The cryptocurrency industry has come a long way since the ICO bubble of 2017, when there were two schools of thought: digital currencies were the next big thing or an outright scam.
Nowadays, you won't find many people who think that cryptocurrencies are the next big thing – with a global market of $1.5 trillion, isn't that already big? As for those who claim this to be an egregious scam, many have gone under, while others seem increasingly tone-deaf as a host of institutional heavyweights enter the Web3 space.
One of the most talked about topics in crypto, particularly as the asset class has begun to mature and blockchain adoption has increased, is the tokenization of real-world assets (RWA).
What if traditional investments (property, art, gold, oil, treasuries, luxury watches) could be tokenized and added to the blockchain? Wouldn't these tangible goods enjoy all the benefits that people rave about when talking about bitcoin, ethereum or USDC? That is, fast settlement, cross-border simplicity, transparency and security.
Bringing RWA to the Blockchain
RWAs are not a modern phenomenon – the concept of exchanging paper trading for wallet addresses has been around since the ICO fervor of 2017. An article published on Nasdaq in March of that year outlined the various benefits that can be gained by tokenize RWAs, pointing out the significant overhead of Web2 trading systems that facilitate business using the old model.
Naturally, the industry has moved forward in the intervening period. In fact, the price of btc more than tripled between 2017 and 2021, while companies like Tesla, MicroStrategy, and, surprisingly, the government of El Salvador have since added billions of dollars in cryptocurrency to their balance.
Furthermore, the rise of the decentralized finance (DeFi) industry and its unreliable financial protocols for trading, lending and saving has multiplied the use cases for digital assets and brought a flood of investor capital into the party.
DeFi didn't really exist when RWAs were first discussed in 2017. But recent conversations around real-world assets invariably reference the sector, as it will inevitably be DeFi protocols (among others) that add RWA support to their interfaces.
In fact, it's already happening: decentralized networks like Centrifuge enable the tokenization of assets like royalties, invoices, and real estate bridge loans, while Ondo Finance has its own Yield Token (USDY) in US dollars, a tokenized note collateralized by short-term bonds. of the US Treasury and demand bank deposits.
As DeFi returns have fallen sharply since the days of the rising bull market, the prospect of tokenized RWAs presents a new potential source of yield in DeFi, providing holders of artworks, commodities, stocks, derivatives, metals precious metals and properties the opportunity to take advantage of their liquidity to obtain a return.
Why tokenize tangible assets?
Without a doubt, the benefits of RWAs would flow in both directions: the arrival of established asset classes in DeFi, which is often considered a wild west for investors, would bring stability to the industry while strengthening its credibility. Billions of dollars in crypto liquidity would also flow into RWAs, and high-yield digital currencies like bitcoin would suddenly represent an alternative form of collateral for tangible assets.
Additionally, more companies would be exposed to DeFi and the prospect of tokenizing real-world assets into fractional ownership. An investor interested in purchasing property, for example, might not be able to afford a mansion, but if that mansion were divided into 500 tokens and his ownership distributed among a network of investors, it could suddenly become viable. The same goes for a supercar, a yacht, a Cessna – you get the idea.
At the recent Digital Asset Week in London, several leading global financial institutions, including BlackRock and Standard Chartered, outlined their action plans in the Web3 space. According to Forbes financial technology reporter Lawrence Wintermeyer, one topic on the agenda was the tokenization of precious metals, property and private markets, a topic that was “returned into the spotlight after a hiatus of a few years, driven for higher interest rates.” “
According to Wintermeyer, private protocols and networks will absorb RWAs, as public protocols may not “withstand the scrutiny of many jurisdictional laws and regulations.”
So what needs to happen for real-world assets to become a significant economic driver for Web3, rather than riding the wave of hype before it peaks and falls spectacularly like jpeg NFTs before them?
Well, current implementations of RWA in the wild will have to be considered a success, lest institutions sour on the idea and return to their old, trusted way of doing things. Existing implementations include JP Morgan's Tokenized Collateral Network (TCN), a private blockchain application that allows the tokenized representation of collateral assets (such as tokenized Money Market Fund shares) to be transferred on-chain. In October, TCN facilitated its first transaction between BlackRock and Barclays.
Separately, HSBC has launched its own gold tokenization platform, HSBC Evolve, which allows institutional investors to purchase tokens representing physical gold (as well as silver, palladium and platinum) held in its London vault. Of course, precious metals have already been tokenized by several platforms, including Bitgild and Pax Gold. But the arrival of a major player like HSBC into the industry is another endorsement of blockchain for investors who tend to avoid cryptocurrencies in favor of the Web2 sandbox.
Whether tokenized on Web3 native decentralized protocols or private networks created by trading leaders, real-world assets are coming to blockchain at a rapid pace. Amid growing institutional interest from institutions like Fidelity, Santander, and BlackRock and a strong desire for yield among investors discouraged by falling DeFi rates, RWAs look set to continue gaining traction. No wonder Boston Consulting Group expects the on-chain RWA market to reach $16 trillion by 2030.
Author biography
As Mintlayer's Chief Operating Officer/CBDO, Zaid Ismail is at the forefront of integrating blockchain technology for the tokenization of real-world assets and opening bitcoin to DeFi. A visionary with deep roots in the Silicon Valley technology landscape and New Zealand's healthcare sector, Zaid is now channeling his expertise into the dynamic environment of Dubai. His career, marked by leadership roles in sales, management and corporate development of companies, reflects a deep vision of emerging trends and an entrepreneurial spirit. Zaid's pivotal role in ai-powered projects like HeartLab underscores his commitment to innovation. At Mintlayer, he imagines and works towards a future where blockchain technology democratizes access to investments in real-world assets, believing in the power of technology to reshape the future of global markets.
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