Real-world asset tokenization is the process of converting the rights to an asset that exists in the real world, such as real estate, art, or commodities, into a digital token that can be traded and managed on a blockchain. This enables new possibilities for ownership, liquidity, and accessibility of assets that were previously illiquid, expensive, or inaccessible.
Why Tokenize Real-World Assets?
There are many benefits of real-world asset tokenization, both for the asset owners and the investors. Some of the main advantages are:
- Fractional ownership: Tokenization allows the asset owner to divide the asset into smaller units, or fractions. Thus, making it possible to widely distribute the ownership of the asset. This lowers the entry barrier for investors who can now afford to buy a share of an asset that was previously too expensive or unavailable. For example, a painting worth $10 million can be tokenized into 10,000 tokens, each representing 0.01% of the ownership. An investor can then buy one or more tokens for $1,000 each, and gain exposure to the value of the painting.
- Increased liquidity: Tokenization also increases the liquidity of the asset, meaning that it can be easily bought and sold on a secondary market. Unlike traditional assets that require intermediaries, paperwork, and lengthy processes to transfer ownership, tokenized assets can be traded instantly and securely, with minimal fees and friction.
- Global access: Tokenization also opens up the asset to a global pool of investors, who can access the asset from anywhere in the world, at any time of the day, using their digital wallets and devices. This expands the market size and demand for the asset.
- Enhanced transparency: Tokenization also improves the transparency and trustworthiness of the asset, as the token represents a verifiable claim to the underlying asset, backed by smart contracts and blockchain technology. The token can also store and track the provenance, ownership, and performance history of the asset, creating a digital record that is immutable and auditable.
How Does Real-World Asset Tokenization Work?
The process of real-world asset tokenization involves several steps, such as:
- Asset selection: The first step is to select an asset that is suitable for tokenization, based on its value, demand, and legal status. The asset should also have clear and undisputed ownership, and a reliable way to verify its existence and condition.
- Asset valuation: The next step is to determine the fair market value of the asset, based on its current and future potential, and the expected cash flows and risks associated with it. The asset valuation should also take into account the costs and fees involved in the tokenization process, such as legal, regulatory, and technical expenses.
- Asset tokenization: The third step is to create a digital representation of the asset, or a token, that complies with the relevant standards and regulations. The token should also have a clear and enforceable set of rules and rights for the token holders, such as voting, dividends, redemption, and governance. The token should also be compatible with the chosen blockchain platform and the target marketplaces.
- Asset distribution: The final step is to distribute the token to the interested investors, either through a primary offering or a secondary market. The token distribution should follow the applicable laws and regulations, such as KYC, AML, and securities laws, and also ensure the security and privacy of the transactions and the data.
What Are the Challenges and Risks of Real-World Asset Tokenization?
While real-world asset tokenization offers many benefits, it also faces some challenges and risks, such as legal and regulatory uncertainty, especially in certain jurisdictions, technical and operational complexity, as well as certain market and performance risk. However, with the further adoption and the growth of the industry should develop the best practices that would minimize those risks.
Conclusion
Real-world asset tokenization is a game-changer for web 3, as it enables the digitization, democratization, and decentralization of real-world assets, creating new opportunities for asset owners and investors. However, real-world asset tokenization also faces some challenges and risks that were mentioned above. Therefore, real-world asset tokenization requires careful planning, execution, and management, as well as the collaboration and cooperation of various stakeholders, to ensure the success and sustainability of the tokenization ecosystem.
Further Reading
- $10 trillion future: how tokenization is redefining asset management and industry operations: https://www.rolandberger.com/en/Insights/Publications/Tokenization-of-real-world-assets-unlocking-a-new-era-of-ownership-trading.html
- RWA Tokenization: What Does It Mean to Tokenize Real-World Assets? https://www.coindesk.com/learn/rwa-tokenization-what-does-it-mean-to-tokenize-real-world-assets/
- Real-World Asset Tokenization: A New Form of Asset Ownership https://realt.co/real-world-asset-tokenization-a-new-form-of-asset-ownership/
- What are Real World Assets (RWA) in Crypto? https://www.coingecko.com/learn/what-are-real-world-assets-exploring-rwa-protocols
