Introduction

Following our recent deep dive into the world of NFTfi, it only makes sense to discuss arguably the most exciting use case of it, tokenization. Real-world assets (RWAs) and financial assets can be tokenized and put on the blockchain. Tokenization is the process of representing a RWA on-chain with a token like an ERC-20 (fungible token on Ethereum) or an ERC-721 (non-fungible token on Ethereum). Tokenization encompasses virtually any real-world asset. These can be tangible assets like real estate, physical art and collectibles, and gold. They can also be intangible assets like stocks and treasury bonds.

Rationale

What does tokenization bring to the table for RWAs?

• Permits global 24/7 trading for everyone. When it comes to RWAs, most of the trading activity is limited to working hours during business days as in the case of stocks and real estate. It could also be restricted to certain geographical locations. For tokens on a blockchain, trading activity is not halted at any time and is open to everyone all around the world.

• Unlocks liquidity through innovative approaches like fractional ownership through fractionalization.

• Brings the transparency of the blockchain to RWAs, allowing things like RWA trading activity, owner trading activity history, and other information related to the asset to be traced.

Challenges

However, RWA tokenization is fairly nuanced and faces many complexities:

• Regulatory uncertainty and legal concerns are undoubtedly top of the list of challenges facing RWA tokenization. Navigating the intricate landscape of regulations and legal frameworks across different jurisdictions can be a difficult task, as tokenization blurs the lines between traditional assets and their digital representations.

• Valuation discrepancies can arise. Having to accurately appraise tokenized assets and maintain an acceptable level of semblance to the asset’s real-world value can prove to be difficult, especially due to the use of different valuation methods on and off chain.

• Third party custodians will always be needed, which effectively eliminates the possibility to achieve decentralization within the RWA tokenization space. Safeguarding the security and redeemability of digital tokens and their underlying RWAs requires robust custody solutions to thwart potential theft, fraud, and cyberattacks.

Current Landscape

There are several groups and protocols in the industry that have integrated RWAs into the work they’re doing. MakerDAO has been spearheading the RWA tokenization narrative since 2020. MakerDAO, issuer and lender of stablecoin DAI, has added assets like tokenized real estate to its list of collateral offerings. In addition to that, RWAs (mainly US treasury bonds) make up over 50% of Maker’s annual revenue.

Ondo Finance has been making waves in the space since launching in 2022. Ondo is a decentralized investment bank that invests in and tokenizes US government bonds and corporate bonds. It’s easy to see Ondo being a leader in the tokenization space when one learns of the relationships they have developed with Coinbase and asset manager BlackRock.

Goldfinch is an on-chain decentralized credit platform which connects borrowers and lenders around the world and has decentralized auditors review the loan request before approving it. Currently, Goldfinch is working on abstracting the seed phrase away to make the platform more accessible to non-crypto natives.

Other worthy mentions are Maple Finance, an institutional on-chain capital market which invests in US treasuries, as well as Centrifuge, an institutional on-chain credit ecosystem that launched in 2017, and is one of the very first DeFi protocols to integrate RWAs.

Future Outlook

As the regulatory environment around RWAs continues to mature and legislation becomes clearer, institutional investors are expected to increasingly participate in RWA tokenization. This influx of institutional capital could pave the way for broader market acceptance and a surge in mainstream adoption of the cryptocurrency space and all of its related technologies.

RWA tokenization is primed to become a cornerstone of DeFi. Tokenized real-world assets can serve as collateral for lending and borrowing, as they have been already. This introduces new ways to unlock liquidity within the DeFi space. Besides that, the synergy between RWA tokenization and DeFi could lead to the creation of innovative financial products that blend the best of both worlds and take the world by storm.

Widespread RWA tokenization is still a long journey ahead mainly due to the reasons mentioned above. The tokenization industry will reach its maturation phase when best practices and standards from a legal standpoint are finally defined.

RWA tokenization plays a massive role in global financial inclusion. By fractionalizing assets, which effectively lowers entry barriers, individuals who were previously excluded from traditional investment opportunities due to their geographical location or socioeconomic status can now participate in ownership and investment.

At Waterfall, we encourage the exploration of the tokenization space and appreciate all the efforts going into building the right applications and infrastructure to bring this disruptive technology to the masses. We firmly believe tokenization will lead the next wave of crypto adoption, and we are here for it.