Real-World Asset Tokenisation: A Beginner's Guide to RWAs
Real-world asset (RWA) tokenisation has become a fast-growing sector in the cryptocurrency market. As of 2024 the total RWA value increased nearly 37% year-to-date and 2,327% over the past three years.
But what are RWAs, and what is the benefit of tokenising them? Let's find out together in this article!
Real-World Asset (RWA) Tokenisation 101
Real-world assets (RWAs) are tangible instruments that exist in the physical world that are later brought on-chain through tokenisation. Examples include treasury bills, real estate, invoices, money-market funds, and carbon credits.
As part of the tokenisation process, something of value is captured with a token that resides on a blockchain and this token can be held in cryptocurrency wallets and utilised in decentralised applications (dApps).
With tokenisation, RWAs could be transformed into digital assets that retain all the advantages of cryptocurrencies (e.g., public-key cryptography, transparency, traceability, and peer-to-peer transfers) while representing instruments present in the physical world. As these assets can be introduced into decentralised finance (DeFi), a massive market can be brought on chain to fill a crucial gap between crypto and traditional finance (TradFi).
With global fixed income markets outstanding and the global equity market capitalisation together equaling $231 trillion in 2022, many believe RWA tokenisation is among the most significant market opportunities in the crypto space. In contrast, the DeFi market's total value locked (TVL) is currently standing at $96.32 billion (as of July 1, 2024).
What Are the Benefits of RWA Tokenisation?
The traditional finance market's size is vast, yet it has been struggling with obsolete practices that hinder its efficiency. While capital is critical for a significant portion of SMEs, only between 13.1% and 29.7% of small business loans were approved in the US in September 2023. Also, loans' margins and estimated marginal costs stand at 10% at banks in emerging markets and 6% in advanced economies based on the findings of IMF's Global Financial Stability Report.
Image source: IMF
In contrast, decentralised finance platforms operate without intermediaries, are managed by their communities, and operate autonomously with smart contracts. According to the same IMF study, DeFi protocols have by far the lowest margins and marginal costs due to the absence of operational and labor costs. However, the decentralised finance sector is rather nascent, and such projects must rely on native token emissions and DeFi-native revenue to provide yield for their users.
On-chain real-world assets can bridge TradFi with DeFi to improve the efficiency of traditional financial assets. This includes enhanced liquidity, transparency, as well as fractional ownership. As they can be issued, managed, and traded on the blockchain without intermediaries, on-chain RWAs feature lower costs and faster settlements than their traditional counterparts, removing critical barriers for issuers.
At the same time, RWA tokenisation also empowers decentralised finance protocols to gain exposure to a new asset class and provide their users with more sustainable yield and higher APYs. Moreover, crypto projects can also leverage RWAs to hedge against digital asset market risks. Since TradFi and DeFi are rather uncorrelated, cryptocurrency teams can keep a part of their treasuries in RWAs to reduce their exposure to negative market events or price movements.
Decentralised stablecoins can also diversify collateral across traditional asset classes with RWAs to improve their coins' stability. In fact, MakerDAO, the issuer of the DAI stablecoin, increased its exposure to RWAs in the last few months. As a result, tokenised treasury bills (T-Bills) and other RWAs now account for 25.83% of Maker's annualised revenue.
What Are the Types of Real-World Assets That Can Be Tokenised?
Numerous types of real-world assets can be tokenised, and we have collected some of the most popular categories in the table below:
| RWA Type | Description |
|---|---|
| Private credit | Private credit can be tokenised by collateralising off-chain assets to issue blockchain-based loans to businesses. |
| Treasury bills | Tokenising T-Bills allows individuals and organisations to buy, hold, and sell treasury bills with global accessibility, lower fees, and reduced regulatory risks. |
| Real estate | Real estate can be tokenised to enhance liquidity, prove ownership over property via the blockchain, and lower barriers for investors via fractional ownership. |
| Art and collectibles | Tokenising physical art and collectibles as non-fungible tokens (NFTs) can significantly improve the liquidity of a traditionally illiquid asset class. |
| Commodities | Representing commodities like gold and silver on the blockchain allows investors to hold these physical assets with fractional ownership, lower fees, fast settlement, and greater accessibility. |
| Stablecoins | One could argue that stablecoins are the first and most successful applications of real-world assets, as they represent tokenised fiat currencies on the blockchain. |
In terms of their types, it is also important to mention RWA coins, which are the native tokens of real-world asset projects and platforms. Based on CoinGecko's rankings, the top five RWA coins by market capitalisation are the following:
Ondo Finance (ONDO): $1.729 billion (market capitalisation)
Pendle Finance (PENDLE): $764.75 million
MANTRA Chain (OM): $642.23 million
XDC Network (XDC): $437.96 million
OriginTrail (TRAC): $328.75 million
What Are the Potential Challenges and Risks of Tokenised RWAs?
Despite their potential to improve financial markets, tokenised RWAs may pose various risks and challenges for crypto market participants.
First, the tokenisation of real-world assets involve smart contracts. If these contracts are not regularly reviewed and audited, they may include errors, bugs, and vulnerabilities that could be exploited by attackers and may result in a loss of funds for investors.
Furthermore, there is a risk of centralisation and counterparty-related risks due to the custody of the physical assets. Also, tokenising RWAs may introduce new types of financial risks to investors. For example, defaults, liquidations, and legal disputes related to the business issuing the token may lead to financial losses for holders of real-world asset tokens.
It's also essential to discuss regulatory challenges, which could increase the complexities for market players. In addition to staying compliant with the rules of nations, some jurisdictions may not recognise tokenised RWAs, or their classification may vary by country. This makes it challenging for many organisations to enter this market, especially for those that lack the necessary resources to deal with potential legal disputes.
Finally, the concept of on-chain RWAs is rather new. While it is a fast-growing market, its adoption has been only picking up, and we still need to wait multiple years until they are embraced by the masses.
What Are Some Examples of Successful RWA Tokenisation?
Examples of successful RWA tokenisation include:
Sygnum tokenising Picasso's Fillette au béret masterpiece, creating 4,000 tokens from the artwork and selling it to over 50 investors at 1,000 CHF ($1,110) a piece.
Franklin Templeton launching the Franklin OnChain U.S. Government Money Fund (FOBXX) in June 2021 to tokenise US treasury bills, with the T-Bill's total net assets standing at nearly $350 million.
Pax Gold (PAXG), the gold-backed stablecoin of Paxos, representing tokenised gold as the largest commodity-based RWA, with a market cap of over $428 million.
Tokenised Real-World Assets: A Fast-Growing Market to Watch Out for in 2024 and Beyond
Real-world asset tokenisation enables issuers to represent physical financial instruments on the blockchain and take advantage of enhanced liquidity, transparency, traceability, as well as lower fees and faster settlement. At the same time, DeFi projects can gain exposure to RWAs to offer more sustainable yield to their users, hedge against market risks, and improve the stability of stablecoins.
It is a fast-growing crypto sector, which is expected to expand further in the coming years. Thus, it is something that market participants should pay close attention to.Check out VALR's podcast with Animoca Brands' Yat Siu to learn more about RWAs and the future of Web3 and digital ownership!
Frequently Asked Questions
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Real-world assets that can be tokenized include treasury bills, real estate, invoices, money-market funds, carbon credits, private credit, art and collectibles, commodities (like gold and silver), and fiat currencies as stablecoins.
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Tokenizing real assets involves capturing something of value with a token on a blockchain, which can then be held in cryptocurrency wallets and used in decentralized applications. The process includes creating tokens representing the physical asset.
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Yes, an NFT (non-fungible token) can be considered a tokenized asset, particularly when it represents physical items like art or collectibles.
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Financial assets that can be tokenized include treasury bills, private credit, real estate, commodities, and fiat currencies (as stablecoins).
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Challenges include smart contract vulnerabilities, centralization and counterparty risks, financial risks like defaults and liquidations, regulatory challenges, and the newness of the market which may slow widespread adoption.
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A simple example of tokenization is the creation of tokens representing ownership of a piece of real estate, allowing the property to be bought, sold, and traded on a blockchain platform.
Risk Disclosure
Trading or investing in crypto assets is risky and may result in the loss of capital as the value may fluctuate.
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Disclaimer: Views expressed in this article are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
