Real World Assets (RWAs) & ETPs
THE BRIDGE BETWEEN TRADFI & DEFI
Larry Fink (Blackrock) Says Tokens Are “The Next Generation For Markets”
…think of tokens as digital assets that can be traded via protocols, you may well agree with me that his view is accurate, credible and inevitable. It may sound hyperbolic, but I am sure that the future will be tokenized.
“Mr. Fink’s perspective is not, I am sure, idealogical. His view of a new kind of financial market infrastructure of fungible and non-fungible tokens that are exchanged through decentralised financial services will provide “instantaneous settlement” and “reduced fees.” Tokens are bearer instruments. The token for $100 or for a seat at a Rangers game is either in my wallet, in which case it is mine, or it is in your wallet, in which case it is yours. When a token goes from my wallet to your wallet it is now yours. There is no clearing or settlement, no reconciliation and no question of authenticity.” Forbes David G.W. Birch march 1, 2023
Larry Fink on Tokenization is the Future of the Next Generation. #securities #tokenization #ETPs “ETFs
"I believe the next generation for markets, the next generation for securities, will be tokenization of securities," BlackRock CEO Larry Fink said during the New York Times DealBook event.
TD;LR
3 key characteristics to drive the new asset class:
Transparency // Universal access // The ability to reduce "frictional costs".
Real World Assets (RWAs) are tangible or physical assets existing in the physical world, represented on the blockchain through tokens. Tokenization converts these assets into digital tokens, enabling digital ownership and trading. RWAs encompass various physical assets, including real estate, commodities, art, company shares, and traditional financial instruments. Tokenization enhances liquidity, fractional ownership, and accessibility to a global audience.
RWA tokenization addresses issues like lack of liquidity, limited accessibility, lack of transparency, interoperability, regulatory compliance, complex asset management, and social impact. It offers benefits such as fractional ownership, enhanced liquidity, transparency, efficiency, global accessibility, lower entry barriers, and integration with decentralized finance (DeFi).
Several projects, like Goldfinch, Maple Finance, Maker, Centrefuge, Ondo Finance, RealT, TheGraph, Anchorage, Frax.Finance and Inveniam, have demonstrated the potential of real-world asset tokenization. Use cases extend beyond traditional assets and include intellectual property, collectibles, supply chain, commodities, debt instruments, identity, governance, carbon credits, music rights, and luxury goods.
Exchange-Traded Products (ETPs) intersect with RWAs through tokenization, offering diversification, access to illiquid assets, fractional ownership, liquidity, low minimum investment, portfolio diversification, institutional investment, hedging, global exposure, income generation, regulation, ESG investing, and more. ETPs backed by a diversified portfolio of RWAs provide investors with a way to spread risk across various asset classes, access illiquid assets in a liquid market, hold fractional ownership in expensive assets, and benefit from liquidity, low minimum investment, portfolio diversification, and regulatory oversight. RWA tokenization and ETPs as RWAs provide numerous advantages, transforming the financial landscape and opening up opportunities for investors in various asset classes.
Real World Assets (RWAs).
Real World Assets (RWAs) refer to tangible or physical assets that exist in the physical world and are represented on the blockchain through tokens. These assets are brought onto the blockchain to enable digital ownership and trading. RWAs can include a wide range of physical assets, such as real estate properties, commodities like gold or oil, art pieces, company shares, and even traditional financial instruments like bonds.
The concept of tokenizing RWAs involves converting these physical assets into digital tokens, each of which represents a share or ownership stake in the underlying asset. This tokenization process allows for greater liquidity, fractional ownership, and easier transfer of ownership, making it more accessible to a global audience of investors.
RWAs hold the potential to revolutionize traditional financial markets by providing transparency, reducing intermediaries, and increasing efficiency in asset ownership and trading.
What problems does RWA tokenization solve.
Real World Asset (RWA) tokenization solves several key problems in the world of traditional assets and finance:
Lack of Liquidity: RWAs can be illiquid, making it challenging for investors to buy or sell them quickly. Tokenization enhances liquidity by allowing fractional ownership and easier trading of these assets on blockchain platforms [1].
Accessibility: Traditional assets like real estate or art often have high entry barriers, limiting access to a select few. Tokenization democratizes access, enabling a wider range of investors to participate in asset ownership [1].
Transparency: Blockchain technology provides transparency by recording all transactions on a public ledger. This reduces the risk of fraud or manipulation and enhances trust in asset markets [1].
Interoperability: Tokenized assets can interact with smart contracts and decentralized finance (DeFi) protocols, opening up new possibilities for financial innovation and the creation of novel financial services [5].
Regulatory Compliance: RWAs must adhere to legal and regulatory frameworks. Tokenization platforms need to address these compliance issues, ensuring that assets are tokenized and traded in accordance with local laws and regulations [2].
Asset Management: Custody and management of physical assets can be complex and costly. Tokenization platforms can offer solutions for efficient asset management, reducing operational overheads [2].
Social Impact: RWAs are not only investment assets but can also impact issues like social mobility and the environment. Tokenization can create avenues for responsible and sustainable investment, aligning financial goals with societal benefits [4].
In summary, RWA tokenization addresses issues of liquidity, accessibility, transparency, interoperability, regulatory compliance, asset management, and social impact, making it a promising development in the financial industry.
Tokenization of real-world assets offers several significant benefits.
Fractional Ownership: Tokenization allows for the fractionalization of assets, meaning that high-value assets, like real estate or artwork, can be divided into smaller, more affordable ownership units. This opens up investment opportunities to a wider range of individuals and institutions [4].
Liquidity: Traditional assets can be illiquid, making it challenging to buy or sell quickly. Tokenized assets, on the other hand, can be traded 24/7 on blockchain platforms, enhancing liquidity and reducing the time it takes to complete transactions [4].
Transparency: Once tokenized on a blockchain ledger, real-world assets benefit from increased transparency. All transactions are recorded on a public and immutable ledger, reducing the risk of fraud and improving trust among investors [3].
Efficiency: Tokenization reduces friction in the transaction process. It streamlines processes such as asset transfer, ownership verification, and settlement, which can lead to cost savings for investors and asset managers [2].
Global Accessibility: Blockchain-based tokenized assets are accessible to a global audience. Investors from different parts of the world can participate in the ownership and trading of these assets, increasing market reach [1].
Lower Entry Barriers: Tokenization lowers the barriers to entry for traditionally exclusive investments like high-end real estate or rare art pieces. It makes these investments more accessible to a broader range of investors, fostering inclusivity in the financial market [4].
Integration with DeFi: Tokenization of real-world assets presents opportunities for decentralized finance (DeFi) by providing collateral and tapping new sources of capital. This can further stimulate innovation and growth in the DeFi space [5].
In summary, real-world asset tokenization offers benefits such as fractional ownership, enhanced liquidity, transparency, efficiency, global accessibility, lower entry barriers, and integration with DeFi. These advantages are reshaping the way traditional assets are bought, sold, and managed, driving the adoption of blockchain technology in the financial sector.
Advantages of RWA Tokenization:
Cost Reduction: Tokenization of real-world assets can significantly lower costs by eliminating intermediaries like lawyers, brokers, and custodians. This makes transactions more efficient and cost-effective [1].
Accessibility: Tokenization can make ownership of real-world assets more accessible to a broader range of investors. Fractional ownership enables individuals to invest in high-value assets like real estate with smaller capital contributions [4].
Efficiency: Blockchain technology streamlines processes such as asset transfer and ownership verification, reducing administrative burdens and enhancing overall efficiency [1].
Innovation: RWA tokenization opens up opportunities for innovation in the financial sector. It can lead to the creation of new financial products, services, and investment strategies, driving the growth of the crypto and blockchain industry [5].
Regulatory Clarity: As blockchain technology matures and regulatory clarity improves, the future of asset tokenization becomes more promising. Institutional investors are increasingly considering tokenized real-world assets as part of their portfolios [5].
Increased Liquidity: Tokenized real-world assets can be traded 24/7 on blockchain platforms, enhancing liquidity compared to traditional illiquid assets like real estate or private equity [2].
Security: Blockchain technology offers enhanced security and transparency, reducing the risk of fraud and ensuring the authenticity of asset ownership records [1].
In summary, real-world asset tokenization presents several advantages, including cost reduction, accessibility, efficiency, innovation, regulatory clarity, increased liquidity, and enhanced security. These benefits are driving the growing interest in and adoption of RWA tokenization in the crypto and financial markets.
Some RWAs tokens.
Ondo Finance
Maker (MKR): Collateral Expansion: MakerDAO is a collateralized debt platform on Ethereum that has arguably made the most progress in terms of RWA adoption. Introducing RWAs as collateral in MakerDAO aims to diversify the collateral pool, reduce risk, and potentially increase the stability of DAI. Tokenization: RWAs need to be tokenized on the blockchain to be used as collateral. This process involves creating digital representations of these physical assets, making them tradable and usable within the DeFi space.
Centrifuge (CFG): Centrifuge is a blockchain platform focused on tokenizing Real World Assets (RWAs) to make them accessible in decentralized finance (DeFi). RWAs, which include assets like invoices, real estate, or loans, are represented as NFTs on Centrifuge's Tinlake platform. This allows individuals and institutions to invest in these assets, bringing liquidity to traditionally illiquid markets
Maple Finance (MPL): Maple Finance facilitates the integration of RWAs into DeFi by tokenizing them as NFTs and using them as collateral. This process allows investors to earn yields on their assets while providing borrowers with access to liquidity. It is a unique approach to combining traditional assets with the DeFi ecosystem, offering benefits like diversification and yield generation for both borrowers and lenders.
Goldfinch (GFI): Goldfinch is a protocol that helps businesses, primarily emerging-market based, access crypto lending without having to post crypto collateral. Instead, loans are collateralized with RWAs Goldfinch is a project focused on tokenizing off-chain assets for DeFi, aiming to increase accessibility to assets like real estate. It is considered one of the promising projects in this field [3].
Ondo Finance: Ondo Finance is bringing institutional grade products ranging from government bonds to high yield bonds to DeFiTo do this, Ondo has created three different investment funds, OUSG (Short-term US Government Bond Fund), OSTB (Short-term Investment Grade Bond Fund), and OHYG (High-Yield Corporate Bond Fund), which own the underlying institutional assets. They then tokenize these investment funds to become RWAs (called “fund tokens”). After users engage in a KYC/AML process, they are able to trade fund tokens and use those fund tokens in permissioned DeFi protocols. Ondo Protocol is particularly noteworthy because, with Bondblox, it is one of the few protocols building out the public credit RWA market
RealT (RT): RealT offers tokenized real estate properties, allowing fractional ownership and trading of real estate assets. It has gained attention for its innovative approach to property tokenization [2].
TheGraph (GRT): TheGraph is a decentralized indexing protocol used to query data from the Ethereum blockchain. It plays a crucial role in tracking and managing various DeFi tokens backed by real-world assets, enhancing their usability and accessibility [5].
Anchorage (ANC): Anchorage is a platform that provides custody solutions for various digital assets, including those backed by real-world assets. Its services are essential for maintaining the security and trustworthiness of these tokens [6].
Inveniam (ICNQ): Inveniam focuses on tokenizing real-world assets like real estate and infrastructure. It offers blockchain-based solutions for asset tokenization, making it easier for investors to access these traditionally illiquid assets [4].
These real-world asset tokens represent various approaches to tokenizing assets like real estate, enabling fractional ownership, enhancing liquidity, and increasing accessibility. While these projects have potential, it's essential to conduct thorough research and due diligence before investing in any cryptocurrency or token.
tZERO (TZROP): tZERO is a blockchain-based platform that specializes in the tokenization of real-world assets, including private company equity, real estate, and more. Its native token, TZROP, represents ownership in these tokenized assets, providing liquidity to traditionally illiquid investments.
Harbor (R-DUS): Harbor focuses on tokenizing real estate assets and offers a token called R-DUS, which represents fractional ownership in commercial real estate properties. These tokens provide investors with access to real estate investments that were previously difficult to access.
Polymath (POLY): Polymath is a blockchain platform that enables the creation and management of security tokens, including tokens representing real-world assets. POLY tokens are used for various functions within the Polymath ecosystem.
Securitize (SECU): Securitize is a platform that helps companies tokenize various assets, including real estate and venture capital. While SECU is not a direct representation of real-world assets, it plays a crucial role in the tokenization process.
TokenSoft (TSS): TokenSoft provides tokenization services for a range of assets, and while TSS is not a specific asset token, it is associated with the tokenization industry, including real-world assets.
These tokens and platforms are part of the growing ecosystem of real-world asset tokenization, providing investors with new opportunities for diversification and access to assets that were previously less accessible. It's essential to conduct thorough research and due diligence before investing in any of these tokens.
Frax Finance (FRAX): Frax is a decentralized stablecoin that utilizes a combination of cryptocurrencies and real-world assets (RWAs) in its collateral pool. RWAs enhance FRAX's stability and offer several key use cases:
Stable Transactions: FRAX allows for stable value transactions, mitigating the price volatility of cryptocurrencies.
Asset-Backed Tokens: RWAs in FRAX can be tokenized, enabling the trading and investment in asset-backed tokens representing real-world assets.
Lending and Borrowing: RWAs provide stable collateral for DeFi lending platforms, expanding lending opportunities.
Hedging: Investors can use FRAX backed by RWAs as a hedge against cryptocurrency volatility.
RWAs in DeFi: FRAX's unique approach paves the way for more RWAs to be tokenized and integrated into decentralized finance, bridging traditional and digital finance realms.
RWA tokenization use cases (ditional use cases):
Tokenization of Intellectual Property: Intellectual property rights, such as patents, copyrights, and trademarks, can be tokenized. This allows creators to sell or license their intellectual property more easily and transparently.
Tokenization of Collectibles: Rare collectibles like vintage cars, rare stamps, and memorabilia can be tokenized, enabling fractional ownership and trading among collectors.
Tokenization of Supply Chain: Tokenization can be used to represent physical goods at various stages of the supply chain. This enhances transparency, traceability, and efficiency in logistics and inventory management.
Tokenization of Commodities: Physical commodities like gold, silver, and oil can be represented as tokens. This makes it easier for investors to gain exposure to commodity markets.
Tokenization of Debt Instruments: Traditional debt instruments like bonds and loans can be tokenized, allowing for more efficient issuance, trading, and settlement of debt.
Tokenization of Identity: Personal identity information can be tokenized, enhancing security and privacy while still allowing for identity verification when needed.
Tokenization of Governance: Tokens can represent voting rights or governance in organizations, enabling decentralized decision-making and stakeholder participation.
Tokenization of Carbon Credits: To combat climate change, carbon credits can be tokenized to create a more accessible market for trading and incentivizing carbon reduction efforts.
Tokenization of Music Rights: Musicians and artists can tokenize their music rights, ensuring fair compensation and royalties for their work when it's used in various ways.
Tokenization of Luxury Goods: High-end luxury goods like watches, jewelry, and handbags can be tokenized, making them more accessible for investors and collectors.
Real-world asset tokenization offers a wide range of possibilities across various industries, enhancing liquidity, accessibility, and efficiency in the traditional asset markets. These use cases demonstrate the potential for blockchain and tokenization to disrupt and innovate numerous sectors of the global economy.
ETPs & RWAs (also see post on xx about ETPs)
Exchange-Traded Products (ETPs) and Real World Assets (RWAs) are two distinct financial instruments, but they can intersect in certain ways, particularly in the context of tokenization and blockchain technology. Here's an elaboration on how ETPs and RWAs are related:
Definition:
ETPs: ETPs are a broad category of financial instruments that are traded on stock exchanges and represent ownership in underlying assets. They include Exchange-Traded Funds (ETFs), Exchange-Traded Notes (ETNs), and Exchange-Traded Commodities (ETCs).
RWAs: Real World Assets refer to tangible assets from the physical world, such as real estate, fine art, commodities, and more, that are tokenized on a blockchain to represent ownership or shares.
Tokenization of RWAs:
RWAs can be tokenized on a blockchain to create digital representations of ownership or shares in these physical assets. These tokens are often referred to as Real World Asset Tokens (RWA tokens).
Creation of RWA-Based ETPs:
ETP providers can create new financial products known as RWA-based ETPs. These ETPs are designed to track the performance of a basket of RWA tokens, allowing investors to gain exposure to a diversified portfolio of real-world assets through a single ETP.
Benefits:
Diversification: RWA-based ETPs provide investors with diversification across a range of real-world assets, reducing risk compared to investing in a single asset.
Liquidity: ETPs are traded on stock exchanges, offering liquidity to investors in the RWA market.
Accessibility: ETPs make it easier for retail investors to access the world of real-world assets, which may have been traditionally reserved for institutional investors.
Examples:
An ETP provider could create an RWA-based ETF that tracks the performance of tokens representing shares in a portfolio of real estate properties.
Another example could be an ETP tracking the value of tokens representing ownership in a collection of fine art pieces.
Regulation:
The regulatory framework for RWA-based ETPs may vary by jurisdiction and may be subject to securities regulations. Compliance with regulatory requirements is crucial when creating and offering these products to investors.
Challenges:
The valuation and custody of real-world assets in digital form can be challenging.
Ensuring compliance with securities regulations in different regions can be complex.
In summary, ETPs and RWAs intersect when ETP providers create products that allow investors to gain exposure to a diversified portfolio of real-world assets through tokenized representations. These RWA-based ETPs leverage blockchain technology to offer benefits such as diversification, liquidity, and accessibility to a wide range of investors. However, they also face challenges related to valuation, custody, and regulatory compliance.
Exchange-Traded Products (ETPs) that are linked to Real World Assets (RWAs) have several compelling use cases. These ETPs can offer investors unique opportunities and benefits in the financial markets. Here are some use cases for ETPs as RWAs:
Diversification:
ETPs backed by a diversified portfolio of RWAs provide investors with a way to spread risk across various asset classes. For example, an ETP could comprise real estate, art, and commodities, reducing concentration risk.
Access to Illiquid Assets:
RWAs, such as real estate or fine art, are often illiquid, making it challenging for individual investors to access them directly. ETPs backed by RWAs offer a liquid and tradable representation of these assets, enabling investors to buy and sell shares in a liquid market.
Fractional Ownership:
ETPs allow investors to hold fractional ownership in expensive or large assets. For instance, an ETP backed by high-value real estate properties allows investors to own a fraction of these properties, which would otherwise be financially out of reach.
Liquidity:
ETPs trade on stock exchanges, providing liquidity to investors. This liquidity is especially valuable for investors who want to exit their positions quickly or make short-term trading strategies.
Low Minimum Investment:
ETPs typically have lower minimum investment requirements compared to direct investment in RWAs. This accessibility makes it easier for a broader range of investors to participate.
Portfolio Diversification:
ETPs backed by RWAs can be integrated into an investor's overall portfolio strategy to diversify across asset classes. This diversification can help reduce risk and enhance long-term returns.
Institutional Investment:
Institutional investors, such as pension funds and endowments, can use RWA-based ETPs to allocate a portion of their portfolios to real-world assets. This can enhance their overall asset allocation strategies.
Hedging and Risk Management:
ETPs can be used for hedging purposes. For instance, an investor with exposure to real estate in their portfolio can use an ETP to hedge against potential downturns in the real estate market.
Global Exposure:
Investors can gain exposure to RWAs from different regions and markets through ETPs. This allows for global diversification without the need for direct investment in foreign assets.
Income Generation:
Some ETPs backed by income-generating RWAs, like rental properties or dividend-yielding stocks, can provide investors with a source of regular income through distributions.
Regulated Investments:
ETPs are often subject to regulatory oversight, which can provide a level of investor protection and transparency in RWA-backed investments.
Environmental, Social, and Governance (ESG) Investing:
ETPs can be structured to include RWAs with specific ESG criteria, allowing investors to align their investments with sustainability goals.
These use cases highlight the versatility and advantages of ETPs as a means to access and invest in a wide range of Real World Assets, making them a valuable addition to the investment landscape for both individual and institutional investors.
Sources:
https://www.binance.com/en/research/analysis/real-world-assets-state-of-the-market
https://www.bcg.com/publications/2022/relevance-of-on-chain-asset-tokenization
CoinDesk - The Tokenization of Real-World Assets (RWA) Explained
CoinGecko - What are Real World Assets (RWA) in Crypto?