You may have heard about real-world tokenized assets a lot in early 2024 when it penetrated the market at scale, becoming a multi-billion-dollar market. As it continues to thrive, growing in market size and adoption, many retail investors are curious about what it entails and how to benefit from it. Let’s assess this financial product in detail.
Real-world asset tokenization is a way of using digital tokens to depict physical/ traditional assets like real estate, bonds, commercial equipment, etc, on the blockchain. It’s an investment method that allows many people to easily invest in real-world assets and use their proof of ownership to access many opportunities on-chain.
How Does Real-world Asset Tokenization Work?
Traditionally, often than not, an individual or a few persons can purchase a property or any other physical asset. For example, if a block of ten flats costs $3 million, an individual can pay the amount to own it. However, with the tokenization method, the worth of the property is turned into tokens of smaller prices, like $ 1,000 per token, and as many as ten or more investors can collectively buy it. This means each buyer owns a part or fraction of the block of flats. So, if it takes 300 people to buy the entire token, all 300 are co-owners.
For small-scale investors who do not have large capital, tokenized RWA allows them to be fractional owners and enjoy dividends on their investment. The tokens are more than just an investment. They serve as a certificate of ownership, which can be used as a form of security or collateral on-chain.
RWA Tokenization Use Cases and Advantages
Ownership and Diversification
Ownership and portfolio diversification are major use cases and advantages of RWA tokenization. Like the example of the $3 million property at the onset, you can invest in real estate, intellectual properties, arts of value, and much more without needing huge capital. With this technology, you can invest in multiple fronts, having fractional ownership in many traditional assets without breaking the bank.
Accessibility on Defi
In the decentralized finance world, RWA tokenization allows for asset-backed lending. On DeFi lending platforms, borrowers can use RWA tokens, which serve as proof of ownership as collateral for loans. Instead of submitting paperwork, which may take a long time to verify, since RWA tokens are on-chain, it’s much easier to verify, accelerating loan processes. Apart from loan benefits, investment access is another advantage of RWA tokenization. Fractional ownership is now possible with many traditional investments, which wasn’t the case before.
Transparency
Being on-chain, tracking and auditing tokenized assets is seamless. Risks of mismanagement are greatly reduced, making the system safe to a large extent.
Challenges Facing Tokenized RWA
Tokenizing real-world assets comes with certain challenges, such as liquidity and cross-border regulations.
Cross-Border Regulations
Tokenized assets are just finding their way into the global market; hence, most countries do not have a clear classification just yet. And this also spills into tax issues. If an investor from Japan chooses to purchase tokenized assets in Belgium, the tax laws that apply, buyer protection, and the application of domestic property laws of the countries involved are still unclear.
Liquidity
Despite tokenized RWA’s large market share, liquidity remains an issue. Some tokens may be difficult to sell due to a lack of buyers. Since it’s still at an early stage, demand for some tokenized assets is small. Should you own such a token, reselling might be challenging.
Limited Investor Knowledge
While the potential of the tokenized RWA market is high, many investors across the world have little to no knowledge of how blockchain, tokens, and digital assets work. This limits the involvement of many, slowing down the growth of the industry.
How to Tokenize an Asset
Before we cover how to invest in existing tokenized assets, let’s first examine how to create tokenized assets. If you want to tokenize some of your physical assets, here are a few things to consider.
Select the Asset.
Select or choose the asset you wish to tokenize. You can use a painting or artwork, precious metals like gold, treasury bills, or infrastructure such as solar farms.
Run the Necessary Checks
After selecting the asset you wish to tokenize, do a thorough assessment to make sure it’s legally safe to put up for sale. Check local laws to avoid violating any regulatory requirements. Additionally, the value of the assets should be verifiable by an independent body.
Choosing the Token Specification and RWA Platform to Use
The token standard, the total number to be created, and the worth to assign each token are important decisions to make.
The blockchain, whether a private or public blockchain network, should also be decided. Above all, choosing a trusted tokenization platform is the most important. The platform must have solid security protocols and smooth usability.
Creating The Token
After taking the important steps, creating the token is next. Keep in mind that the token must be pegged to a real-world asset. Upon creating the tokens, the smart contract will automate all processes, ensuring seamless transactions from token purchase to dividend payout and much more.
With this simple guide, you can start planning your own RWA crypto project and start attracting investors.
How You Can Tap Into Tokenized RWA
Going by its current market landscape, tokenized RWA presents a unique opportunity to build your financial portfolio. Centrifuge, Maple Finance, Ondo, and Token Capital are active companies offering tokenization investment and services. With the RWA market valued at billions of dollars, here’s how you can tap into it.
Educate Yourself
Educate yourself about blockchain, especially how tokenized assets work. Don’t get into RWA investment without a solid knowledge of its inner workings.
Research
Do your research about which RWA platform you want to choose for investment. Security measures, types of assets offered, process of registration, and legal compliance are important factors to consider before choosing a platform.
Your research should also include the type of tokenized RWA assets you want to choose. When choosing your preferred type of real-world asset, the timeline of the investment as well as your risk tolerance are important. And if you’re starting small, target an RWA with enough market liquidity.
Pick a Reputable Platform
A good number of investment companies now offer tokenized RWA. Do your research and choose a reputable one. Picking a good platform is equally important when your goal is to set up tokenized assets, since you can choose to invest in or set up one.
Start Small
Don’t go all in at first. Start small, then gradually increase your investment amount. Even if you have a large capital to work with, starting small allows you to learn the ropes without running at a big loss.
Diversify
Diversifying insulates you from huge losses. For example, if you spread investment across different tokenized assets instead of just one, when one of your investments loses value, others may still be in good shape.
Conclusion
Tokenized RWA is a revolutionary system that simplifies investment in traditional finance products. It’s also opening up a world of possibilities and access to many investors using an on-chain system, allowing physical assets to be of use in the digital world. Although with sizable advantages, unclear regulatory or developing guidelines, and liquidity are some of the major challenges of the tokenized assets system. However, the tokenized assets market is thriving, set to hit $30 billion in a few years from now.
As you contemplate venturing into this financial sphere, remember to do research, educate yourself, and invest strategically.
FAQ
What’s RWA In Crypto?
RWA in crypto is about creating tokens on the blockchain that represent the value of real-world assets. It allows investors to have fractional ownership of traditional assets like gold, treasury bills, bonds, real estate, infrastructure equipment, etc.
What Blockchains Support RWA Tokenization?
Ethereum, Avalanche, Polygon, and Solana are some of the networks that support real-world asset tokenization.
How To Invest In RWA Tokens
Investing in RWA Tokens is becoming easier by the day as DeFi platforms and aggregators now offer tokenized RWA investment plans to retail and institutional investors.
Are RWA Tokens Really Worth It?
Yes, RWA tokens are pegged to real-world assets, giving them real value. RWA tokens can be a digital representation of property, a business, and more.
How Can I Start Tokenization?
If your goal is to start a tokenization project and not invest in an existing one, do the following:
- Choose the assets you want to tokenize and check with local regulators.
- Determine the platform to launch your RWA tokens and attach a price.
- Pick a third-party auditor to ascertain the value of the physical assets and verify that they are free from legal complications.
- Mint or launch your RWA tokens and put them up for sale.
Tokenization of Real-World Assets (RWA): How You Can Tap Into It was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.