What Are Real World Assets?

Okay, I have been asked this enough, so it’s time to write it down here. I am going to offer my definition of Real World Assets (RWA) and explain why I think RWA is an appropriate and useful term to describe the transformation of traditional financial markets underway today.

Opinions Vary

What are Real World Assets? What does it mean? That depends on who you ask.

Some people think anything of value can be considered RWA.

For many, RWA is something you can actually hold in your hand, an object you can physically touch, items that accountants categorize as tangible assets.

For others, the term Real World Asset is unnecessary at best or confusing at worst. For them, there are already well-established terms for financial assets that fall into tangible or intangible categories, classifying every possible financial instrument: securities, funds, bonds, real estate, money markets, commodities, machinery, collectables and so on — so why bother coming up with yet another term?

Distinguishing Blockchain Assets

RWA is any financial asset that is tokenized for use on a blockchain. Blockchain involvement distinguishes RWA from traditional financial assets originating outside the blockchain space. RWA fulfills a need to differentiate between assets from traditional financial systems and assets originating from blockchains.

Compared to other commonly encountered terms used to describe on-chain assets, RWA actually reduces confusion. Take for example: Digital Assets. What does that entail, traditional financial assets, blockchain assets, both? Assets in general are already digitally represented in today’s traditional financial system. How do we distinguish between them and blockchain assets? Digital assets cast an even wider net than RWA; in fact, RWA would be included under the digital asset umbrella.

RWA also helps by grouping together the set of assets suitable for tokenization on-chain. Although RWA specifically represents on-chain assets it nevertheless casts a wide net encompassing both tangible and intangible assets. It combines multiple asset classes into a new super-class of assets capable of being issued, traded and held in custody on a blockchain, a market projected to be $16T by 2030, 10% of global GDP.

The bulk of this RWA opportunity lies in traditionally illiquid investments like commercial and residential real estate, carbon credits and other renewable energy assets, collectables such as artwork and many other antiques, and certain debt instruments (bonds). Illiquid assets are difficult to quickly turn into cash. Large barriers exist in traditional markets, high minimum investment requirements for example, plus antiquated, inefficient platforms and processes. To minimize overhead, retail investors are intentionally excluded from investment opportunities in favor of just a few wealthy investors. This longstanding situation creates significant opportunities for RWA blockchain platforms which specialize in:

1. Lowering costs up to 70% through automating administrative overhead in middle and back offices
2. Tokenizing illiquid assets into smaller fractional units, issuing many more affordable tokens to a wider investor pool, significantly expanding the scope of investments retail investors can own and trade, accelerating the rate of investor democratization

RWA Genesis: Tokenization Then Issuance

Creating RWA involves two primary phases:

1. Tokenization involves the specification and due diligence taken to transform an asset into a digital token suitable for custody and trading on blockchain. During this phase token value is linked directly to the value of the underlying Real World Asset so token holders retain legal ownership of the tokenized asset.
2. Issuance takes place after asset tokenization, which involves the actual minting for distribution of tradable tokens on the blockchain.

Just How Significant is RWA?

Larry Fink, CEO of the world’s largest asset manager, BlackRock, has spent the past year emphasizing how traditional financial markets will be transformed by tokenization:

The next generation of financial markets and securities will be built on the tokenization of assets

Don’t believe me? Watch Mr. Fink expound upon “Tokenization”: