What is RWA in cryptocurrencies?

Real-world assets (RWA) are becoming increasingly popular and have significantly contributed to the development of the cryptocurrency and blockchain industries. Using the blockchain, they have enabled thousands of users to supplement their investment portfolios with investments in real estate, precious metals, or even works of art. RWA does something that previously seemed impossible—they combine tangible assets with the transparency and efficiency of digital technology.

Thanks to tokenization, RWA opens up access to the global decentralized economy, breaking down barriers for investors and providing access to previously unattainable assets. In this article, we will take a closer look at how RWA works, its advantages, and disadvantages, and how they can change how we invest and manage assets in the future.

What are real-world assets (RWA)?

Real-world assets (RWA) refer to tangible, physical assets with intrinsic value, such as real estate, commodities, or art, that are tokenized for use on the blockchain. This process involves the creation of digital representations or tokens that reflect the value and ownership of these assets, allowing them to be bought, sold, or traded on decentralized finance (DeFi) platforms.

Tokenization is a process within the blockchain ecosystem that represents the conversion of physical assets into digital tokens. Real-world assets (RWA) involve the tokenization of tangible assets (such as bonds, stocks, artwork, or real estate) into digital formats with a clear monetary value that is tradable.

RWA is key to bridging the gap between traditional finance (TradFi) and decentralized finance (DeFi), which combines the tangible value of physical assets with the flexibility and accessibility of blockchain technology.

This allows for the integration of real assets into the digital economy, increasing their accessibility to users around the world (even if they do not have physical access to real assets or have a small financial package for investment). RWA tokenization provides liquidity to illiquid assets, ensuring partial ownership and simplifying transactions with them.

As a result, real assets get a new level of interaction with investors, providing a sufficient level of transparency, which is important for trust in digital finance. Each token contains metadata (verifying its authenticity and ownership) that can be openly verified on the blockchain, ensuring transparency and trust in transactions.

RWA is finding its place in the cryptocurrency ecosystem as a tool for transferring tangible assets to the blockchain, which allows combining the stability of real assets with the speed and flexibility of decentralized finance.

How RWA work

RWA works through a tokenization process that allows physical assets to become part of the blockchain ecosystem. This process can be divided into several stages, each of which ensures the legitimacy and transparency of the tokenized assets.

Technical process of tokenization

The first stage is off-chain formalization. Before a real asset can be integrated into the digital blockchain ledger, its value, ownership, and legal status must be unambiguously established in the physical world. For this purpose, the market price, performance history, and physical condition of the asset are taken into account. The asset must also have undisputed legal ownership, confirmed by deeds or invoices.

The second stage is the transfer of information across the bridge. At this stage, information about the asset is converted into a digital token. Data on the asset's value and legal ownership are embedded in the token's metadata. Thanks to the transparency of the blockchain, anyone can verify the authenticity of the token based on this metadata, and its registration in the decentralized blockchain network eliminates the possibility of fraud and speculation with these assets.

This approach allows you to fix the legitimacy of tokenized assets, allowing them to be integrated into the blockchain with a high level of trust. If the tokenization process is carried out correctly, real assets do not differ in functionality from classic tokens.

Principle of transactions with tokenized assets

As we mentioned above, a wide range of physical assets can be tokenized, such as artwork or precious metals, but the most popular tokenization today is the tokenization of non-moving assets. Let's take the example of real estate and see how to interact with tokenized assets.?

• Step 1 - Connecting to the platform: The owner of the real estate creates a token on a blockchain platform that supports tokenization. This token represents the value of the physical property in electronic form.
• Step 2 - Token validation: The token is identified and validated, which guarantees its uniqueness and ownership. From now on, the owner of the physical asset is the owner of its token.
• Step 3 - Transaction: The owner transfers their tokens to another user via the blockchain platform. The transfer of tokens is equivalent to the physical transfer of property from one person to another without the involvement of lawyers, state registration apparatus, etc.?
• Step 4 - Recording the transaction: The transaction is recorded on the blockchain, ensuring transparency and immutability. Adding information to the blockchain protects ownership from counterfeiting, price dumping, and similar fraud.
• Step 5 - Confirmation: The new owner receives a confirmation of ownership. After the transaction is completed, the legal ownership of the physical asset (in our example, the ownership of a physically existing real estate object) is transferred from one user to another.

Main obstacles to the global use of RWA

In our article, we described RWA as an ideal tool, as a standard to strive for, but this technology, like all others, has its problems and limitations.

Despite its functionality and transparency, RWA faces regulatory difficulties due to different laws in different jurisdictions and the need to comply with financial regulations in several regions. In addition, ensuring the security of the communication between the token and its physical counterpart is crucial to prevent fraud and maintain trust. Since even with the correct tokenization of assets, their physical status is crucial, global implementation of rules and practices for handling such cases is required.

Regulatory requirements, such as KYC and KYB compliance, are important but can create additional challenges for RWA platforms. Issues begin at the launch stage of such platforms. Integration of standards is the first obstacle, as it involves many legal and compliance processes that are costly for small platforms and newcomers to the field. Standards compliance requirements also depend on the legislation where the platform operates, and its globalization will require compliance with the laws of many regions.

Finally, scalability remains a key issue, as platforms must provide high performance and process large volumes of transactions without losing efficiency. Without the introduction of new features, the platform will quickly become outdated, and their uncontrolled implementation creates cybersecurity risks and reduces efficiency. Therefore, scaling a platform requires its developers to strike the perfect balance between scaling speed, security, and efficiency.

Why do you need RWA (areas of application)

To continue, we need to look at the functioning of illiquid assets and understand how RWA increases their liquidity. Illiquid assets are those assets that take a long time to realize and are difficult to transform into finance without losing their value. Such assets include works of art, investment deposits, loans, securities, real estate, etc.?

When real assets are tokenized on the blockchain, they become more liquid and accessible to a wider audience of investors. The main advantages of their transformation are:

• Increase in liquidity
• Increased transparency of operations with them
• Reducing management costs?
• Round-the-clock access to them?

This helps make real assets more accessible and attractive for investment, increasing their liquidity and reducing risks. Assets that used to be “ballast” for a company or private owners become attractive investment opportunities.

Accessibility through partial ownership

Accessibility through partial ownership of real assets gives investors ownership of a share of assets that have been transformed into tokens. By “splitting” a more valuable asset into shares, access to them for smaller investment market players is improved.

Partial ownership of RWA allows investors to receive income from these assets (dividends or a portion of the profit from the sale of assets proportional to the share of ownership) This is attractive and beneficial for investors who want to diversify their investments (to reduce risks) and receive income from different types of property.

Transparency and security of blockchain transactions

The transparency and security of blockchain transactions involving real-world assets (RWA) are key to ensuring that investors have confidence in RWA and that their assets have value. And that the platform (through which they manage their assets) is a trusted intermediary between the user and the digital asset.

Transparency in the blockchain is ensured by the fact that all transactions are recorded in a permanent and immutable database that is accessible to all network participants. This makes it easy to verify and analyze all transactions, which reduces the risk of fraud and fake transactions.

The security of transactions in the blockchain is ensured by using cryptographic methods that ensure reliability and inaccessibility to data distortion. In addition, blockchain transactions are typically backed by consensus mechanisms that ensure that all network participants agree that the transactions are correct. In such a decentralized system, each participant has the right to vote, and the value of his or her vote depends on the number of tokens he or she owns.

Creating new markets for investors

Traditional investment markets, such as stocks, bonds, and real estate, have long been considered the mainstays for investors. They provide high liquidity and accessibility, allowing investors to buy or sell assets quickly. However, traditional markets can be vulnerable to market fluctuations and economic changes, which increases risks for investors.

Markets using RWA open up new opportunities. They allow investors to include new types of investments in their portfolios. This approach reduces risks through diversification, as investors can invest in different industries and projects.

Successful projects that help develop this area

The market already has many DeFi startups and companies that develop and promote the use of RWA. We won't review them all but will focus on the largest market players.

Centrifuge is a platform for tokenizing real assets on the blockchain. It provides the infrastructure and ecosystem for tokenizing, managing, and investing in real assets. It is the first protocol to bring real assets to the blockchain and aims to create a better financial system.

The main features of the platform include:

• Tokenization of real assets: Allows tokenization of various types of assets such as bonds, loans, real estate, and others.
• Fund management: The platform provides the ability to manage funds, including tracking asset positions, transactions, and operations.
• Investing: Allows investors to access a variety of assets, improving transparency and providing better portfolio insight.
• Blockchain lending: Connects investors and debtors without the need for banks.

RWA,xyz is a platform that analyzes tokenized real assets. It provides unique opportunities for tracking and analyzing various asset classes, such as stable cryptocurrencies, government securities, global bonds, private loans, etc.

The main features of the platform include:

• Aggregate metrics: Visualize common metrics for different tokenized asset protocols.
• Company Directory: Discover and contact companies and issuers of real assets.
• Data access: Provides the ability to export data for further analysis or the creation of new financial products.

It is a platform for those interested in the tokenization of real assets and wants to get detailed analytical data about them.

Conclusion

Real-world assets (RWA) have already become an innovation that has enabled the integration of physical assets into the blockchain and opened up new horizons for investors and companies. However, today, RWA faces barriers related to the complexity of regulation and the need to ensure a reliable connection between a physical asset and its digital token. The issue of cybersecurity also remains important, as the scalability of platforms must be accompanied by improved protection against potential threats.

Despite all the nuances, the future of RWA looks promising. Thanks to the introduction of advanced technologies and international standards, real assets will be able to become a key part of the decentralized economy. In the future, real assets promise not only to create new investment opportunities but also to fundamentally change our understanding of how we see the management of tangible assets in the digital world.