Real-World Assets (RWAs) Explained

Real-world assets (RWAs) in blockchain are digital tokens that represent physical and traditional financial assets, such as currencies, commodities, equities, and bonds.

Real-world asset (RWA) tokenization is one of the largest market opportunities in the blockchain industry, with a potential market size in the hundreds of trillions of dollars. In theory, anything of value can be tokenized and brought onchain.

This is why tokenized RWAs are a growing market segment in the digital asset industry, with an increasing number of projects looking to tokenize a wide variety of assets, including cash, commodities, real estate, and much more.

What Are Tokenized Real-World Assets (RWAs)?

Tokenized real-world assets (RWAs) are blockchain-based digital tokens that represent physical and traditional financial assets, such as cash, commodities, equities, bonds, credit, artwork, and intellectual property. The tokenization of RWAs marks a significant shift in how these assets can be accessed, exchanged, and managed, unlocking an array of new opportunities for both blockchain-powered financial services and a wide variety of non-financial use cases underpinned by cryptography and decentralized consensus.

Tokenizing Real-World Assets

Tokenizing real-world assets involves representing the ownership rights of assets as onchain tokens. In this process, a digital representation of the underlying asset is created, enabling onchain management of the asset’s ownership rights and helping to bridge the gap between physical and digital assets.

Benefits of Tokenized Assets

• Liquidity: Tokenized real-world assets (RWAs) can make traditionally illiquid assets more easily tradable. By putting these assets on blockchain networks, which can interact with each other, investors from around the world can buy and sell these assets more easily. This global access can increase the overall liquidity of these markets.

• Transparency: Since the tokenized assets are represented onchain, transparency and auditable asset management are ensured, which decreases overall systemic risks, as the amount of leverage and risk in the entire system can be more accurately determined.

• Accessibility: Tokenized RWAs can broaden the potential user base of certain asset types by enabling easier access through blockchain-based applications and allowing a broader set of users to utilize assets that would otherwise be unavailable to them through fractional ownership.

How To Tokenize Real-World Assets

The high-level process of tokenizing a real-world-asset involves several steps.

• Asset selection: Determining the real-world asset to be tokenized.

• Token specifications: Determining the type of token (fungible or non-fungible), the token standard to be used (like ERC20, ERC721, or ERC1155), and other fundamental aspects of the token.

• Blockchain selection: Choosing the public or private blockchain network on which to issue the tokens. Integrating Chainlink Cross-Chain Interoperability Protocol (CCIP) helps make the tokenized RWA available on any blockchain.

• Offchain connection: Most tokenized assets require high-quality offchain data from secure and reliable oracle services. Using a trusted verification mechanism to confirm the assets backing the RWA tokens is essential for maintaining user transparency. This typically involves a reputable service like Chainlink.

• Issuance: Deploying the smart contracts on the chosen network, minting the tokens, and making them available for usage.

Step number 5 (Issuance) is out of scope for this bootcamp.

Types of Tokenized Assets

Tokenized assets can be classified by three key traits.

1. Asset Location:

   1. OnChain Asset 👈 These wouldn't be considered real-world assets. These digital assets, like ERC-20 tokens and NFTs, exist natively on a blockchain. They are created, stored, and transferred within the blockchain.

   2. OffChain Asset These real-world assets exist outside a blockchain, like tokenized real estate, stocks, or commodities, but are represented digitally onchain through tokenization.

2. Collateral Location:

   1. OnChain Collateral Collateral is stored directly onchain. These could be cryptocurrencies or tokenized assets held in a smart contract as security.

   2. OffChain Collateral Collateral involves real-world assets held outside the blockchain but linked to onchain tokens. It could be held by a custodian or in a traditional financial institution.

3. Backing Type:

   1. Direct Backing The tokenized asset directly represents ownership or a claim on the underlying asset. Each token corresponds to a specific portion of a real-world asset.

   2. Indirect Backing, AKA Synthetic Tokens that derive their value from the underlying asset but don't represent direct ownership, tracking the value of the assets to represent their value.

8 Types of Tokenized Assets

1. Onchain asset, onchain collateral, direct backing Example: WETH (Wrapped Ethereum)

2. Onchain asset, onchain collateral, indirect backing (synthetic) Example: WBTC (Wrapped Bitcoin)

3. Onchain asset, offchain collateral, direct backing Hypothetical example: A wrapped BTC ETF

4. Onchain asset, offchain collateral, indirect backing (synthetic) Hypothetical example: A wrapped BTC ETF that represents an ETH ETF

5. Offchain asset, onchain collateral, direct backing Hypothetical example: A stablecoin backed by other stablecoins

6. Offchain asset, onchain collateral, indirect backing (synthetic) Example: DAI

7. Offchain asset, offchain collateral, direct backing Example: USDC (USD Coin)

8. Offchain asset, offchain collateral, indirect backing (synthetic) Example: USDT (Tether)