Tokenization of Real World Assets: A Detailed Guide on Asset Tokenization

The tokenization of real world assets concept involves representing physical, real world assets with digital tokens on blockchain. This innovative application of blockchain is paving the way for a new way of representing, transferring, and purchasing of physical assets. Apart from this, asset tokenization offers efficient transactions, making illiquid assets like real estate liquid, accessible, and more efficient.

With numerous benefits and the ability to transform how we perceive traditional asset transfers, RWA tokenization is emerging with full force in crypto. If you are struggling to get a hang of real-world asset tokenization and its functionality, you are at the right place. In this article, we will learn everything from what tokenization is and how it works to its benefits, challenges, and more there is to know.

What is Tokenization of Real World Assets?

Tokenization of real world assets means assigning digital proof of ownership to real world assets on blockchain. While cryptocurrencies, stablecoins, NFTs, are all virtual assets, real estate properties, physical artworks, commodities, and other tangible or intangible assets with value, called real world assets (RWAs). Blockchain made it possible to tokenize these assets, replacing traditional methods such as deeds, copyrights, etc.

Types of Real World Assets

From real estate properties to intellectual properties, there are several types of real world assets that can be tokenized.

• Real Estate Properties:

  Properties such as commercial buildings, residential buildings, and plots are the well-known examples of real world assets.

• Artwork:

  High value artworks by expert artists are also RWAs.

• Commodities:

  Gold, silver, and other expensive materials and commodities.

• Stocks and Bonds:

  Age old traditional financial instruments such as stocks and bonds.

• Collectibles:

  Rare and valuable items such as vintage cars, sports memorabilia, other luxury items, old coins, etc.

• Intellectual properties:

  Patents, trademarks, music royalties, and copyrights to invaluable things.

• Natural Resources:

  Assets like timberland, minerals, water rights, etc.

• Insurance Policies and Loans:

  Traditional loans and insurance policies.

• Industrial Infrastructure:

  Transportation assets like planes, ships, renewable energy source projects, healthcare assets like medical equipment, and more.

How Does Tokenization of Real World Assets Work?

Even though the process of real-world asset tokenization seems simple in explanation, it involves multiple key steps to ensure that a real world asset’s ownership rights are accurately transferred to digital tokens on blockchain.

Asset Identification and Valuation

The first step in the asset tokenization is to identify the asset, be it a real estate property, an artwork, or any other real world asset we listed above. Conducting a thorough valuation of the asset helps you determine the market value of the identified asset. Establishing a proper market value of the asset helps while tokenizing it and assigning value to its digital tokens.

Legal Framework and Compliance

Since the process of tokenizing real world assets involves transferring ownership rights of an asset to digital tokens, it needs to have a legal framework. Most of the existing RWA projects set up special purpose vehicles (SPVs) or trusts to develop a legal structure. Apart from that, making the asset tokenization legally compliant based on the regulatory rules of that particular jurisdiction is also necessary.

Digital Token Creation

The next process is to create digital tokens that represent a share of the asset. For instance, if we plan to tokenize a real estate property, having a certain market value, the asset will be divided into predefined no. of shares, with the same value. After tokenization of the asset, digital tokens will represent shares of the asset. All the holders of digital tokens will get ownership of a share of the asset.

Smart Contract Development

Smart contracts, which are the self-executing codes on blockchain, enable the creation, issuance, and governance of digital tokens. The development of smart contracts is a crucial step in tokenization of real world assets. Smart contracts ensure that the issuance of tokens to holders as well as the liabilities and benefits associated with them will be distributed transparently and accurately.

Token Distribution and Sale

Once the real world asset is tokenized with a proper creation of digital tokens and the development of smart contracts, the next step is to distribute the tokens among buyers. Similar to how investors acquire crypto tokens via private sales and public sales, they can also buy RWA tokens through token distribution and selling methods. Since the asset is fractionalized and tokenized, buyers and sellers can easily trade RWA tokens on secondary markets as well.

Asset Management and Governance

Each RWA token holder will have the responsibility in managing the underlying asset. If it is a real estate property, each holder has a role in maintaining the property, from development, maintenance and repair to managing tenant relations, etc. Additionally, participating in the governance of the asset, means taking decisions that would shape the future of the asset management will take place as instructed in the smart contract. ens on secondary markets as well.

Market Trading and Ownership Transfers

After launching the project and holders acquiring the RWA tokens, they can trade these tokens in the secondary markets as well. Buyers and sellers can transfer the ownership of RWA tokens based on the value of each share of the asset and other instructions laid out in smart contracts. In the case of illiquid assets such as real estate properties, real-world asset tokenization is nothing less than a boon since it makes market trading of RWA tokens more efficient and liquid.

Benefits of Tokenization of Real World Assets

• Increased Liquidity:

  Fractionalizing and tokenizing an illiquid asset makes it easier for buyers and sellers to trade on the market.

• Accessibility:

  When a real world asset is tokenized, it democratizes investment and opens doors for a global pool of investors to buy the tokens.

• Improved Transparency and Security:

  The inherent properties of blockchain such as immutability and high security ensure that there is no malpractice in the acquisition of RWA tokens.

• Asset Programmability:

  By representing real world assets with digital tokens, tokenization enables automated compliance checks, automated governance, and benefit distribution, eliminating the risks associated with traditional asset management.

• More Efficient Transactions:

  Unlike traditional asset transactions, there will be no middlemen and hidden charges in the purchase of assets. The RWA tokenization eliminates intermediaries, which leads to faster and cost-efficient transactions.

• Investment Flexibility:

  In the case of traditional asset investments, the purchase amount is high, making it inaccessible for many investors. However, the fractionalization of assets lowers the barrier to entry for investors.

• Diversification:

  Investors will have better opportunities to diversify their crypto portfolios with RWA tokens. Asset tokenization also helps in the risk management of their investment portfolios.

Risks and Challenges in Tokenization of Real World Assets

Regulatory Challenges

The concept of blockchain and crypto came much earlier than the RWA tokenization. In many parts of the world, there aren’t yet any clear regulations in place for cryptocurrencies itself and it's no brainer to say that there are no regulatory frameworks for RWAs yet. The uncertainty in how governments treat asset tokenization is one of its biggest challenges.

Market Adoption Challenges

Though there are many efficient and profitable ways to take advantage of virtual assets, many people are not yet ready to adopt them. There are multiple reasons behind this, including the complexity of the crypto space. The lack of familiarity with these tools, liquidity risks, and price fluctuations are some of the major concerns for asset tokenization to reach widespread market adoption.

Technological Risks

Apart from regulatory concerns, there are some technological risks as well with the RWA tokenization. While smart contracts are vulnerable to coding bugs and exploitation, blockchain technology has its own concerns like lack of interoperability. Additionally, scalability is another concern that the entire blockchain industry is focusing on improving. Hence, real-world asset tokenization has multiple technological risks behind its implementation.

Custodial Risks

Investors in RWA tokens must trust custodians or entities that take custody of assets and issue RWA tokens. If this lacks transparency, there is a risk of fraud and token holders may not get the benefits they are supposed to get from their acquisitions. Until there are regulated custodians in place, custodial risk is a huge barrier for RWA adoption.

Difficulties in Asset Valuation

The entire process of asset evaluation and assigning value to each share of the asset can be complex. Tokenization of real world assets is still in its early stages of development in comparison to the traditional asset industry. This is the reason why RWA tokenization faces some discrepancies in asset valuation.

Resistance From Traditional Systems

There will be resistance in adopting RWA tokenization from market participants and regulatory bodies. Since asset tokenization threatens their existing systems, combined with the complexity of this technology, there will be huge resistance for tokenization to go mainstream.

Active Tokenization of Real World Assets (RWA) Projects

Even though the asset tokenization concept is relatively new, most of the crypto projects have already started exploring real-world asset tokenization and bringing real world use cases to it. With the ability to bring market liquidity to traditional illiquid assets and making asset transfer processes more efficient, tokenization of real world assets is set to redefine the traditional asset industry.

According to the 21.co report, the market value of tokenized assets will reach $10 trillion by 2030 in a bull-case scenario and $3.5 trillion in a bear case scenario. Let us look at some of the active RWA tokenization projects here.

You can view the market performance of the best RWA crypto tokens to gauge investor sentiment in this sector.

• ONDO Finance

  - ONDO Finance is offering innovative solutions by combining DeFi with traditional finance. Its main products include tokenized US Treasuries product and Flux Finance.

• Mantra

  - Mantra is a layer 1 blockchain that offers necessary tools to develop protocols for RWA tokenization.

• Pendle Finance

  - Pendle is an advanced DeFi platform that has an advanced yield management algorithm for RWA tokens.

• OriginTrail

  - It is a data management and verification system for AI and RWA projects. OriginTrail works based on Decentralized Knowledge Graph (DKG).

• Vechain

  - Vechain is a layer 1 blockchain with a capability to power high-performance decentralized applications and RWA solutions.

What’s the Path Ahead for Tokenization of Real World Assets?

World-leading organizations such as JP Morgan, Goldman Sachs, BNY Mellon, BlackRock, and others have already started exploring the tokenization of real world asset concept. With innumerable benefits such as accessibility, market liquidity, transparency, flexibility in investment, and more, RWA tokenization has the potential to disrupt the way we transfer, purchase, and store traditional assets. As stated by market reports, it doesn’t take very long for RWA tokenization to become a trillion dollar market.

FAQs

1. How can real world assets be tokenized?

The process of tokenizing real world assets involves fractionalizing the asset into smaller portions and then representing their ownership with digital tokens on blockchain.

2. What are real world assets?

Real world assets are tangible or intangible assets with value such as real estate properties, artworks, intellectual properties, stocks, bonds, etc.

3. How big is the real world asset tokenization market?

The market size of real world asset tokenization is around $5 billion in 2024.

4. What is tokenization of real estate assets?

Tokenization of real estate assets involves dividing the real estate property into multiple shares and assigning the ownership of each share to a digital token on blockchain. Investors who would like to buy a share of that real estate property can buy the associated digital token or RWA token and get the ownership.