Real-world assets may not be that exciting, because you’ve been dealing with that your entire life. However, these RWAs can also be tokenized onto the blockchain, and then used in DeFi applications or other financial services. If you think that sounds interesting, stay tuned and learn more about how tokenization of real-world assets works.
Real-world assets, or simply RWAs, are physical products that represent a certain value. These physical products can be ownership contracts for real-estate, or perhaps a collectible card from the first generation Pokémon Trading Card Game items. Now, the thing we will be talking about here is the tokenization of RWAs.
Tokenization refers to the process of converting ownership rights of tangible or intangible assets into digital tokens on the blockchain. This then allows for greater liquidity, fractional ownership and increased accessibility to these assets.
Now you may wonder why this is useful. Well, through fractionalization on the blockchain more people have the opportunity to invest or purchase certain items. Instead of auctioning a painting to 20 potential buyers, tokenized RWA can be fractionalized. Ownership is then shared across a group of people, meaning that you could be a shared owner of an extremely valuable artwork, collectible or piece of real-estate.
Cool right? You can read more about RWAs here. Now let’s find out how we can tokenize our own RWA.
1. Identify and assess value
Figure out which valuable item you would like to tokenize. It’s wise to not do this with the cheapest items, because the process of tokenization also involves costs. Therefore think about real-estate, commodities, artworks, intellectual property, or financial instruments, such as bonds. You will then need to assess the market value of your asset. This will require standard financial practices, and it totally depends on the type of asset you want to tokenize.
2. Compliance and legal structuring
When you tokenize your asset, you will get tokens in return. What types of rights would you associate with those tokens? And perhaps even more important, you need to make sure that the project complies with all applicable laws and regulations. RWA tokens often full under the digital asset category, and are therefore often classified as securities. When you tokenize assets or cash flows, then your RWAs get to deal with financial rights. However, there are also examples where ownership rights and utilization rights come into play.
Generally there are two tokenization structures that pop up regularly:
- Tokenized Special Purpose Vehicle (Tokenized SPV) – The asset is held by an entity, and the entity is then tokenized. Investors purchase the tokens and get indirect access to the underlying RWA. This approach fits well within security regulations.
- Direct Asset Tokenization – The asset itself is directly tokenized, and the tokens represent a direct claim on the underlying asset. This approach is less common due to regulatory challenges, and limited use-cases. But, fractionalized ownership over an NFT could be an example of that.
As you tokenize an asset, you will also have to deal with KYC/KYB and anti-money laundering processes.
3. Custody
When you have the asset at hand, you will need to have its originality verified. Depending on the type of asset you want to tokenize, different organizations come into play. For example, Chainlink Proof of Reserve can verify assets backing tokens. Another example, Courtyard stores all cards and then issues the tokens. Token holders can then redeem their NFT for the physical copy of the card, whenever they please. Bank statements proof that your money is secure in the bank, in a similar way custody verification should always be possible.
However, there’s a challenge. Because you store your money in a bank, because you trust that bank (to an extend). When it comes to RWAs, there’s no company that has the quality reputation of your local bank. These are still all start ups. Do you trust them to store your Picasso painting? Or your Nike Air Force 1 sneakers? Yup, that’s an issue.
4. Token creation and issuance
When you have all the above set in place, you need to pick your platform. Depending on the type of assets you want to tokenize, a certain platform may be your best choice. Vintage wine? Pokémon cards? Real-estate? Or financial bonds? Pick the platform that works best for your RWA.
Examples of potential platforms are:
- RealtyX – for tokenized real-estate
- Courtyard – for tokenized collectibles
- MetaZ – for tokenized sneakers
We strongly advise you to explore DappRadar to get to know the leading brands in the RWA space. You may also need to think about how you want to tokenize your item. Do you want it as an NFT, or a set of ERC-20 tokens?
5. Primary and Secondary Offering
With your RWA tokenized on the blockchain, you need to decide how you’re going to sell your tokens to investors. Will you sell everything through a primary sale? And will you allow buyers to trade your tokens on the secondary market? If the answer to that last question is ‘yes’, then your RWA could become part of the DeFi ecosystem. It would allow buyers to take out a loan against their token holdings, for example.
Closing words
Tokenizing real-world assets is your ticket to unlocking a world of opportunity—fractional ownership, skyrocketing liquidity, and a front-row seat to the future of finance. Whether it’s a Picasso, prime real estate, or a rare Pokémon card, you’re not just tokenizing assets; you’re revolutionizing wealth creation. So, dive in, tokenize, and let’s reshape the financial landscape together.
