What are Tokenized Real-World Assets?
Real-world Assets (RWAs) are financial investment products issued on blockchain that represent tangible assets such as real estate and intangible assets such as bonds. RWA tokenization converts these assets as security tokens using blockchain technology. In this manner, asset value can be tokenized and utilized in on-chain trades.
It is important to note that security tokens represent off-chain RWAs. At the same time, security tokens may also be treated directly as real-world asset or RWAs. RWAs are usually backed by traditional assets and serve as sustainable and reliable digital asset classes that bridge the gap between DeFi and TradFi.
RWAs are in the form of digital tokens that are hosted on blockchains. Tokenized RWAs represent different types of assets such as artwork, intellectual property, and metals etc.
How do Tokenized Real-World Assets Work?
A blockchain can create digital tokens based on RWAs using a tokenization process. In this manner, investors can purchase, sell, or trade tokenized RWAs from a blockchain. Here are some important features of tokenized RWAs:
In the first stage, it is imperative to identify a RWA for tokenization. Once an RWA is selected it undergoes evaluation to determine value and set a scale to ensure unit for standardization.
It is important to consider regulatory requirements when tokenizing an RWA. For instance, generating Special Purpose Vehicles (SPVs) for specified utility such as storing and managing assets and mitigating investment risks associated with tokenized RWAs.
Smart contracts are automation protocols on a blockchain network. They ensure how tokens are created and traded. In this manner, the process also becomes unbiased and warrants transparency for investors.
Once an RWA is finalized for tokenization and the necessary tokenization structure is completed it is time to select a suitable blockchain network. Usually, developers pick Ethereum blockchain on account of smart contract support.
Tokenized RWAs exist in the form of digital currencies. Traditionally, one cryptocurrency represents a small portion of the asset’s unit price. These tokens are generated on a blockchain network and may establish the local tokenization standards such as BRC-20 or ERC-20 etc.
A blockchain that issues tokenized RWAs also keeps an immutable and open-sourced record regarding propriety records. This digital record contains information concerning trading history such as transactions, purchases, sales, and transfers. In this manner, there is little chance of theft or conflict among investors.
Tokenized RWAs also require custodial solutions. They can include security measures for tangible assets such as real estate and suitable storage for tokens.
Tokenized RWAs are hosted on blockchain networks but they are hosted on trading platforms. Regulated and decentralized trading platforms may list RWAs and allow investors who do not have the technical skills to access them directly from a blockchain network.
Accessibility and Liquidity
The tokenization of RWAs brings more liquidity and accessibility. In comparison, traditional markets have stringent trading restrictions and expensive buying threshold. Therefore, tokenization of RWAs makes them more accessible for a greater amount of audiences.
Advantages of RWA Tokenization
RWAs convert tangible assets such as real estate, artwork, and commodities into digital form that bring more capital inflows and increments liquidity.
The entry barrier for investors is lowered since the tokenized RWAs coins represent a small portion of unit assets. In this manner, fractional trade is possible which also adds to liquidity.
Tokenized RWAs increase transparency for investors in comparison to TradFi. In this manner, the blockchain will generate an immutable ledger that protects the platform against fraud and produces reliable records of all transactions and proprietary records.
Tokenized RWAs also improve accessibility for traditional assets by converting them into digital format. In this manner, the active trading duration is also incremented.
Tokenized RWAs have gained recent traction within DeFi sector on account of serving as an intermediary between digital and traditional financial sectors. It also has additional features such as yield-generation, leverage trading, and loans.