Tokenized Real-World Assets (RWAs) and How They Work

One of the promises of crypto and its underlying blockchain technology is the ability to transform the use and exchange of real-world assets (RWAs). Since their inception, early digital asset pioneers and visionaries have long set their sights on revolutionizing the storage, and circulation of physical goods through tokenization. So far, the most successful execution of this concept has been the creation and use of stablecoins: digital assets pegged on a 1:1 basis with a fiat currency. Going forward, builders aim to extend this functionality to other financial instruments, as well as collectibles, art, and even real estate.

However, there are many unanswered questions as to how value and authenticity can be ensured through the tokenization of such assets. Follow along below as we explore tokenized real-world assets, how they work, and what role they could play in your crypto journey.

What are Tokenized Real-World Assets (RWAs)?

Put succinctly, tokenized RWAs are digital representations of existing goods or value. Unlike BTC or ETH, which are discovered through network functions on their respective blockchains, tokenized RWAs help bridge traditional or tangible assets for digital exchange. These relationships can exist on a one-to-one basis, such as stablecoins, or through the fractionalization of larger assets into tokenized shares. In the latter case, an example often cited is the ability to own 1/1,000 of an artwork, luxury item, or piece of real estate.

In addition to physical goods, tokenized RWAs can also help digitize intangible financial instruments such as bonds and debt. While these value representations themselves only exist on paper or databases, tokenization can help ease their transfer, and circumvent costly third-party fees. For champions of expanding access to financial markets, such a practice could help put historically exclusionary markets within reach for a greater swath of the global population.

Why Tokenize RWAs?

Fans of tokenization often emphasize how the practice would democratize the investment landscape by streamlining essential services. While this is a broad statement, it’s successful in illustrating the revolutionary impact that such a systemic overhaul could prompt. From reimagining supply chain functionality, to allowing greater participation across diverse markets, advocates for tokenization center increased access as one of many key advantages. While the rise of crypto has encouraged participants to reimagine how value is conceived of and put to use, tokenization is taking the argument further in a logical succession. 

Similar to how digital assets have opened doors to wealth generating opportunities for retail participants, this increased access helps sidestep costly fees associated with various investment avenues. Historically, financial, art, and real estate markets require a litany of appraisers, lawyers, and wealth managers to assist in the transfer and authentication of value. Through tokenization, participants can choose to transact on a peer-to-peer basis, and enter agreements without the costly oversight of and intervention by third-party gatekeepers. 

Not only do advocates believe this will help participants retain more of their original value, but it could potentially expedite processes that often get bogged down by bureaucratic rubber-stamping. However, it’s worth noting that eradicating these checks and balances that, while at times tedious and expensive, do serve critical functions that can protect consumers from untoward risk. To that end, let’s examine some of the potential pitfalls that could await participants who rush into transactions without conducting adequate research.

What are the risks of Tokenized RWAs?

With every new advancement that emerges in the crypto space, bad actors are often waiting in the wings to exploit unsuspecting investors flocking to the latest hype cycle. And when the developments in question remove steps that often ensure credibility in traditional transactions, their digital counterparts can invite a whole litany of possible hazards. Much like the spike in counterfeit NFTs that rattled the ecosystem back in 2021, authentication of RWAs remains a hurdle for builders and participants alike. Unfortunately, instances of fraud are able to proliferate on a much larger scale when the assets themselves are further abstracted from their point of origin.

For instance, with the right training, it’s possible to identify fake fiat currency, forged artwork, or inauthentic memorabilia. But by deferring the users’ proximity to the asset in question through tokenization, traders can be more easily duped into purchasing “high-value” items that, under first hand observation, would have raised red flags. That’s of course assuming they existed in the first place. That’s why it’s crucial to only purchase RWAs or fractions of assets that are truly backed or derived from actual value. Thankfully, a core principle of the crypto space is conducting thorough research to vet all potential opportunities. That way, newcomers to the space and veteran participants alike can take more confident action when engaging with tokenized RWAs.

What’s the future of Tokenized RWAs?

As the crypto ecosystem becomes increasingly intertwined with traditional financial systems, established investment verticals will have the advantage of adopting cutting-edge innovations to ease and diversify the exchange of value. Not only could assets like government bonds and debt find purchase on blockchain infrastructure, these emerging transacting rails have the potential to liberate markets for wider public engagement. Art and antique auctions that are often exclusionary by both admittance and price points could allow collective ownership through the fractionalization of assets. Given the high closing prices of masterworks and one-of-a-kind luxury items, there’s potential for participants to share the spoils while removing barriers to entry.

However, it’s crucial for builders, enthusiasts, and newcomers alike to remember that tokenization merely represents the object or value in question. One cautionary tale from 2022 occurred when an NFT promoter tokenized a drawing by celebrated Mexican artist Frida Kahlo, and then burned the original to increase the token’s value. It should go without saying that this defeats the purpose of tokenization, as the object the token represented now no longer exists. While this stunt was a flashpoint in the then-rising NFT movement, the effort sparked justified backlash that likely hurt the cause of expanding public interest in digital asset usage. While every industry undergoes growing pains in its path toward refinement, this incident should serve as a helpful reminder that representations of value plummet when trust in its worth is undermined or broken.

To that end, it’s important for retail users to educate themselves, and deploy sound judgment when participating in these fledgling markets. If use cases are opaque, or the underlying value of an asset is at all questionable, participants should consider avoiding such projects. Rather, opportunities that can prove they’re backed by real-world assets – an existing artwork, luxury item, or property – then it’s time to conduct a personal risk assessment before making a financial decision. As public interest continues to grow around these alternative modes of investing, we’re likely to see a spectrum of possibilities arise, all of which should be carefully examined. In the meantime, projects that articulate a strong rationale for their usage, and back their claims with sound, above-board deliverables, could stand to prompt a sea change around tokenized RWAs. 

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