Analyses
11
Apr
rwa tokenization

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RWA and tokenization

RWA is one of the hottest trends in the crypto industry. RWA stands for Real World Assets, which refers to all assets outside blockchains, such as equities, real estate, commodities, and currencies.

One of blockchain’s most significant application opportunities is tokenizing real-world assets. The potential market value of this industry is up to hundreds of trillions of dollars.

In recent years, crypto investors have better understood the potential of RWA tokenization. Tokenization, converting real-world assets into digital tokens, opens new investment opportunities, and this sector will grow significantly in the coming years.

This article is a beginner’s guide to the RWA and the opportunities tokenization has.

What does tokenization mean?

Tokenization means converting real-world assets into digital tokens and storing them on a blockchain. These tokens can be considered digital proof of ownership. Although tokenization is often used in the context of stocks, any RWA can be tokenized.

The goal of tokenization is to enable partial ownership and make high-value assets more accessible to a broader range of investors. You probably can’t afford a million-euro house, but what if you could buy one-thousandth or one-millionth of it through tokenization?

The NFT technology is also related to RWA. A car, an apartment, or a piece of art can be tokenized into a single NFT. In the future, buying a car might be as easy as transferring an NFT to a crypto wallet. Another example is to tokenize real estate into a million fungible tokens, which enables partial ownership to thousands of investors.

Tokenization is not a new concept in the crypto world. It has been used for over ten years, but the idea hasn’t become trendy. The best-known example is stablecoins, which are tokenized US dollars. The largest stablecoin on the market is Tether (USDT), whose market cap has exceeded 100 million dollars.

tether

The tokenization of euros has been slow so far due to minimal demand. The situation will probably change when the MiCa regulation for stablecoins is introduced in 2024.

Tokenized real-world assets enable greater liquidity, transparency, and accessibility. Tokenization is one of the most promising application areas in blockchain technology, as its potential application areas extend to almost all economic activities.

Smart contracts and oracles

In tokenization, smart contracts and oracles are the most noteworthy technologies you must understand.

A smart contract refers to program code stored in the blockchain that executes predetermined commands without the intervention of a third party. Smart contracts enable fully automated processes without intermediaries. For example, a tokenized apartment or car can easily change owners with the help of a smart contract.

However, smart contracts have one significant limitation: they can only use the information of their blockchain. To fix the problem, a smart contract must receive information from outside the blockchain via an oracle.

Chainlink is the most prominent oracle solution in the market. It is a decentralized network of oracles that links smart contracts with the outside world. Chainlink enables the reliable and decentralized transfer of real-time data to the blockchain. It is also used to connect different blockchains.

See the picture below to understand better.

chainlink oracles

No application in the DeFi world could offer up-to-date and reliable crypto price data without Chainlink.

RWA and cryptocurrencies

Real-world assets (RWA) and cryptocurrencies are connected through tokenization. Tokenization makes it possible to utilize RWA in the crypto world in trading, investing, and lending.

For example, you can create a token on the Ethereum blockchain representing real estate or shares of the company. The tokenized asset can then be traded against other cryptos on decentralized exchanges. This combination of RWA and cryptos offers exciting advantages.

The tokenization of RWA enables a new kind of liquidity and new uses for them. Traditional assets such as real estate are pretty illiquid, so selling or buying them can be time-consuming. Thanks to cryptos, these assets can be easily bought, sold, or exchanged through digital marketplaces—even in small amounts.

Cryptocurrencies also enable greater access to RWA. Investing in real estate or art is difficult for an ordinary investor. In addition to high capital requirements, restrictions from regulation can be an obstacle.

rwa real estate

These barriers can be removed in the crypto world. If real estate were tokenized, a small investor could buy a share of a New York skyscraper for 100 euros.

Blockchain technology also brings transparency and security to the trading of real-world assets. It enables real-time and irreversible accounting, which increases trust between the parties. In addition, smart contracts can automate many processes and ensure contract terms are fulfilled immediately and fairly.

RWA and DeFi

When discussing RWA, it is also essential to consider the DeFi industry. DeFi ecosystems enable innovative ways to leverage RWA. One of the critical features of DeFi is the previously mentioned smart contracts, which allow real-time and automated asset management without intermediaries.

In the DeFi world, investors can use their RWA holdings to provide liquidity and use them as collateral. You could use tokenized real estate as collateral for a stablecoin loan in the Aave app and invest the borrowed funds in Bitcoin. Aave has already experimented in the RWA sector but has yet to catch on on a large scale.

Below is a screenshot of the Aave.

aave

In the future, combining RWA and DeFi can lead to an even more open and efficient financial market offering broader and more diverse investment opportunities.

Real-world assets and various blockchain projects have begun to find each other lately. This development is highly desirable, especially from investors’ perspective. Cryptocurrencies can open up entirely new dimensions for improving the liquidity, accessibility, and security of real-world assets.

Ondo Finance

Ondo Finance is a DeFi app on the Ethereum blockchain closely linked to RWA. It enables its users to access various financial services without the limitations of the traditional financial system.

In Ondo Finance, linking crypto-based loans and financial instruments to real-world assets is possible. This allows investors to reap the benefits of cryptos and physical world assets.

Below is a picture of the Ondo Finance homepage. The app can be found at ondo.finance.

ondo finance

Ondo Finance has emerged as one of the most prominent RWA tokenization apps. Its range of services is constantly expanding, and in the future, Ondo Finance will enable the creation of even more RWA assets on the Ethereum blockchain.

Looking at Ondo Finance’s innovations gives an excellent insight into what tokenization of RWA means in practice. Ondo Finance’s main features are:

  • USDY: A stablecoin
  • OUSG: Ondo Short-Term US Government Treasuries
  • OMMF: US government money market funds

Let’s go through these in more detail next.

USDY

USDY stablecoin is one of Ondo Finance’s key innovations. Although it is officially called a stablecoin, investors should note that it radically differs from the most well-known stablecoins on the market today.

The main difference is that USDY holders can accumulate yields on their investments just by keeping them in their wallets. Traditional stablecoins do not offer a feature like this. USDY is, therefore, not based on fiat currencies but on bonds. USDY can best be described as a tokenized bond.

OUSG

OUSG (Ondo Short-Term US Government Treasuries) is a financial instrument that allows users to participate in the US government bond market using tokenization.

OUSG allows users to diversify their investments in the traditional financial system and enjoy the benefits it offers without the costs due to intermediaries. This creates an entirely new opportunity to participate in the US Treasury market in a decentralized and efficient manner.

OMMF

OMMF (US government money market funds) allows investors to participate in US money market funds. The funds are fully tokenized, and shares can be acquired by redeeming OMMF tokens at a unit price of one dollar.

OMMF tokens can be traded 24/7 and used in various DeFi services. This also allows investors to take advantage of traditional money market fund shares in the world of cryptocurrencies. OMMF’s primary goal is to offer savers a more efficient way to manage their wealth.

Investing in the RWA sector

If you want to invest in the RWA & tokenization trend, you can do it in many different ways. You should also check out the X thread below, where the topic is discussed.

Here are some examples of how to take advantage of the RWA & tokenization trend.

  • Smart contract platforms: Tokenization takes place on smart contract platforms, which benefit indirectly from this trend via increasing demand for the native token. Good alternatives are Ethereum, Avalanche, and VeChain.
  • Oracles: Chainlink is the leading oracle solution, but its smaller competitors can offer much higher percentage increases.
  • Stablecoins: Maker’s and Athena’s governance tokens, MKR and ENA, are examples of how you can also invest in stablecoins.
  • DeFi apps: Ondo Finance, Pendle, and Frax are examples of DeFi apps in the RWA sector.

KuCoin and Binance are popular cryptocurrency exchanges that offer a wide range of RWA sector cryptocurrencies. Learn more about these exchanges via our KuCoin review and Binance review.

Summary

The tokenization of real-world assets (RWA) is a hot topic in the crypto industry. Combining RWA with blockchain technology opens the doors to entirely new investment opportunities.

Tokenization provides a framework for converting wealth from the physical world onto the blockchain. With tokenization, the liquidity, transparency, and accessibility of RWA will improve significantly. Smart contracts and oracle solutions are critical technologies in this process.

The tokenization of RWA offers significant benefits from the perspective of asset holders and crypto ecosystems. Integrating RWA into DeFi apps opens up new opportunities for the DeFi ecosystem and provides investors an even more open and efficient financial market.

AboutBitcoin Team

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