A term oft scene in the blockchain world is RWA … what does this mean? Well – it stands for “real world assets” and is commonly used when referring to the type of assets that blockchain technology can tokenize. This means creating a digital representation of ownership of a piece of a real world asset on the blockchain (of course there are more nuances but the point of this post is to capture the economic reasoning behind RWA tokenization).
That’s Cool but Why Should I Care?
Look – blockchain technology is most associated with “crypto” but, as Layer 1 noted on the Block previously (see Blockchain Not Crypto – Layer 1 Explained – Layer 1 (joinlayer1.com)), the technology can be applied in a multitude of ways – including tokenization. This includes tokenizing ownership interest in real world assets.
The focus here is the economic reasoning for why RWA tokenization generally is of interest and not specific use cases. There are two main utilities for RWA tokenization: 1. increase liquidity of an illiquid asset, and 2. providing access to potentially high yield to investors that may previously had no access. In short – RWA tokenization facilitates profit realization and investment diversification to traditionally illiquid and unique assets.
Not Sure I Understand the Utility?
Tokenization can increase the ability of investors to access certain assets that may generate high yield by: (i) breaking down the ownership of a particular asset into fractional ownership represented by a digital token that can be transacted with; and (ii) making such assets available to those individuals that previously did not have the means to invest in such asset (whether due to financial constraints or geographical constraints). In sum, tokenization of real world assets can break down investment cost barriers and create yield opportunities originally not available to the average person through creating new investment rails.
This type of tokenization, should an appropriate marketplace exist, can cultivate trading activity amongst token holders and promote credible price discovery of once illiquid and out of reach assets. The more data being created – the more benefits that can be derived from the data itself.
Of course, there are several other benefits, risks, challenges (regulatory and technological) that relate to RWA tokenization – but the point here is to help individuals understand the driving purpose behind this type of blockchain technology utilization. Sooner or later, it will hit your radar (via news, social media or otherwise) and we hope this knowledge (albeit focused) helps you understand the general context for the technology.
Recent Trends & Further Information
Recent Trends have shown RWA tokenization has been applied to a number of industries but increased usage of this technology has been seen in three real asset categories in particular: Real Estate, Debt and Investment Funds.
This is NOT new technology and the space is ever evolving. Layer 1 may be introducing you to the concept of RWA Tokenization but it is important to stay up to date on the area (if interested) by researching and exploring new articles on the subject. A solid source of information to learn more about RWA Tokenization is rwa.xyz – this is a static website that includes in depth information on RWA Tokenization.
Post Date: December 15, 2023