon credits for speculation with pretty low entry prices, and Ondo Finance lets you buy tokens for Treasuries.
If you want to get a little more frivolous, there’s Algorand for art, books and music (low prices!) or Lympid — which offers tokens for many things, including luxury watches and racehorses. Silly and outright irresponsible offerings are also around in various places, but we’ll leave those for you to explore on your own. (Hint: Look all you like, but don’t buy!)
Are RWA Assets the Future of Finance?
Maybe! More traditional ways to invest in tangible assets probably aren’t going anywhere anytime soon, but the fact that serious financial institutions have embraced RWA tokens to some extent shows that they certainly have a future. The tokenization of Real-World Assets may seem a little strange at first glance, but it makes complete sense when you think about it. All the benefits of Real-World Assets, with all the security and convenience of the blockchain? It’s obvious why more and more investors are saying, “Yes, please!”
