What are Real World Assets – Benefits and Role in DeFi

Real-world assets (RWAs) are revolutionizing the financial landscape by leveraging blockchain technology to tokenize various valuable items. These assets can be physical, digital, or data-based, ranging from real estate and commodities to art and intellectual property.

Tokenizing these assets on a blockchain offers new ways to transfer ownership, share revenue streams, and increase liquidity for previously illiquid or non-commercial assets.

This guide will explore what RWAs are, their benefits, and how they are integrated into decentralized finance (DeFi).

What Are Real-World Assets (RWAs)?

Real-world assets are tangible or intangible items with substantive value that exist outside the digital realm. These assets include anything from real estate properties, commodities, and machinery to stocks, bonds, and intellectual property. By tokenizing these assets, they can be represented digitally on a blockchain, creating a digital twin that can be easily traded, shared, and managed.

Examples of Real-World Assets

• Stablecoins: Digital currencies pegged to fiat currencies like the US dollar or euro. Stablecoins provide a stable and liquid alternative to traditional currency.
• Real Estate: Tokenized properties allow fractional ownership of real estate, making it accessible to a broader range of investors.
• Commodities: Tokenizing commodities like gold or agricultural products enables new investment opportunities.
• Art and Collectibles: Blockchain technology can represent unique artworks and collectibles, allowing fractional ownership and preserving provenance.
• Intellectual Property: Artists and inventors can issue tokens representing shares in future revenues from their works.
• Vehicles: Cars, boats, and planes can be tokenized to facilitate seamless custody transitions and fractional ownership.

Benefits of Tokenizing Real-World Assets

Enhanced Efficiency

Tokenizing assets allows fractions of high-value items to be traded 24/7 on digital exchanges, bypassing brokers and enabling fast, global transactions. This streamlines processes like cross-border deals and automated income redistribution.

Increased Trust

Blockchain technology ensures atomic settlement of real-world assets without needing a trusted third party. Intrinsic consensus mechanisms increase trust and efficiency in transactions.

Greater Transparency

A public, immutable record on the blockchain provides full visibility into asset ownership and transaction activity. This transparency establishes clear title and provenance, preventing fraud through open tracking of transfers and liens.

Simplified Compliance

Smart contracts can automate regulatory requirements and KYC/AML checks. Digital tokens make it easier to adhere to tax reporting obligations through integrated tools and public ledgers.

Reduced Costs

Eliminating middlemen reduces traditional transaction fees and documentation expenses. Blockchain consensus lowers maintenance costs compared to physical assets and legacy record-keeping.

Improved Liquidity

Fractionalizing RWAs increases liquidity, allowing tokens representing these assets to be readily traded. This creates new secondary markets for investments that were previously illiquid.

Types of Real-World Assets

Stablecoins

Stablecoins maintain price stability relative to designated assets like currencies or commodities. They are used for cross-border payments and function as banking infrastructure for the unbanked. Examples include Circle’s USDC and Tether’s USDT 

Real Estate

Tokenizing real estate allows people to invest in properties globally through fractional ownership. Platforms like Lofty and SliceSpace facilitate the tokenization of residential and commercial properties.

Commodities and Precious Metals

Tokenizing commodities like gold enables consumers to own physical gold in digital form. Projects like Meld and Agrotoken allow farmers to tokenize their grains, transforming them into digital assets for trade and collateral.

Art and Collectibles

Platforms like Artory bring art and collectibles on-chain, allowing for fractional ownership and preserving digital provenance. This makes high-value art investments more accessible.

Books and Music

Digital tokens can represent ownership of books, music, and films. Projects like Book.io and Opulous are pioneering the issuance of ebook and audiobook RWAs, offering true ownership to creators and fans.

Intellectual Property

Artists and inventors can issue tokens representing shares in future revenues. Platforms like ANote Music and Dequency enable the sale of music rights and royalties, recorded on the blockchain.

Vehicles

Tokenizing cars, boats, and planes facilitates seamless custody transitions and fractional ownership. Blockchain can track the provenance of vehicles as they change hands.

Salaries and Invoices

Tokenizing payroll and invoicing allows individuals to use future income streams as collateral for loans. Platforms are developing solutions for accessing earned but unpaid wages or discounting invoices for instant cash.

Consumer Goods

High-value products like electronics and luxury items can be tokenized for fractional ownership and resale. This fosters customer loyalty programs and retains asset value cycles within ecosystems.

Real-World Assets in DeFi

Lending and Borrowing

DeFi platforms allow tokenized assets like real estate and commodities to be used as collateral for loans. Borrowers receive stablecoins or other tokens, while lenders earn interest.

Index Funds

DeFi enables passive exposure to baskets of RWA tokens within a single pooled investment, diversifying risk across different tokens and asset classes.

Asset Management

Autonomous funds protocols deploy capital by trading RWA tokens to generate returns, integrating real-world assets into DeFi.

Less Risky Investments

RWAs bring less volatility to DeFi compared to crypto-native assets. Real estate, commodities, and art-linked assets offer more stable investment options.

How to Tokenize Real-World Assets

Choose an Asset

Identify a valuable real-world asset suitable for tokenization. Proper vetting is essential, considering ownership, clear title, valuations, and partnerships.

Seek Regulatory Approval

Ensure compliance and seek relevant regulatory approval before tokenizing an asset. This guarantees the legal recognition of digital tokens.

Choose a Blockchain

Select a blockchain with smart contract capabilities to govern ownership shares, transactions, and asset administration. 

Create Tokens

Develop digital tokens to represent ownership shares in the real asset. Decide on token standards, total supply, and distribution models.

Issue the Tokens

Mint the tokens, linking them to the real-world asset with underlying information like photos or signed documents.

Trade Tokens

List and exchange tokenized assets on decentralized applications and cryptocurrency exchanges, allowing fractional ownership and global liquidity.

Conclusion

Tokenizing real-world assets on blockchain technology brings immense benefits, including enhanced transparency, increased liquidity, and democratized ownership. By fractionalizing assets, we open new investment opportunities and create secondary markets for previously illiquid items.