Wednesday W.O.W - Tokenisation of Real World Assets (RWAs) 💸🧱
[5 min read] Your mid-week bite sized treat on emerging tech on our journey to the Metaverse. Learn how tokenisation is a bridge that uses new technology to solve problems in traditional finance.
A nibble of knowledge in your inbox every Wednesday with a simple format:
🇼 What the technology is
🇴 Objective(s) - what is it trying to achieve, with some examples
🇼 Why it is important to users as well as businesses & brands.
This is week 30 of the 520 weeks of writing I have committed to, a decade of documenting our physical and digital lives converge.
As a follow-up to my previous post on DeFi (Decentralised Finance), we will be exploring some of DeFi’s building blocks. Bringing tokenisation to real-world assets is a component of mainstream adoption of blockchain technology, both to solve problems in traditional finance as well as unlock a world of new opportunities.
Let’s dive in:
🇼 What is the Tokenisation of Real-World Assets?
The tokenisation of real-world assets is a relatively new concept that brings the benefits of public blockchains and decentralised finance (DeFi) to traditional financial assets. It involves representing traditional assets, such as real estate, commodities, stocks, and even intellectual property, as digital tokens on a blockchain.
Imagine a token as a digital representation of a physical asset, like a digital certificate of ownership. Just as a ticket represents your entry to a concert, a token represents your ownership or investment in a real-world asset. These tokens are programmable, transparent, and auditable in real time, thanks to the properties of blockchain technology.
By tokenising real-world assets, we unlock a new level of efficiency, transparency, and accessibility in the financial industry. It allows for seamless and efficient trading, increased liquidity, reduced costs, and the creation of innovative financial products. Now, let's explore why this process is so important and what it aims to achieve.
🇴 What objectives does the tokenisation of Real-World Assets strive to achieve?
Tokenisation aims to achieve several objectives that revolutionise the way we interact with financial assets. Let's take a closer look at these objectives and see some examples of how tokenisation is already making an impact:
Increased Efficiency: With blockchain's single source of truth, post-trade reconciliation becomes faster and more streamlined. Assets can be settled atomically, meaning the transfer of ownership and payment can happen simultaneously. For example, consider the issuance of bonds using blockchain-based record keeping, which has shown up to a 90% reduction in issuance costs. (Deep dive: Tokenised Bonds Surpass $200M In Market Capitalisation)
Increased Transparency: Public blockchains offer real-time auditability, allowing anyone to verify the quality of asset collateral and assess systemic risks. Transparent record-keeping also helps mitigate disputes and provides a clear view of on-chain activities. This transparency builds trust and confidence in the financial system.
Built-in Compliance: Tokens can be programmed with complex compliance rules, ensuring regulatory requirements are met while preserving user privacy. For example, privacy-preserving Know Your Customer (KYC) tools can shield personal information while remaining compliant with regulations.
Liquid Markets: Tokenising historically illiquid assets, like real estate or pre-IPO shares, increases accessibility and liquidity. It unlocks trillions of dollars worth of assets that were previously inaccessible to many investors. This liquidity enables the creation of innovative financial products and investment opportunities
Composability: Tokenization enables permissionless composability between new and existing DeFi applications. Developers can build on a common settlement layer, ensuring collaboration without the fear of being deplatformed. It's like having Lego blocks that can be combined in countless ways to create innovative financial products.
Reduced Costs: By removing intermediaries and automating processes, tokenisation significantly reduces costs. For instance, tokenised assets can eliminate the need for traditional middlemen, leading to cost savings of up to 40% in fundraising. This opens up opportunities for businesses and individuals to access financial markets with lower barriers.
🇼 Why does the Tokenisation of Real-World Assets play a role in the future of finance?
The tokenisation of real-world assets is not just a passing trend; it has the potential to reshape the future of finance. Here's why:
Expansion of DeFi: The rise of DeFi has already demonstrated the value of tokenisation by connecting the traditional financial economy with blockchain applications. Stablecoins, a type of tokenised asset pegged to a fiat currency like the US dollar, have facilitated this connection and expanded the value proposition of DeFi. The success of DeFi showcases the appetite for tokenised real-world assets and points to a growing mega-trend in on-chain finance. As more real-world assets get tokenised, we can expect further integration between DeFi and traditional finance, leading to a more inclusive and efficient financial system.
Unlocking Global Scale: While DeFi has seen significant growth, it has largely operated in a circular economy isolated from traditional businesses and services. Tokenisation bridges this gap by providing a means to connect real-world assets with the decentralised financial ecosystem. This integration unlocks global scale and enables seamless interaction between traditional financial markets and blockchain-based systems. For instance, a farmer in a remote region could tokenise their agricultural produce, enabling direct access to global markets and attracting investment from a broader pool of investors. Tokenisation eliminates geographical barriers and opens up opportunities for global participation in previously localised markets.
Accessibility and Inclusion: Tokenisation has the potential to democratise access to financial markets by reducing barriers to entry. Previously illiquid assets, such as real estate or fine art, can be fractionally tokenised, allowing individuals to invest in small denominations. This fractional ownership model opens up investment opportunities to a wider audience, including retail investors who may not have had access to such assets before. Additionally, tokenisation enables peer-to-peer transactions, eliminating the need for intermediaries and reducing costs. This increased accessibility and inclusivity can drive financial empowerment and economic growth, particularly in underserved regions.
Innovation and New Financial Products: Tokenisation paves the way for the creation of new financial products and services. Smart contracts enable the automation of complex financial agreements, such as programmable dividends, revenue-sharing models, or royalty distributions. These programmable features eliminate the need for intermediaries and streamline processes, leading to increased efficiency and lower costs. Furthermore, tokenisation allows for the seamless integration of different asset classes, enabling the creation of diversified portfolios and innovative investment vehicles. As the ecosystem matures, we can expect to see a wave of creativity and innovation in financial markets, driven by the flexibility and programmability of tokenised assets.
Challenges and Considerations: While the potential benefits of tokenisation are significant, there are challenges and considerations to address. Regulatory frameworks need to adapt to the evolving landscape to ensure investor protection, market integrity, and compliance with existing laws. Security and privacy measures must be robust to safeguard digital assets and user information. Additionally, standardization and interoperability across different blockchain platforms are essential for seamless asset transfer and efficient market functioning.
In conclusion, the tokenisation of real-world assets holds immense promise for transforming the financial industry. It combines the benefits of blockchain technology, increased efficiency, transparency, accessibility, and innovation, opening up new avenues for economic growth and financial inclusion. As the adoption of tokenisation continues to grow, we can expect a fundamental shift in how we interact with and invest in real-world assets, paving the way for a more interconnected, inclusive, and efficient financial ecosystem.
Want more?
If you want to learn more, start with this great long-form read from the Chainlink blog, and watch this onstage panel from the Alternative Investment Management Summit Summit London 2023 “Real-world Asset Tokenization - The Next Generation of Markets”
That’s all for this week! If you have any organisations in mind that could benefit from learning about emerging technology, be sure to reach out. Educational workshops are one of many consulting services I offer.