Tokenized RWAs: A New Dawn in Finance?

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Tokenized RWAs: A New Dawn in Finance?

Tokenized RWAs: A New Dawn in Finance?

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As digital assets keep expanding and gaining more popularity by the day, tokenized Real-World Assets (RWAs) have stolen the spotlight, and are currently getting all the hype.

Tokenized Real-World Assets

Simply put, real-world assets transformed into digital tokens and stored on a blockchain (or any other distributed ledger technology), are known as tokenized RWAs.

These include but are not limited to:

  • Real Estate
  • Financial Assets (equities and bonds)
  • Art
  • Commodities
  • Intellectual Property

The core idea behind real-world asset tokenization is creating a virtual investment vehicle on the blockchain linked to tangible things like mentioned above.

The digitisation of physical assets allows for greater liquidity, transparency, as well as accessibility. Not only this, but it is also seen as a way to modernise and democratise conventional financial markets.

What is Tokenization?

By definition, tokenization refers to the process of issuing a digital representation of a certain asset on a blockchain.

Blockchain, smart contracts, and digital assets – the latter created via tokenization – stand to change the way ideas, information, and money are exchanged on a day-to-day basis.

Tokenization has the potential to create several types of tokens such as stablecoins, NFTs, etc.

With industry experts forecasting up to $5 trillion in tokenized digital-securities trade volume by 2030, tokenization is definitely being seen as a big deal.

More specifically, the market for tokenized assets could potentially reach $10T in a “bull case” and $3.5T in a “bear case”, according to digital asset manager 21.co.

Example:

Many individuals find themselves interested in buying art, either for pleasure or as an investment, but are priced out.

Most people can’t afford to fork over record-breaking amounts like $195 million for Marilyn painting, or even $850,000 for a mere print of Queen Elizabeth.

But what if you could buy “shares” of an artwork just like you can buy fractions of a publicly traded company? That is the whole idea behind tokenization of real-world assets.

The Warhol use case is not fictional, but based on a real-life scenario: a company called Freeport offered fractionalised shares of Andy Warhol paintings, creating 1,000 tokens that represent shares of the work that anyone can buy.

This tokenization of RWAs is not solely happening in art, but in bonds, gold, houses… and this concept is gaining momentum and interest from traditional finance players.

Adoption

Despite initial scepticism from critics, the market for tokenized real-world assets has seen significant growth over the year.

In fact, it is expected for the tokenization of global illiquid assets to be a $16 trillion industry by the end of the decade, with recent data suggesting that the total value has reached an all-time high of $2.75 billion in August.

Tokenized Treasuries

Some big institutions have even predicted that the tokenized RWA market could grow to a $10T market by 2030.

There is one particular RWA that has been getting major attention lately: tokenized treasuries.

  • Franklin Templeton tokenized over $300M of its U.S. Government Money Fund.
  • Ondo Finance tokenized over $100M of its short-term US Government Bond Fund.
  • WisdomTree tokenized $10M of its short-term Treasury Fund.

Tokenized U.S. treasuries, cash equivalents, and bonds have gone from $113M to a $750M market in under just a year.

1. Why are treasuries getting put on chain?

  • It offers near-instant settlements, 24/7 trading, and lower costs for investors.
  • Investors gain more exposure to U.S. treasuries – T-bills, bonds, etc.
  • Tokenized RWAs solve a big problem in DeFi by providing tokens that are backed by real assets that can earn a real yield.
2. What are the advantages of keeping ownership of real-world items on chain?

  • It lowers costs by removing middlemen like lawyers, brokers, banks, etc.
  • It lowers the barrier to entry and creates more liquidity.
  • Its transparent process increases trust and accountability for traders.
3. What are the concerns surrounding RWAs?

  • Regulatory Obstacles: it is deemed difficult to navigate the changing regulatory environment, which differs significantly between jurisdictions.
  • Custody of Assets: protecting the underlying financial or legal assets supporting the digital tokens is crucial.
  • Market Acceptance and Liquidity: investor confidence may be weakened by illiquidity and price volatility caused by low trading volumes or limited adoption.

What Comes Next for RWA Tokenization?

Traditional finance firms are excited by the idea of tokenizing assets they already are trading, such as gold, stocks, commodities, etc.

With real-world assets being tokenized, they are expected to significantly expand and change in the future.

During 2023 alone, the market has seen the debut of several new market players, such as OpenEden, Ondo Finance and Maple Finance – which proves that this emerging trend is here to stay, and eventually reach new heights.

It is possible to anticipate a rise in investor confidence and institutional involvement, especially with the regulatory framework still developing and adapting to this new asset class.

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