Tokenized Assets: Why Real World Assets should be represented onchain

Imagine a world where buying an apartment is as simple as a click. The Web3 world is redefining how we transact, invest and manage assets. A key development in this transformation is the push to bring Real World Assets on the blockchain (“onchain”) and represent them digitally.

What are RWAs and why bring them onchain?

RWAs encompass a wide range of assets from traditional investments like stocks and bonds to real estate, commodities and even intellectual property. By tokenizing these assets, we unlock these powerful Web3 benefits:

• Transparency: Blockchains enhance the visibility and traceability of asset ownership.

• Composability: Tokenized assets can be integrated into the wider Web3 ecosystem and interact with elements like DeFi protocols.

• Seamless Transactions: Tokenization streamlines the trading and transfer of ownership.

As we dive deeper into the transition of representing RWAs onchain, we find three key reasons that make this shift extremely exciting.

1. Unlocking Previously Hidden or Ignored Value

Traditional economic structures often overlook or undervalue assets due to constraints inherent in these systems. Tokenization, however, brings the capability to unlock and harness this value, making it visible and tradeable.

A perfect example of the capability to unlock and harness value is in the telecom industry. Traditional cell providers make the most amount of money from directly selling mobile data to consumers. However, an alternate approach, adopted by companies like DENT Wireless, challenges this model. They built a secondary marketplace for mobile data, allowing them to capture value that was previously ignored.

Source: Dune Helium Foundation 

Another compelling example is the Helium Network. This decentralized network uses blockchain technology to incentivize individuals with ownership of the network to deploy hotspots which then provide wireless coverage for cellular devices. Unlike the traditional model of centralized network infrastructure owned by large telecom companies, Helium’s model pays hotspot operators in MOBILE tokens when their hotspots are utilized by others to access the network, thus distributing the network’s value among its participants. This has introduced a new level of participation in the telecom sector, although it’s important to note the network’s relative infancy with only about 50,000 subscribers indicating a small but rapidly growing adoption curve.

Representing RWAs onchain doesn’t mean simply digitizing these assets. It’s also about revisiting traditional models, challenging economic blind spots and transforming untapped value into tangible gains. The Helium Network is a perfect example of this transformation turning individual contributions into network infrastructure. As networks like Helium expand and mature, they offer a glimpse into the potential for a more participatory economic model within the web3 landscape.

2. Improving Process Efficiency

Representing RWAs onchain can significantly enhance process efficiency, particularly in sectors where transactions are complex and time-consuming. Lets look at real estate, an industry characterized by lengthy processes and substantial paperwork.

RoofStock onChain represents houses as NFTs, allowing them to simplify the lengthy real estate process. The ownership of RoofStock NFT equates to the ownership of an LLC that holds the underlying property. In one case, an Alabama home was purchased as an NFT on the Ethereum blockchain using stablecoins, thereby removing the need for banking intermediaries, and their associated costs and delays.

One unique feature this approach brings is the composability it brings to the onchain asset. RoofStock collaborates with Teller Protocol, allowing them to offer a two-year mortgage loan where the NFT is locked in an escrow contract as the collateral. This allows DeFi market participants to lend up to 80% of the value against the NFT, creating a streamlined efficient mortgage process that is significantly different from the traditional, more time-consuming process.

While tokenizing houses streamlines certain processes, there are new things to think about. What if your wallet gets hacked and someone steals the NFT? Do you lose possession of the house. There needs to be guardrails designed in place so the legal owner is able to use traditional methods of recourse to report the hack and retrieve the NFT through the custodian or the tokenization protocol (RoofStock, in this case)

While the concept of tokenizing real estate is revolutionary, it’s clear that we are still very early. RoofStock onChain, has tokenized and sold only four homes so far with the total sales amounting to $777k. Despite the tiny beginnings, this example underlines the process efficiency that can be achieved by representing RWAs onchain. 

Increased adoption and Integration of other composable protocols can simplify and speed up transactions, paving the way for more efficient processes in real estate and beyond.

3. Improving Economic Efficiency

Generally, “Economic Efficiency” refers to the optimization of financial resources and streamlining access to economic products. In the context of Web3, it can also take on an added dimension of enhanced accessibility and fluidity in financial transactions.

The increasing interest in tokenized treasuries is a fitting example. Over the past year, the total market cap of tokenized treasury products has increased about 4x, an indication of the sector’s rapid growth and the significant role that traditional financial institutions are beginning to play. The well known TradFi incumbent, Franklin Templeton, now represents about half (3/22/24 Source: RWA.xyz) of this new market, highlighting the integration of traditional and decentralized finance. 

Source: RWA.xyz

The tokenization of stocks, bonds, and other financial assets is not just a possibility but a current reality, allowing for more efficient and accessible asset swapping and opening the door to a streamlined economic landscape.

In parallel, other sectors are also harnessing the power of tokenization to enhance economic efficiency. For example: 4K, a decentralized protocol allows anyone to generate an NFT backed by a physical asset like a watch or an artwork. This physical asset is securely held by a third-party guardian and the owner of the NFT can redeem it for the underlying physical item at any time. Users can collateralize their NFT to secure a loan onchain using NFT Lending Protocols like NFTFi, or Arcade, a process that would be difficult in traditional financial systems.

This new capability has the potential to unlock billions in value that might otherwise remain inaccessible. Tokenized financial assets aren’t a futuristic vision but a present reality, actively contributing to a more efficient economic environment. This allows for the integration of composable protocols to simplify transactions and opens up new financing avenues. 

Merging RWAs with onchain protocols doesn’t just tweak the system- it can pave the way for a hyper-efficient economic landscape.

The Current Challenges with RWAs

1. Interoperability: Different protocols may represent RWAs using multiple standards. It may be complex to achieve interoperability between assets from different protocols. The authors of this report on RWAs point to the standards adopted for the exchange of text, audio, etc on the internet and underscore the need for standards enabling “Internet-Native Finance”.

   
   

2. Regulatory Compliance: Onchain RWAs still have to operate within the current regulatory framework of relevant jurisdictions. Republic raised $16 Million through a token offering called “Republic Note”. Each token represents a unit of Class B LLC membership interests. According to Republic, this offering complied with existing regulations like SEC’s Reg D and also ensures technical features like asset freezing, clawbacks, etc are available for issuers to compliantly handle fraud.

   
   

3. Liquidity Concerns: On one hand, tokenizing RWAs can unlock value that was previously inaccessible, but it might also lead to liquidity challenges. Creating liquid markets for specific or niche assets may be difficult. This problem also presents an opportunity for the development of Decentralized and Centralized Exchanges that offer a way to trade these RWAs compliantly. For example, the wallets allowed to interact with these exchanges are KYC/AML verified and assets are listed after an approval process.

   
   

4. Asset Verification: The ability to verify the authenticity of a tokenized RWA is an important and challenging problem at the same time. The Web3 ecosystem has experienced multiple incidents where concerns were raised over the condition of customer reserves, like the FTX Exchange, Celsius or issuers of stablecoins. Loss of trust in the practices of a third-party custodian can have damaging consequences for the whole space. Existing frameworks like the SEC’s “Qualified Custodian” rules must evolve to support tokenized RWAs while not affecting the ability for custodians to operate. Creating trust and confidence through robust auditing and transparent processes will be essential to unlocking the full potential of RWAs onchain.

What the Future Holds:

As the space matures, we can anticipate these product categories: 

1. Curated Marketplaces: As the RWA ecosystem grows, we will see the emergence of user-friendly, curated, front-end marketplaces that cater to specific RWA niches and offer a seamless investment experience for retail and institutional investors. These marketplaces will curate a range of tokenized assets onchain and monetize through referral fees or take a percentage of the transaction. 

   
   

2. Mullet Marketplaces: Traditional alt-asset marketplaces like RallyRd, Masterworks, etc have an issue with low secondary market liquidity. We will see some of these marketplaces move parts of their backend onchain to improve market liquidity through Automated Market Makers (AMMs) or token incentives for adding liquidity. 

   
   

3. RWA Auditors: Onchain RWAs can expose investors to asset verification and other risks. Similar to the Smart Contract Auditor market, we will see the emergence of RWA Auditors that go beyond the Smart Contract Audits and will also audit legal/regulatory compliance, verify the authenticity of the tokenized assets (particularly for collectibles). We might see participation in this space from traditional audit companies, smart contract auditors expanding their existing offerings or new entrants into the market. 

   
   

4. RWA Tokenization Protocols & Services: As the demand for tokenizing assets increases, we will see more RWA Tokenization Protocols (like 4K) and Tokenization Service Providers (like Securitize, Swarm and Republic Crypto) that will simplify the process of launching new onchain assets and also building software that interacts with these assets. 

   
   

5. RWA Insurance: As the value locked in onchain RWAs grows, there will be a need for specialized insurance products to protect investors against risks like asset fraud and smart contract vulnerabilities. Tailored RWA Insurance solutions will be offered by new providers or existing Crypto Insurance providers like Nexus Mutual, Coincover or Evertas. We will see products emerge that appeal to companies operating in the RWA space as well as individual investors seeking exposure to RWAs.

   
   

Representing RWAs onchain is not just a digital transition but a fundamental shift that can redefine traditional economic models and financial systems. By unlocking hidden value, enhancing process efficiency and improving the overall economic efficiency, the integration of RWAs with Web3 has the opportunity to lay the foundation for a more transparent, fluid and innovative financial landscape. Examples such as DENT, Helium, RoofStock and Ondo identify the tangible impact of this shift across various industries. It is important to recognize both the potentials and the challenges that lie ahead. The implementation of RWAs onchain will require robust legal frameworks, technical innovation and an effort towards interoperability and standardization.

The world of onchain RWAs is poised for explosive growth. Representing assets onchain has the power to transform how we invest, access ownership and power entire industries. If you’re exploring new investment avenues, streamlining existing processes related to asset ownership or seeking fresh ways to capitalize on assets, the time to explore this space is now.

If you're excited about the potential of onchain Real World Assets and want to explore opportunities, share insights, or collaborate on projects in this space, I'd love to connect