Since the year 2020, the phenomenon of tokenization of real assets has begun to gain popularity in the blockchain ecosystem. For example, the decentralized platform MakerDAO began accepting treasury securities and bonds as collateral for its stablecoin called DAI, which immediately fueled public interest and drew attention to the link between traditional assets and the blockchain. Two years later, the largest crypto analysts (experts from Binance Labs, Coinbase, etc.) called real assets one of the most promising crypto trends.
By 2023, it became clear that the experts’ assumptions were confirmed and RWA (real-world assets), indeed, became a trend in the crypto industry. Today, the total amount of all loans secured by real assets exceeds $4 billion, and new crypto projects are already moving precious metals into the blockchain space.
Tokenization of real assets – what is it?
In general, the concept of tokenization is associated with the transformation of all tangible and intangible values of the real world (securities, precious metals, real estate, copyright products) into tokens — a payment instrument of the crypto industry.
Tokenized assets or RWA can be bought, sold, gifted, exchanged. The value of such assets in the digital world is ensured by their value in the real world. RWA trading is carried out with the support of dozens of blockchain platforms. According to recent data from the analytical platform DeFiLlama, the RWA ecosystem includes about 25 protocols. The main function of RWA is the integration of traditional assets into the DeFi sector in order to expand its capabilities.
Crypto analysts have called RWA a bridge between traditional finance (TradFi) and decentralized finance DeFi, which is capable of:
- providing the crypto market with new sources of capital;
- stabilizing the crypto market;
- increasing the number of liquidity and profitability sources.
Tokenization stages
Experts identify 3 main stages that a real asset goes through before becoming tokenized.
- Identification
At this stage, the traditional asset is assessed and its full description is made in accordance with legal requirements (condition, cost, owners, documents, etc.)
- Transferring an asset to the network — creating an RWA
After the so-called formalization of a traditional asset (its approval in the real world), all data about it is transferred to the blockchain. This requires the help of smart contracts and tokens of various standards.
- Maintaining the RWA
At this stage, the tokenized asset requires the most support and attention. It is necessary to constantly supply up-to-date information about it, maintain the level of liquidity, communicate with the issuer, and check legal information about it. This is the most energy-consuming stage.
Why is tokenization of real assets so popular now?
Despite the fact that the beginnings of RWA appeared back in 2018, tokenization has only gained popularity now. Experts and analysts link this with a prolonged downward trend in the crypto market. The crypto industry needs a good shake-up and RWA technology can do exactly that.
According to Coinmarketcap, in September 2023, the total market capitalization of all crypto assets was $1.05 trillion. In 2021, this number was three times higher. The DeFi sector needs new sources of liquidity now more than ever — over the past year it has been losing money. Capitalization of stablecoins has decreased, as well as trading volumes on DEX. Apparently, RAW is the ideal way out of this situation.
RWA problems
The transfer of «real-life» assets to the digital space, even in theory, would not have occurred without some issues. It's all about the already classic set of obstacles that young projects consistently “break through” when they strive to expand. The list includes three factors: technical, legal and data storage security factor.
- Technical factor
Technical limitations directly depend on current legislation. Government authorities seek to control both real and digital assets. And if in the first case they’ve succeeded, then when it comes to cryptocurrencies and tokenized assets – not so much. That world turned out to be too difficult to control. Many smart contracts and tokens standards simply do not allow third parties to participate in payment transactions.
In order not to conflict with the authorities and continue to grow in a given direction, developers are looking for compromises. It is expected that in the near future blockchains will be released that are more tailored to the needs of RWA and satisfaction of the authorities. To the disappointment of many users, such platforms are likely to be less confidential and more centralized than the ones that we’re used to.
- Legal factor
Regulatory issues in the RWA sector are not as pressing as in the Crypto World. The asset is already legally registered in real life, so all that remains to do is to adapt it to the digital world. But, since the digital market is still quite young and unstable, its legal norms are also uncertain. Therefore, a young project seeking to tokenize real-world assets will have to face new asset regulation requirements that have not yet been fully formalized.
- Safety factor
The key problem in the tokenization process is the low level of synchronization between decentralized assets and real ones. This can lead to interruptions in the operation of service platforms, as well as a number of unpleasant incidents such as:
- double spending of the underlying asset (simultaneous use of a real and digital asset as collateral);
- problems with the repayment of tokenized obligations by the issuer of tokens;
- unauthorized sales of underlying assets by RWA issuers.
In general, according to leading experts in the cryptocurrency world, the trend of worldwide tokenization of real assets is more than relevant today. It is actively developing and becoming increasingly stronger in both markets — traditional and digital, which in the future may lead to their complete merger. As soon as the regulation of cryptocurrency becomes clearer for all parties (for the authorities in the first place), then such a unification will become possible. In any case, the ecosystem of these two markets is already undergoing significant changes.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “6 Things to Do Before Crypto Bull Run” and “Thodex Founder Jailed For 11,196 Years”.
