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RWA tokens (real-world asset) are blockchain tokens that represent tangible assets. They have currently become one of the most trending instruments in the crypto industry. These tokens represent ownership or a claim on the real asset. But what are they, and for what reason are they the talk of the town?
Imagine being the owner of a fraction of a building in New York or Paris, one bar of gold kept in a vault, or even a bond of the government of USA, with no paperwork, brokers, or huge upfront costs involved. That is what RWA tokens do. In short, RWA tokens make real-life investments as easy to trade as crypto.
Note: Crypto investments involve significant risk. Do not take the views mentioned here as financial advice. Please conduct thorough research before making any investment.
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How RWA tokens work
Tokenization involves three steps:
- Step 1: Asset custody or verification - A physical asset is held by a trusted, regulated entity.
- Step 2: Issuance of tokens on blockchain - The custodian issues tokens on a blockchain. Specific tokens signify ownership, claims, or participation rights.
- Step 3: Investors buy/trade the tokens.
They are digital assets that any person can purchase through trading sites or decentralized finance applications.
Subsequently, investors obtain interest payments on securities like bonds, income shares in property investments, and bonuses for transactions involving bills or credits.
Why RWA tokens are important
1) Fractional ownership
The assets once reserved for affluent individuals, such as large enterprises or public securities, can now be bought by retail players due to the possibility of fractional ownership.
2) Global markets 24/7
Tokenized assets trade 24/7 just like cryptos:
- Anytime
- Anywhere
- No geographical restrictions
- Traditional markets close at 4 PM; blockchain does not
3) Faster settlement
Modern financial systems rely on numerous middlemen, such as stockbrokers, commercial lenders, settlement centres, and auditing firms, for transactions.
The blockchain shortens transaction processing times significantly, typically down to fractions of an hour rather than weeks.
4) Access to high-quality yields
The decentralized finance protocols combine tokenized assets for high-quality assets like digital treasury securities to offer investors secure and predictable earnings opportunities.
5) Transparency
The movements of all transactions are duly recorded across an open ledger system. Hence, this system reduces risk of fraud or manipulation.
Most in-demand forms of RWA tokens
Here's a comprehensive list of the most in-demand types of RWA tokens:
- Tokenized treasuries.
- Government bonds backed by the government of the USA.
- Tokens are the fastest-growing segments like ONDO, BENJI from Franklin Templeton, BlackRock BUIDL fund.
- Tokenised real estate: These include properties tokenized for fractional investment. An example of this will be an asset valued at 10 million dollars is denoted using 10 million digital units of currency.
- Tokenized commodities: These include physical assets like gold, silver and oils. Often, these units rely on tangible resources stored safely within fortified repositories.
- Tokenized private credit/invoices: Companies tokenize their receivables or invoices, allowing investors to purchase claims on future cash flows.
- Tokenized receivables and loans: Companies tokenize their receivables or loan books, giving investors exposure to real credit assets. Investors earn the interest generated by the underlying borrowing activity, making these tokens a core driver of on-chain lending markets.
- Tokenized funds/ETFs: This category includes mutual funds or ETFs issued on blockchain. They follow the model of paying dividends, along with tracking the net asset value. BlackRock and Franklin Templeton have issued such products.
- Tokenised Carbon Credits: These represent verified climate assets brought on-chain and are widely used in environmental and carbon markets. Each token reflects a measurable action toward reducing emissions or achieving carbon neutrality.
Why RWAs are growing quickly
1) DeFi wants stable yields
Crypto yields are all over the place. Securities like treasury bonds offer stable annual gains of approximately over 4%, which makes these assets appealing for use in decentralized finance systems vis-a-vis crypto yields.
2) Institutional adoption
Several prominent global banking entities advocate for RWA tokenization technology:
- BlackRock: BUIDL fund
- JPMorgan: Onyx platform
- Franklin Templeton: tokenised funds
- HSBC: tokenized gold
These inspire confidence among consumers.
3) Supportive regulation for RWAs
Several nations, such as Singapore, Abu Dhabi, Hong Kong, the European Union, and the United States, are developing regulations concerning tokenisation processes.
All these reduce risk for issuers and investors alike.
4) Lower costs & faster execution
Tokenization reduces overheads:
- Less paperwork
- Automated reporting
- Instant settlements
It encourages implementation across financial institutions. An RWA will facilitate greater accessibility of conventional securities at lower transaction costs worldwide. They are emerging as an important backbone in both the upcoming era of decentralized finance and the traditional financial institutions’ landscape.
