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Your Complete Guide to Real-World Asset Tokenization

21 Jun 2024 updated
11 min

Table of content

Ownership of expensive, non-fungible assets has always been a privilege of the few. However, such investments have their pros and cons, with the lack of capital liquidity being one of them. Now, imagine a situation in which you own an exclusive painting worth around $1,000,000 and can still use the money invested in this purchase. 

Whether it’s a large office building or an expensive collectible, it can still be a source of liquid capital for you. Tokenization enabled by blockchain technology has made it possible to divide your property into shares, which gives the right of fractional ownership to their buyers. This way, you can still be the owner of your asset by holding 51% of the tokens and get 49% of its price back for circulation and everyday business use. 

At the beginning of 2024, the RWA tokenization market was still at the dawn of its development, at $5 billion. With the present-day market size of this industry, it seems unbelievable to many that the 2030 estimate is around $11+ trillion in the worst scenario, and over $68 trillion in the best outcome.  

asset tokenization estimate

To me, this immense growth tempo is nothing extraordinary, given the fast pace of technological innovation and financial inclusion happening today. Many overlapping factors contribute to that growth and guarantee a cloudless future for the tokenized assets market. Anything, from real estate property to natural resources, can be given a new level of liquidity and operational efficiency with the help of tokenization. 

Thus, it’s time for all early adopters and forward-looking investors to take a closer look at the tokenization of real world assets and embrace this unique business opportunity at the grassroots level. In this article, I will walk you through the tokenization process and explain how you can tokenize vital business assets and reap immense business benefits from this decision. 

Real World Asset Tokenization Explained 

The first successful case of real-world asset tokenization was USDT – a stablecoin pegged to the US Dollar. It has been used as one of the most stable equivalents to USD in the blockchain space since its emergence, but it’s an example of fungible asset tokenization.

RWA

When it comes to non-fungible assets, the process of RWA tokenization usually involves the asset’s division into a particular number of fractions and their sale at the fractional cost of the present-day market value of the asset. For example, you may tokenize an office building worth $25 million and divide it into 2,500,000 tokens, each of which will cost $10. This way, any investor interested in holding a share of real estate property as an investment may start with only $10 in their pocket. 

This unprecedented accessibility of serious investment is enabled by blockchain technology, which works as follows: 

  1. Division of real-world assets into fractions. A certain type of RWA (gold, real estate, fine art, etc.) is divided into a particular number of fractional shares.  
  2. Conversion of asset fractions into digital tokens. The asset is tokenized on one of the popular blockchain platforms by minting the specified number of tokens after the owner’s property verification (e.g., Chainlink’s Proof of Reserve). This stage refers to collateralization – ensuring that the owner has the tokenized asset in the stated quantity. 
  3. Launch of RWA tokens to the DeFi space for circulation. The successfully tokenized real world assets are deployed to crypto exchanges and DeFi platforms, where they can perform the role of utility tokens or investment tools. 

RWA

Types of Real World Assets Suitable for Tokenization 

When it comes to tokenization, there is literally no limit to this technology. It works equally well with fungible and non-fungible assets, so it can be applied to any object of universally recognized and stable value. Here are some examples. 

  • Commodities. All types of commodities and natural resources are tokenized on a large scale today. For instance, gold tokenization is gaining popularity as a novel tool for offsetting the worsening stability of USD as the global currency. Tokenized gold projects combine the stability and steady price growth of gold with the liquidity and operational efficiency of digital assets. 
  • Currencies. Digital currency analogs are already paving their way in traditional financial systems. The first example was USDT, which is pegged to USD, and many other currency analogs are circulating in the crypto space. Another example is the CBDC – a central bank’s digital currency – that many governments are exploring today. 
  • Real estate. The greatest benefit of real world asset tokenization is felt in the real estate sector, where buying business or residential property has always meant freezing a huge sum of money and losing capital liquidity. Real estate tokenization makes investor entry easier, allows beneficial fractional ownership, and increases liquidity for property owners. 
  • Art and collectibles. Tokenized artwork is also a new trend in the modern digital space, with the works of Old Masters tokenized similar to the new creatives’ masterpieces. Tokenized art is easier to buy and sell; it belongs to a community of enthusiasts instead of one person; authenticity is easier to trace and prove using unique blockchain data. 
  • IP objects. Intellectual property still remains the most vulnerable property in terms of theft or abuse. IP tokenization enables easier ownership tracing and authentication for copyrights, trademarks, and patents. 
  • Stocks, bonds, and securities. The tokenization of financial instruments is a game-changer in global access to financial markets. In a world where almost 1.7 billion people have no access to financial services, digital assets revolutionize access and inclusion by giving unbanked people the ability to secure their hard-earned cash. 

Benefits of Asset Tokenization 

Throughout my real world asset tokenization experience at 4IRE, I have seen many successful projects with numerous benefits for their owners and users. The most sizable advantages you may expect from RWA tokenization include: 

  • Liquidity. RWA owners don’t need to freeze their money in large-scale assets by getting a portion of their money back into circulation and re-investment. 
  • Fractional ownership. Users of RWS tokens enjoy the privilege of owning real estate, gold, exclusive fine art, and other objects they would have never afforded with limited capital. 
  • Immutability and transparency. Blockchain-powered tokenization technology ensures transparency of all operations and eliminates the risk of fraud or manipulation. 
  • 24/7 access and financial inclusion. RWA token users can buy and sell their assets 24/7 without the need to stick to regular office hours of traditional exchanges. These digital assets are available for all people across the globe, even to unbanked and underbanked individuals. 

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What Is the Role of Blockchain in RWA Tokenization

Obviously, tokenization would be impossible without blockchain. The most popular platforms used for this purpose are: 

  • Ethereum. This blockchain network firmly takes the lead in the blockchain space due to its smart contract efficiency and security. The ERC20 protocol is still the golden standard in the world of tokenization. 
  • Hyperledger Besu. A corporate-level solution based on Ethereum, Hyperledger Besu can power permissioned and permissionless networks. Its modular architecture allows a great degree of flexibility in asset tokenization. 
  • Quorum. The brainchild of J.P. Morgan and property of Consensus, Quorum is an open-source permissioned blockchain with a focus on privacy. It is fully compatible with Ethereum. 
  • Corda. This option is suitable for enterprise-level solutions and ensures robust regulatory compliance. R3 Corda is optimal for IP and real estate tokenization. 
  • Tezos. This blockchain is known for robust on-chain governance, solid verification capabilities, and self-amending features. Thus, it is a secure and flexible RWA tokenization solution. 

Use Cases and Real-World Examples 

Let’s also recollect several real-world examples of applying RWA tokenization for business transformation. 

  1. USDT. As I’ve mentioned above, USDT was the first and, so far, the most successful case of currency tokenization. This project of Tether is used as a global currency standard in the crypto world.   
  2. Lofty. The company tokenizes residential real estate, including houses and condos, to give investors easier access to real estate investment. 
  3. Carbcoin. This is our company’s successful carbon credit tokenization case. The 4IRE team designed a carbon credit marketplace and created the native token for efficient and standardized carbon credit trading.  
  4. Agrotoken. The project enables farmers to tokenize their harvest (e.g., grains) and exchange those digital assets for money, services, and other goods on digital exchanges. Tokenized grain is also accepted as loan collateral. 

Challenges and Risks in Asset Tokenization 

It would be wrong to say that RWA tokenization is a universally beneficial solution for asset owners and businesses. As with any other innovative technology, it comes with some notable risks and challenges you need to consider. I believe that the most significant risks are: 

  • Regulatory risks. Tokenized RWAs enjoy a status similar to that of cryptocurrencies, meaning they are legally ambiguous in many jurisdictions. Such tokens are neither commodities nor securities; therefore, this form of property ownership is prone to abuse or even legal prosecution in some legal systems. 
  • Lack of standardization. Like NFTs, RWA tokens have limited interoperability and liquidity because they are still new in the digital market. They are only at the early stage of adoption, so RWA token issuers and buyers both have no single protocol for value or property standardization, thus complicating the token trading and exchange processes. 
  • Security issues. Blockchain systems are vulnerable to exploits and hacker attacks, as cybercrime is on the rise in the Web3 space. Thus, there are high risks of security incidents and loss of funds stored in RWA tokens. 
  • Liquidity risks. Depending on the number of fractions into which a real-world asset is divided, the liquidity of token trading in the decentralized space may be severely limited.
  • Custody and asset management limitations. RWA token issuers need to guarantee asset security and proper management, which is often unattainable because of projects’ lack of transparency on security and compliance issues. 

7 Steps to Tokenize a Real-World Asset 

The process of RWA tokenization may differ depending on the blockchain you choose, but the general algorithm is as follows. 

  1. Asset identification and valuation. The starting step is to choose the real-world asset you want to tokenize. It should be assessed in terms of liquidity, potential market demand for fractional ownership, and the business value of this project. 
  2. Blockchain partner selection. Next, you should partner with a company that will execute the whole process of RWA tokenization for you. Check the provider’s credentials, reputation, and portfolio of similar projects to ensure the company has the needed tech stack and expertise. 
  3. Blockchain network selection. Discuss blockchain network options for your tokenization project to choose an optimal protocol that meets your security, scalability, and interoperability expectations. 
  4. Smart contract development and audit. Your development team creates smart contracts that will document ownership rights and regulate the transfer of ownership and the token’s value on the blockchain. Run a thorough manual and automated smart contract audit to eliminate the risk of exploit or fraud with your tokens. 
  5. Regulatory compliance audit. Prepare the full package of legal documents and compliance verifications for your respective jurisdiction to guarantee the token’s legal nature. 
  6. Token minting and distribution. Mint the tokens on the blockchain after going through the “proof of reserve” procedure. Transfer the minted tokens to your IPFS for further distribution.  
  7. Asset management and trading. Launch your RWA tokens in the crypto space, making them open for trading, storage, and investment.

How to Make Profits from RWA Tokenization

The real world asset tokenization industry is quickly gaining momentum because of the unique benefits and opportunities it gives to expensive non-fungible asset owners. They gain profits from the liquidity of their non-fungible belongings; by tokenizing assets, they may allocate the money to investment projects and earn a decent ROI instead of freezing funds in one purchase. Thus, by partnering with a reliable asset tokenization company like 4IRE, any RWA owner can reap added profits from their unique assets of value in the DeFi space. 

RWA tokens’ buyers also enjoy a wide range of earning opportunities, such as:

  • Appreciating RWA value. If you invest in RWA tokens of real estate, gold, or fine art, you may expect to reap sound profits from this purchase in several years. These assets are enjoying a stably rising demand and grow in value year by year, thus offering good passive income for their fractional owners. 
  • Rental income. If you buy RWA tokens for rental property, you receive the right to a portion of rental income the building’s owner derives from rental contracts. 
  • Token trading. Trading is a source of income for many crypto enthusiasts, and the same relates to RWA tokens. You can earn money from the volatile prices of tokens by executing timely trades on various exchange platforms. 
  • Crowdfunding projects. While your financial limitations may not allow you to buy a house or an exclusive work of art, RWA tokens enable crowdfunding of such purchases. This way, you get as many tokens as you can afford to buy and participate in a lucrative deal. 
  • Staking and yield farming options. Some RWA assets are accepted to liquidity pools in exchange for an attractive APY, enabling you to get a stable passive income from your investment. 
  • Fractional ownership of high-value assets. Finally, investors in RWA assets may get a unique opportunity to diversify their portfolios with real estate, precious metals, and other unique property assets at a reasonable price. Imagine how self-indulging it is to own a fraction of a Mona Lisa painting or the Empire State Building! 

This way, owning RWA tokens represents a tangible earning opportunity. It’s a great chance to diversify your portfolio and tap into the niches with a traditionally high entry threshold, typically inaccessible to retail investors on small budgets. 

Conclusion 

The world is ready for blockchain innovation, and one of the notable gains this technology gives to investors is fractional ownership. By introducing RWA tokens, large asset owners have given people access to previously unattainable investment industries and have received greater liquidity of their funds. I firmly believe that real world asset tokenization has a bright future and will develop in leaps as blockchain adoption continues to grow. Thus, the time to invest in RWA tokens is now. 

FAQ

What assets can be tokenized?

It is possible to tokenize anything, from real estate property to trademarks, patents, and fine art. The use of tokenization in finance is also growing, with stocks, bonds, and treasuries also being tokenized to allow greater access to financial instruments among underbanked and unbanked populations.

How do I start tokenizing my assets?

You need to partner with a reliable tokenization company that will consult you on the available platforms and perform the process of ownership validation and minting for you. A blockchain form can also assist you with launching the token to a DeFi platform or exchange.

What are the costs involved in tokenization?

On average, RWA tokenization may take from $100,000 to $300,000+ in costs, depending on the asset class and technology you’re using. The main part of fees comes from legal and licensing expenditures.

Is asset tokenization legal?

Yet, the RWA tokenization technology is fully legal, as it involves the digitalization of the asset’s real-life value and its fractional circulation. If the owner goes through the process of proof ownership/reserve, they have the right to issue tokens into circulation.

How secure are tokenized assets?

The ERC20 standard is highly secure and can give a certain degree of asset reliability. Yet, tokenized assets are still vulnerable to the security risks typical for other crypto coins, such as high volatility, low interoperability, and cybersecurity threats.

What is the difference between digital assets and tokenized real-world assets?

Digital assets are a digital blueprint of a physical asset, while tokenized assets are fungible (regardless of the fungibility features of their RWA analog) and can be used as financial instruments.

What are the real-world asset trends in 2024?

The most popular RWA trends are the expanding usage of stablecoins and tokenized treasuries. Users are also exploring private credit tokenization and non-fungible assets like art, books, trademarks, and the like. Tokenization is also gaining momentum in GreenFi and regenerative finance.

Why choose 4IRE for real-world asset tokenization?

4IRE has been at the grassroots of blockchain technology adoption and has a huge experience in the field of tokenization. Our team is behind many DeFi projects that we’ve implemented from start to finish. So, we’re ready to offer hands-on experience and a diverse tech stack to make your project a success.

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