Op-Ed: Tokenized real-world assets have the potential to bring billions of dollars in value on-chain, but before that can happen, the infrastructure needs to be in place to support them.
The tokenization of real-world assets (RWAs) is one of the most exciting blockchain use cases to have emerged in recent years. The ability to tokenize a physical asset such as a painting or property unlocks all kinds of new possibilities. Not only can it be fractionalized, but it can be used as collateral, paving the way for additional DeFi applications.
But for all their brimming potential, tokenized RWAs have seen modest adoption so far. This is because these assets come with rules dictating who can trade them and how. With DeFi infrastructure still catching up, RWAs remain accessible to a narrow onchain audience – but that’s poised to change.
The Case for Asset Tokenization
Placing real-world assets onchain brings a number of key advantages. For one thing, blockchain architecture makes it possible to trade these assets 24/7 with global availability. The use of a single ledger of truth also ensures accuracy in terms of pricing. Every participant knows that they are paying the same rate for the same tokenized asset.
Arguably the greatest benefit from tokenizing RWAs, however, is liquidity. It’s hard to sell a housing development in a day. It takes time to offload a renaissance painting. These are highly illiquid and non-fungible assets that are not easily disposed of, despite their undoubted value. But when they’re tokenized and split into smaller parts, they can be traded instantly by investors all over the world.
Companies such as Maple and Backed are bringing real-world assets onchain and in the process allowing institutional capital to enter. This unlocks new use cases, particularly when it comes to lending and stablecoin collateralization. The full potential of RWAs is still being discovered, with innovation occurring apace as this blockchain sector takes shape.
What Makes RWAs Different
Unlike regular crypto tokens, RWAs must be backed by the physical assets they represent. And not just in word, but with verifiable proof: if a platform is tokenizing gold, it needs attestations of physical deposits of the gold; likewise if it’s fractionalizing art by dividing an Old Master into 1,000 shares. When it comes to RWAs, “trust me bro” doesn’t cut it.
This means that not just anyone can launch a RWA market: entities who do so must be registered with the financial regulator where they are domiciled. Similarly, not just anyone can trade RWAs since many of the instruments they are composed of constitute securities, which are only accessible to accredited investors. The solution to this challenge lies in identity verification: a system for demonstrating that those trading RWAs have the permission to do so. But the form such a system should take has still to be settled.
Permission in a Permissionless Environment
The permissionless design of blockchain is one of its greatest strengths. It means that every onchain user is treated the same, regardless of who they are or where they’re from. Notably, 1 ETH in your wallet is as good as 1 ETH in anyone else’s. But as we’ve established, not everything that can be accessed on blockchain rails is designed to be universally available. The solution to this dilemma lies in identity verification.
There are a number of approaches to establishing user verification in an onchain environment. One method is to enforce KYC at the point of platform access, such as using social login coupled with wallet signing, to bond the individual’s identity to their digital one.
This is how KYC is done with centralized exchanges, but it’s an inelegant solution when applied to DeFi. Moreover, many users have understandable concerns about entrusting their data to multiple platforms, which increases the surface area for identity theft.
An alternative approach is to enforce verification at the protocol level instead, which is the approach we’re taking with Haven1. That way, all users who interact with the network are verified once and then able to freely interact with all the platforms and applications deployed on it. This might sound radical for DeFi users accustomed to using public blockchains such as Ethereum, but it provides a secure and frictionless solution that still allows innovation to thrive.
Finally, there is the option of using decentralized identifiers (DIDs). These allow anyone to create a globally unique identity that can be used to demonstrate that its owner has completed verification. Such self-sovereign identities are particularly suited to blockchain-based systems, and free protocols from having to implement their own verification program complete with the cost and compliance burden this carries.
RWAs Are Just Getting Started
Tokenized real-world assets have the potential to bring billions of dollars in value on-chain and to bring liquidity to illiquid markets. But before that can happen, the infrastructure needs to be in place to support them. This means introducing identity verification solutions that are robust, reliable, and secure – while also respecting the rights of users to maintain pseudo-anonymity in the course of ordinary DeFi activity.
From oil to treasury bonds and commercial property to fine art, when it comes to real-world assets, all are ripe for tokenization. But there’s little point in tokenizing these commodities if the available investor pool is tiny. Broadening access for RWAs calls for building out the infrastructure for trading them, starting with identity verification. Get that right and everything else will follow.
-
Jeff Owens is Co-Founder of Haven1 – an EVM-compatible L1 blockchain purpose-built to provide a secure and trusted environment for on-chain finance. Jeff was previously Co-Founder and CEO of Coinbag, which helps businesses and institutions manage and de-risk their on-chain assets. Jeff has been in the blockchain space as a builder, advisor, and investor since 2015, before which he held senior product roles at global fintech firms including travel platform Agoda and web-based telepharmacy company TelePharm.
Haven1 is an EVM-compatible Layer1 blockchain designed to offer a secure and trusted environment to drive the mass adoption of on-chain finance. Incubated by the teams behind digital wealth platforms Yield App and Coinbag, Haven1 incorporates a provable identity framework and robust security guardrails at network level to provide retail, professional and institutional investors with an on-chain finance platform that facilitates innovative use cases and closes the gap between traditional finance and Web3.
To learn more about Haven1, visit https://www.haven1.org/.
This article contains links to third-party websites or other content for information purposes only (“Third-Party Sites”). The Third-Party Sites are not under the control of CoinMarketCap, and CoinMarketCap is not responsible for the content of any Third-Party Site, including without limitation any link contained in a Third-Party Site, or any changes or updates to a Third-Party Site. CoinMarketCap is providing these links to you only as a convenience, and the inclusion of any link does not imply endorsement, approval or recommendation by CoinMarketCap of the site or any association with its operators. This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice. The views and opinions expressed in this article are the author’s [company’s] own and do not necessarily reflect those of CoinMarketCap. CoinMarketCap is not responsible for the success or authenticity of any project, we aim to act as a neutral informational resource for end-users.
