RWA Meaning

What Are Real-World Assets (RWA)?

Real-world assets (RWAs) are tangible and intangible assets or utilities that exist in the physical world. In the context of blockchain, it involves transforming traditional and physical assets of economic value, such as real estate, intellectual property, commodities, and fine art, into digital and tradable formats. This representation of physical assets as digital tokens on a blockchain network is called asset tokenization or RWA tokenization.

What Is Tokenization of Real-World Assets?

Tokenizing RWAs involves effectively representing the value and ownership rights associated with a particular asset or utility as on-chain tokens. The tokenization process bridges the divide between physical and digital assets, or traditional finance (TradFi) and decentralized finance (DeFi). 

Simply put, asset tokenization entails establishing a virtual investment mechanism on a blockchain. So, instead of having a physical piece of artwork or title deed, for example, the ownership and provenance of the asset are put on-chain. As a result, inherently illiquid assets are transformed into fractionalized, accessible, and tradable tokens– thereby boosting liquidity, accountability, and transparency. 

How do blockchains facilitate RWA tokenization?

Blockchain technology serves as the backbone for asset tokenization, ushering in novel ways of asset management, seamless trading, and asset acquisition.  It makes tokenization possible through a high-level process involving several steps. This includes:

• Off-chain formalization: Off-chain formalization involves determining the physical asset’s value, ownership, and legal standing as the preliminary step before linking it to a blockchain. The asset’s value is established based on factors such as its market price, condition, and performance history. In addition, conducting a cross-check against all applicable legal and regulatory rules for disputed legal ownership is vital.
• Smart contract creation and blockchain selection (information bridging): After asset selection and identification, and establishing a legal framework, smart contracts are created to manage ownership tracking, fungibility, and transferability. Consequently, a blockchain network for creating and issuing the asset-backed tokens is considered.
• Token creation and issuance (creating demand and supply): DeFi protocols, playing the significant role of creating new asset-backed tokens, emerge after the necessary groundworks are established. The DeFi platforms also strive to foster an interest in trading these assets to attract more investors. Each token created represents a fractional value of the physical asset’s worth. This not only facilitates fractional ownership but also boosts trading activity.