The Three Requirements of Tokenized Real-World Assets Solved by Chainlink
The future of finance is onchain, and itâs likely to feature hundreds of public and private blockchains that support trillions of dollars worth of tokenized real-world assets (RWAs), including tokenized financial instruments and other assets such as real estate, commodities, and artworks.
To realize the full benefits of onchain finance, tokenized RWAs require three key capabilities. They must be able to:
Be enriched with real-world information.
Be securely transferred cross-chain.
Connect to offchain data regardless of which chain theyâre moved to.
As a decentralized computation platform that has enabled over $8.8 trillion in transactional value, Chainlink is the only fully featured platform that can solve each of these requirements for tokenized real-world assets while maintaining the high level of security required by institutions.
Stage 1: Enriching RWAs With Real-World Information
Tokenized RWAs require much more than a token minted to represent the underlying asset. One of the primary benefits of digital assets is that they are programmable containers of information that can be enriched with all of the information and logic that banks, protocols, and customers require in order to interact with the asset, including proof of reserves, automated corporate actions, identity data, active risk management, settlement requirements, and daily net asset value (NAV).
Since the industry moved from paper-based assets to electronic assets in the mid-1970s, there has not been any meaningful innovation in how the market interacts with these assets. Typically these traditional âstaticâ assets represent an identifier in a database, information is collected and viewed through a Bloomberg terminal (information asymmetry), and risk management is done reactively, e.g. through central bank backstops or clearing houses.
With blockchain technology and Chainlink services, we have an opportunity to create assets that both remove information asymmetry and have proactive risk management features. We can compress all the fragmented information and processes into one cohesive asset.
Having brought 10.8B+ data points onchain, Chainlink services are the industry standard for enriching RWAs with offchain data. Some of these services include:
Proof of Reserve - Autonomous, reliable, and timely verifications enable consumers, monetary authorities, asset issuers, and onchain applications to monitor cross-chain or offchain reserves backing tokenized RWAs. This provides them with enhanced transparency and enables circuit breakers to be implemented, protecting users if the value of offchain assets diverges from assets tokenized onchain.
Identity - Establishing the identity of counterparties and asset owners is necessary in order for banks, asset managers, and their customers to transact with each other in a regulatory-compliant manner. DECO is a privacy-preserving oracle protocol in development that utilizes zero-knowledge technology to enable institutions and individuals to prove the provenance and verify ownership of tokenized RWAs without revealing personal information to third parties.
Data Streams and Data Feeds - Underpin onchain markets with a secure and decentralized source of financial market data around commodities, equities, forex, indices, economic data, business financials, cryptocurrencies, and more.
Functions - Any offchain event or data can be synchronized or published onchain, such as standing settlement instructions, corporate actions, proxy voting, ESG data, dividends and interest, and NAV.
Stage 2: Enabling Liquidity With Cross-Chain Interoperability
Banks, financial market infrastructures, and Web3 protocols are increasingly recognizing that there will be hundreds to potentially thousands of different blockchain networks, particularly if there is specialization around catering to specific asset classes and geographies. Without a secure blockchain interoperability standard, this would lead to fragmented islands of liquidity that prevent the growth of new onchain markets.
As a blockchain interoperability standard, the Chainlink Cross-Chain Interoperability Protocol (CCIP) will serve a similar role to TCP/IP. However, instead of connecting the worldâs information, CCIP will enable smart contracts to securely transfer the worldâs value across public and private blockchain networksâcreating an Internet of Contracts where value is automatically exchanged when certain conditions are met.
Critically for institutions, CCIP provides a single integration gateway to connect backend infrastructure to blockchain networks. In doing so, institutions are able to save time, cut costs, reduce risk, and launch new products faster since they donât have to directly integrate with each individual chain. They only need CCIP as an abstraction layer that connects to and across all chains.
Operating at the highest level of cross-chain security, CCIP is the only solution that meets the strict security standards of capital markets. This is partly why both Swift and ANZ collaborated with Chainlink on the usage of CCIP for cross-chain tokenized asset settlement. As a universal blockchain interoperability standard, CCIP enables RWAs to flow seamlessly between blockchains, broadening accessibility and deepening global market liquidity.
Stage 3: Keeping RWAs Updated as They Move Cross-Chain To Maintain the Golden Record
Keeping assets updated with all relevant information as they move across the financial system will be transformative to maintaining golden records - single data points that provide all of the important information about an asset with total accuracy. We witnessed the outcomes of a system where core financial data was separated from financial instruments during the 2008 global financial crisis. Thousands of mortgages were rolled up into mortgage-backed securities (MBS), and buyers blindly trusted the level of risk that rating agencies assigned to various tranches. Not having easy access to core financial information, many didnât inspect the credit scores, collateral levels, payment history, and other key information, or evaluate the models rating agencies had used (which had incorrectly assumed real-estate prices wouldnât simultaneously decline nationwide).
Onchain finance can overcome this problem for global markets, but it first needs a secure blockchain interoperability standard. When RWAs move across chains, they still need to remain up to date with key data points such as price, identity, and reserves value. Therefore, a secure solution that offers both offchain and cross-chain connectivity for a wide variety of blockchains is required.
Chainlink is the only platform that solves this problem by providing complementary services that span both offchain data connectivity and cross-chain interoperability while maintaining the high security guarantees required by institutions. As a blockchain-agnostic platform, Chainlink enables RWAs to remain connected to all the necessary offchain data through services such as Proof of Reserve, Functions, Automation, Data Streams, regardless of which chain they land on. In parallel, CCIP enables the secure transfer of RWAs between blockchains, while asset issuers and holders have the assurance that the golden onchain record will continue to be updated.
The Universal Standard Powering Programmable Token Transfers
By enabling arbitrary data, tokens, and instructions to be securely sent together between chains, CCIP makes programmable tokenized asset transfers across chains possible (i.e., move Asset X to another blockchain and deposit it into this lending platform to secure a loan). Furthermore, regardless of which chain a tokenized asset is minted on, banks and asset managers can use CCIP to interact with tokenized RWAs from across the onchain economy via their existing backend infrastructure or from a single Web3 wallet.
This industry report provides a comprehensive overview of the growing tokenization market, with contributions from BCG, 21Shares, Paxos, Backed, and Chainlink. Access now.
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