Tokenization Of Real-World Assets (RWAs): Explanations & Future Outlook

In the evolving landscape of finance and investment, tokenization of real-world assets (RWAs) stands out as a revolutionary concept, blending traditional assets with modern blockchain technology. 

Unlike many things in crypto, tokenization is not another hype term. It’s hard to dismiss RWA tokenization as a fad when figures like Larry Fink, the CEO of BlackRock–the world’s largest investment management firm–have repeatedly advocated for asset tokenization.

BlackRock CEO Larry Fink:

‘…the next step is the tokenisation of financial assets, and that means every stock, every bond…’ pic.twitter.com/wBYaqsIA0n

— Radar🚨 (@RadarHits) January 13, 2024

On top of that, in 2023, the Federal Reserve Board suggested that “tokenization may become a larger part of the digital asset ecosystem.” Today, the biggest financial institutions in the world–European Investment Bank and J.P. Morgan–have already tokenized bonds and other securities to lower the barriers to entry into otherwise inaccessible markets. At the same time, the top DeFi protocols like MakerDAO and FRAX pioneered RWAs to gain more stability.

What Are Real-World Assets? 

Real-world assets encompass tangible and intangible assets, including stocks, bonds, real estate, commodities, luxury items, and equities. These assets form the backbone of the everyday economy, representing value in physical and legal forms.

What Is Asset Tokenization?

Asset tokenization is the process of converting rights to an asset into a digital token on a blockchain. Just like owning a stock equates to owning a part of a publicly traded company, owning a digital token equates to owning any real-world asset. This transformation facilitates the division of assets into shareable and tradeable units, enhancing their liquidity and accessibility. 

Blockchain Technology

Tokenization involves critical components such as blockchain technology, valuation mechanisms, and redemption processes, underscoring its potential to bridge digital and traditional financial markets. The process leverages smart contracts to automate management, offering a secure, efficient, and transparent method of handling investments. 

To be more specific, the majority of existing tokenization projects are deployed as ERC-20 tokens on the permissionless (i.e., public) blockchain such as Ethereum or Polygon. There are a few permissioned blockchains, such as GS DAP and HSBC Orion, used by the European Investment Bank, and Onyx Digital Assets, used by J.P. Morgan.

Use Cases for RWA Tokenization

The market value of tokenized assets on permissionless blockchains, estimated at $2.15 billion as of May 2023, illustrates the growing variety and adoption of tokenized assets. This table outlines the diverse range of asset types that have been tokenized, showcasing the innovative intersection of traditional finance and blockchain technology.

Asset Type	Description	Tokenization Examples
Financial assets	Monetary assets held for investment and easily tradable. They include stocks, bonds, bank deposits, and other instruments representing a financial claim or contractual obligation.	1. European Investment Bank: Issued pound sterling and euro-denominated bonds on HSBC Orion and Goldman Sachs’ GS DAP platforms, utilizing CBDC tokens for instant settlement and fiat cash for coupon payouts. 2. Obligate: A platform that enables companies to issue bonds and commercial paper directly on blockchains, offering ERC-20 tokens representing the bonds. 3. Goldfinch: Issues pool-specific tokens for diversified pools of financial assets, likely related to debt instruments. 4. Onyx by J.P. Morgan: A blockchain-based platform for tokenizing and transacting digital assets, including government securities and intraday repo transactions. 5. MatrixDock: Issues stablecoins backed by U.S. treasury securities and reverse repurchase agreements. 6. Ondo Finance: Offers tokenized ETFs referencing various funds, including those linked to U.S. Treasuries and Money Market Funds.
Equity	Ownership shares in companies or ventures that can appreciate in value over time.	1. Hacken: Issued 100 tokens for 10% of the total stake in the company. 2. Aktionariat (DAKS): Issues tokens for private equity investments, representing equity in companies.
Commodities & Physical Assets	Basic interchangeable goods; valuable physical assets such as artwork and precious metals.	1. Agrotoken: Provides tokenized agricultural commodities (soybeans, corn, wheat) with tokens. 2. Paxos Trust: Custodies and tokenizes assets like gold, offering 24/7 settlement and physical redemption. 3. Tangible (TNFTs): Tokenizes tangible items like wine, gold, and watches into NFTs. 4. TG Commodities Limited: Issues Tether Gold, providing a direct link between each token and a specific quantity of gold.
Real Estate	Direct investments in land, buildings, and property	1. RealT: Collects residential properties to tokenize the membership interests in the LLC owning the property, allowing fractional ownership. 2. Lofty: Enables fractional ownership of U.S. rental properties through tokenization on the Algorand blockchain. 3. Tangible (USD): Represents real estate investments with tokens that correspond to real-world properties.

Potential Benefits of Tokenizing RWAs:

Tokenizing RWAs is a gateway for traditional institutions in the blockchain world and offers groundbreaking changes for investment and asset ownership. According to the Federal Reserve Board, the greatest benefit is “lowering barriers to entry into otherwise inaccessible markets and improving the liquidity of such markets.”

Key Benefits

• Fractional ownership: Individual investment in portions of specific assets, such as commercial or residential real estate, making them even more targeted and precise than existing real estate investment trusts (REITs).
• Improved market access: Makes previously unreachable or prohibitively expensive markets accessible to the average investor.
• Enhanced liquidity: Fractional ownership, coupled with a wider investor base through tokenization, can enhance the fluidity of assets that are typically hard to liquidate.
• Faster transaction settlements: Transferring and settling tokenized assets is often faster than traditional asset dealings.
• Programmable features: The application of smart contracts in tokenization can streamline various investment and management aspects, like dividend distribution, voting rights, and changes in ownership, improving efficiency and security.
• Transparency: Onchain monitoring of asset purchasing is way better than quarterly reports, individual countries’ tax records, and other kinds of register tracking
• More stable Web3: For Web3 projects, RWA tokenization adds low-risk collateral to the mix. Incorporating RWAs can dampen the cyclical nature of on-chain yields and improve the stability of DeFi products. MakerDAO’s use of RWAs, for example, has significantly contributed to the economic health of its DAI stablecoin.

Challenges of Tokenized Real-World Assets 

Despite its potential, tokenization faces problems such as market volatility, security and privacy, and complex legal and regulatory requirements.

Key Challenges

• Crypto market volatility: The Federal Reserve’s paper points out the financial stability implications of tokenization, noting the potential for systemic risks due to the interconnections between the inherently volatile crypto ecosystem and the traditional financial system.
• Technical standardization: Lack of universal standards across blockchain platforms creates interoperability issues. Standardized protocols and APIs are needed to facilitate smooth token exchange and integration into existing financial systems without disruptions.
• Security and privacy: $1.9B was stolen from crypto in 2023. The success of the RWA tokenization thus largely depends on the security and reliability of the entire blockchain architecture, meaning that projects undertaking tokenization must implement rigorous third-party audits as part of a broader security strategy.
• Proof of ownership: Valid token issuance may be a problem in proving the legitimacy and asset origin accurately on-chain.
• Legal and regulation: Different jurisdictions’ laws on digital assets, securities, and taxation affect tokenized RWAs. Compliance with U.S. law is a separate topic altogether.

Real-World Assets in DeFi

RWAs play a crucial role in expanding the DeFi ecosystem, with platforms like MakerDAO and Frax Finance integrating RWAs to secure collateral options, offer more diversified services, and generate higher revenue from crypto-native assets.

Since 2020, MakerDAO has pursued this strategy to strengthen its stablecoin, DAI. Today, 46% of DAI are collateralized against various off-chain RWAs (e.g., Centrifuge, BlockTower, Monetalis) with a total exposure of $2.5 billion. This approach brought in nearly $120 million, or 48% of the total revenue, and this made DAI more stable. Frax Finance has also embraced RWAs, particularly to stabilize its native stablecoin, FRAX. Another top DeFi protocol, Aave, is in the initial stages of integrating RWAs.

Hacken Equity Tokenization

The journey is only getting started, and Hacken recognizes the immense potential of bridging tokens with RWAs for our long-term growth. That’s why we offer the first-ever opportunity to enter 10% of Web3 company equity through the native token, $HAI.

Overview

We have launched an equity tokenization initiative, enabling the transition of $HAI token holders to equity shareholders. This innovative approach offers a direct pathway for investors to acquire a stake in the company, leveraging blockchain technology for equity management.

Mechanisms

• Equity allocation: Hacken has allocated 10% of its equity to be available, divided into 100 exclusive tokens, also referred to as slots. Each slot corresponds to an investment of 1 million of HAI tokens, representing a 0.1% ownership stake in Hacken.
• Community private offering: The initiative is structured as a Community Private Offering. This way, we emphasize the engagement of $HAI holders in Hacken’s growth trajectory. Some of the most loyal $HAI holders have been with us for 6 years now, and it’s our way to give them a clear path to becoming legal owners of not just a token but the company itself.
• Valuation: As a departure from typical tokenization strategies, operations exclusively involve HAI, a token subject to market volatility. Consequently, estimating the final slot cost in dollar value poses challenges due to its inherent fluctuations. However, this approach brings notable advantages. For instance, it significantly simplifies the entry for existing HAI holders and serves as an additional direct token utility.
• Participation conditions: To ensure inclusivity and a sensible number of new shareholders, the minimum participation condition is 1 slot (or million $HAI). Participants are not limited in the number of slots they can buy, but the total supply is capped to 100 slots.
• Tokenization partner: Tokenizing 10% of your company is a complex process that involves solving many legal and regulatory challenges. We have decided to allocate additional expertise to make things right by signing with Brickken, a leading tokenization provider.
• Strategic aims: While the broader vision includes a potential public offering by 2027, there are also diverse exit strategies, such as post-offering P2P trading and equity buybacks.

Claim Your Spot

Hacken equity is available in $HAI in early March 2024. Only 100 slots are available. Reserve your slot by joining the wait list here.

Conclusions 

The integration of traditional financial mechanisms into the blockchain through real-world asset tokenization is not merely a buzzword; it’s an evolving reality with substantial influence from the biggest institutions in the world. Tokenizing RWAs marks a significant shift in how we approach investment, ownership, and asset management in the digital era.

By leveraging blockchain technology, RWA tokenization offers notable benefits such as democratizing investment access to stocks, bonds, equity, and commodities, enhancing asset liquidity, and streamlining trading. It also underscores the necessity for elevated security standards to mitigate smart contract and blockchain risks.

In line with these developments, Hacken is pioneering equity tokenization, allowing $HAI holders to transition to equity shareholders and benefit from the reliability, shape the sector’s future, and enjoy classical exit options.

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