The world is changing at a never-before-seen pace. It is primarily thanks to innovations like artificial intelligence solutions, blockchain solutions, and other such technologies. One of the advancements in this new era of technology is the cryptocurrency market. It is a completely new entity that has created a powerful decentralized framework worldwide. In the blockchain sector, one of the biggest markets is real-world asset (RWA) tokenization. It is a hundred billion dollars industry and among the biggest market opportunities in the blockchain sector.
In theory, this technology can be used to tokenize anything valuable and add it to the chain. As more and more projects work on tokenizing a variety of assets including currency, real estate, paintings, and other commodities, tokenized RWAs are becoming a niche in the digital asset business.
In this post, we will cover real-world asset tokenization in detail.
What are Real-World Assets and Asset Tokenization?
Real-world assets or RWAs are digital tokens that represent physical and financial assets like art, real estate, stocks, bonds, intellectual property and more. It is among the promising use cases of blockchain solutions and offers an array of benefits like transparency and increased liquidity.
Asset tokenization is the process by which ownership rights are represented as digital tokens using blockchain technology. Here, the digital tokens work as digital certificates of ownership.
As per the projections from Boston Consulting Group, the user of tokenization of assets will save up to $20 billion a year in global clearing and settlement costs.
What are the Various Types of Real-World Assets Suitable for Tokenization?
There are various real-world assets that can be tokenized using the latest technology. Here are various types of real-world assets suitable for tokenization:
1. Real Estate
- Residential Properties: Single-family homes, condos, and apartments.
- Commercial Properties: Office spaces, shopping centers, and industrial properties.
- Fractional Ownership: Investors can purchase a portion of a property, allowing broader access to real estate markets.
2. Commodities
- Precious Metals: Gold, silver, and platinum can be tokenized, enabling easy trading and ownership without physical handling.
- Energy Resources: Oil, natural gas, and other energy resources can be tokenized to create more liquidity and access to commodity markets.
3. Art and Collectibles
- Fine Art: Tokenizing artwork allows fractional ownership, making high-value pieces accessible to more investors.
- Collectibles: Items such as rare coins, stamps, and memorabilia can be tokenized for easier trading.
4. Equity and Securities
- Company Shares: Equity in private or public companies can be tokenized, making ownership more flexible and transferable.
- Bonds and Other Financial Instruments: Bonds, derivatives, and other securities can also be tokenized, enabling greater liquidity and faster transactions.
5. Intellectual Property
- Patents and Trademarks: Rights to intellectual property can be tokenized, making it easier to buy, sell, or license these assets.
- Copyrights and Royalties: Music, film, and literary rights can be tokenized, providing more direct and transparent royalty payments.
6. Luxury Goods
- Watches, Jewelry, and Cars: High-end luxury items can be tokenized, allowing fractional ownership or easier transfer of value.
- Wine and Whiskey: Rare and valuable wine or whiskey collections can be tokenized for easier trading.
7. Agriculture
- Farmland: Agricultural land can be tokenized to allow investors to own parts of farming operations.
- Crops and Livestock: Tokens can represent ownership of crops or livestock, providing new investment opportunities.
8. Carbon Credits
- Environmental Assets: Carbon credits, used to offset carbon emissions, can be tokenized to facilitate trading and improve transparency in environmental markets.
9. Infrastructure
- Transportation Projects: High-value infrastructure projects such as roads, bridges, or airports can be tokenized to attract more investors.
- Renewable Energy Projects: Wind farms, solar installations, and other green energy projects can be tokenized to facilitate funding and broaden ownership.
Tokenization makes these assets more accessible, liquid, and efficient by leveraging blockchain technology for transparent and secure transactions.
Examples of Asset Tokenization
Tokenization of real-world assets: On a blockchain, real-world assets such as fine art, fiat money, stocks, T-bills, credit, commodities, and carbon credits can be tokenized and stored. They are bearer assets that grant the possessor a claim over an actual asset, much like gold bullion warrants and house deeds. Physical asset tokenization allows assets to be stored, exchanged, and used as collateral over blockchain networks, which is a major distinction from old bearer assets.
Tokenization of digital assets: Web3 requires tokenizing assets that are only available digitally on a blockchain network, particularly for use cases like cross-chain assets and DAO governance rights. Tokenized assets kept on a blockchain allow the owner to retain the asset outright rather than having a claim on the underlying item because they are fully digital.
Tokenization of in-game assets: As a subset of tokenization of digital assets, tokenized assets can be used to represent in-game items like skins, weaponry, or in-game money that are utilized in GameFi projects or metaverses.
Stablecoin is a real-world example of the tokenization of fiat currencies.
What are the Advantages of Asset Tokenization?
Asset tokenization comes with a range of advantages, including:
- Increased market liquidity of assets through global accessibility on blockchain ecosystems.
- Higher transparency and auditable asset management reduce systemic risks.
- Helps expand the potential user base through blockchain-based applications and fractional ownership.
- Reduces the overall transaction cost compared to traditional asset trading and management.
- Smart contracts streamline processes associated with transfer of ownership, dividend distribution, asset management, and more for people involved in the process.
- It offers 24/7 access to the market, always allowing investors access to assets anywhere.
Process of Tokenization Real-World Asset
The process of tokenization for real-world assets can be broadly segregated into five sections, namely:
The process starts by identifying the real-world asset that needs to be tokenized based on market value, potential liquidity, and regulatory compliance.
It includes determining the characteristics of tokens, including fungible or non-fungible, and the standards it would follow, like ERC20 or ERC721. These elements of token design determine the functionality and interoperability of the tokens.
Finding the most suitable blockchain network, which can be either public or private, for providing the token integration with protocols such as Chainlink Cross-Chain Interoperability Protocol (CCIP) comes in this step. It improves token accessibility acoss the different blockchain platforms.
- Addition of Offchain Data
To ensure higher accuracy and reliability of information concerning the tokenized asset, using high-quality off-chain data such as Chainlink oracles is the best choice. Additionally, here you can leverage verification services like Chainlink Proof of Reserve (PoR) to uphold transparency about the assets that back the tokens.
The last step is to deploy smart contracts on the pre-defined blockchain network, then mint the tokens as per the selected specifications and release them to the public for trading and utilization. It is the end of the tokenization process, where stakeholders can have fractional ownership and liquidity of real-world assets.
How Has RWA Evolved till Now?
The past two years have seen a significant evolution of RWAs:
- Technological Advancements: Improvements in blockchain protocols and smart contracts have made the tokenization of RWAs more secure and efficient.
- Regulatory Clarity: Better clarity in regulations of various jurisdictions has increased confidence in RWA investments.
- Institutional Acceptance: Some of the most well-known financial institutions and corporations are now exploring the option of adopting RWA solutions.
- Innovative Platforms: Now, there is an increase in platforms dedicated to RWA that offer specialized services like trading, tokenization, and management.
The Future of Real-world Asset Tokenization
Asset tokenization is still in its early stages; however, it has already shown huge potential in changing the dynamics of global financial market. As this technology improves, we will experience an increase in the number of asset classes that would be tokenized, leading to more investment opportunities.
Additionally, better clarity in regulatory policies of asset tokenization will lead to more institutional adoption and widespread implementation.
The integration of other technologies like artificial intelligence, Web3, and Decentralized Finance (DeFi) will refine the process of asset management. It will lead to a more efficient, flexible, and accessible financial system.
Blockchain Solutions – The Backbone of Asset Tokenization
Asset tokenization is offering a huge transformation in how people manage, invest, and trade physical assets. With the introduction of blockchain solutions, it is becoming possible to get such applications into action.
If you, too, would like to learn how you can benefit from tokenization, contact MoogleLabs blockchain development company for a consultation today.