Blockchain technology has the potential to bring revolutionary changes to our society. Since its introduction in 2008 by an anonymous developer or group of developers under the pseudonym Satoshi Nakamoto, blockchain has evolved from a mere technological curiosity into a powerful tool capable of transforming the global financial system.
The core idea behind blockchain is simple. Instead of recording all transaction data on a centralized server, it is shared among all participants in the network through a distributed ledger. This ledger consists of data bundles called ‘blocks’ linked in chronological order, hence the name ‘blockchain’.
This structure has several important characteristics. First, transparency. All transaction records are public and can be verified by anyone. Second, immutability. Once information is recorded, it is nearly impossible to modify. Third, decentralization. The system operates without control from a central authority. These features combine to create the revolutionary concept of ‘trustless trust’.
The first practical implementation of blockchain technology was Bitcoin. Bitcoin implemented a digital currency system that operates without intervention from central banks or governments. This completely changed our thinking about the future of finance. The idea that a monetary system can function without a central authority, the concept of programmable money, and instantaneous cross-border value transfer are all innovative concepts brought about by Bitcoin.
Following the success of Bitcoin, blockchain technology rapidly evolved. In particular, the emergence of Ethereum greatly expanded the range of blockchain applications. Ethereum introduced the concept of ‘smart contracts’, which are programs that automatically execute when predetermined conditions are met. This enabled various applications such as complex financial products, voting systems, and identity management.
This technological advancement gave birth to a new financial paradigm called ‘Decentralized Finance (DeFi)’. DeFi implements traditional financial services on the blockchain, providing services such as loans, deposits, and asset management without intermediaries. This has greatly increased the accessibility of financial services and reduced costs.
However, the rapid growth of blockchain and cryptocurrencies also revealed several problems. The biggest issue was price volatility. Most cryptocurrencies, including Bitcoin, experienced severe price fluctuations, which became a major obstacle to their use as actual currency. There was also a scalability problem. Major blockchains like Bitcoin and Ethereum had limitations in the number of transactions they could process per second, which posed challenges for large-scale use.
Various attempts have been made to solve these problems. Stablecoins emerged to address price stability issues, and layer 2 solutions or new consensus algorithms were developed to solve scalability problems. There have also been various attempts to connect with existing financial systems.
It is in this context that ‘Real World Assets (RWA)’ tokenization has emerged. RWA refers to the representation of tangible assets from the real world as digital tokens on the blockchain. This is gaining attention as a way to utilize the advantages of blockchain while strengthening connections with the real economy.
The beginning of RWA was stablecoins. Since Tether (USDT) issued its first USDT token on the Bitcoin blockchain in 2014, various stablecoins such as USDC and DAI have emerged. These provide value stability by being pegged to fiat currencies while allowing users to take advantage of blockchain benefits. As of February 2024, the total market capitalization of stablecoins reaches $133.6 billion, with USDT accounting for 71.4% of this.
The success of stablecoins led to the issuance of other forms of RWA. Most notably, products that tokenize government bonds. In 2023, as U.S. interest rates rose and treasury yields surpassed cryptocurrency yields, tokenized treasury products gained significant popularity. The market capitalization of tokenized treasury products issued by companies like Franklin Templeton and Ondo Finance surged by 795% from $104 million in January 2023 to $931 million in February 2024.
The structure of tokenized treasuries typically works as follows: First, a licensed asset manager creates a money market fund. This fund invests in treasury bonds or repo agreements, and all assets are held by a trusted custodian. Then, tokens representing shares in this fund are issued and traded. This process requires KYC (Know Your Customer) procedures, and there may be investor qualification restrictions in some countries.
Beyond treasury bonds, various forms of RWA are emerging. For example, there are products that tokenize precious metals like gold and silver. Tether Gold (XAUT) and PAX Gold (PAXG) are prominent examples, accounting for 83% of the tokenized precious metals market. There are also cases of tokenizing other commodities like uranium.
Another important area of RWA is on-chain private credit protocols. These are systems that allow real businesses to obtain unsecured loans on the blockchain based on their creditworthiness. Protocols like Maple, TrueFi, and Clearpool are leading this field. These protocols saw rapid growth from late 2021 to early 2022 but were significantly impacted by the collapse of Terra and FTX. However, they are showing signs of recovery recently, with an increase in loans to real businesses.
The operation of these private credit protocols typically works as follows: First, the protocol creates a lending pool either directly or through trusted third parties. Investors deposit funds into this pool, and businesses apply for loans. Experts called ‘delegates’ or ‘sponsors’ evaluate the loan applicant’s industry, financial condition, reputation, etc., to decide whether to grant the loan. Once the loan is executed, the business repays the principal and interest according to the agreed schedule, which is then distributed back to the investors.
RWA is also being utilized as a tool to address environmental and social issues. ‘Regenerative Finance (ReFi)’ projects are examples of this. They implement various environmental protection activities on the blockchain, such as carbon credit trading, ocean plastic collection, and renewable energy certification. For instance, the Toucan protocol allows companies to tokenize their excess carbon credits, while ReSea and Plastic Bank record the amount of plastic collected from the ocean on the blockchain. This enhances the transparency and efficiency of environmental protection activities.
The realm of RWA is expanding beyond finance to real estate, art, luxury goods, and more. RealT tokenizes real estate ownership to enable fractional investment, while Courtyard.io tokenizes the ownership of rare collectible cards for trading. Fashion brand RTFKT sells NFTs linked to actual sneakers, and Watches.io creates NFTs as digital twins of luxury watches for trading.
This growth of RWA is being accelerated by the active participation of traditional financial institutions. Global financial companies like Goldman Sachs, JP Morgan, and BNY Mellon are building blockchain-based asset management and trading systems. For example, Siemens issued a one-year bond worth 60 million euros on the Polygon blockchain in 2023, and the Hong Kong government issued tokenized green bonds worth 800 million Hong Kong dollars. This shows that RWA is no longer an experimental technology but is becoming part of the mainstream financial system.
RWA has the potential to solve several problems in the existing financial system. First, it can increase the liquidity of assets. Even illiquid assets like real estate or artwork can be easily traded through tokenization. Second, fractional ownership of assets becomes possible. This expands investment opportunities for small investors. Third, it can increase transaction efficiency. Complex transaction processes can be automated through smart contracts. Fourth, it can enhance transaction transparency. All transaction records are recorded on the blockchain and can be verified by anyone. Fifth, cross-border transactions become possible. This can greatly improve the efficiency of global capital markets.
In particular, RWA is opening up new funding channels for small and medium-sized enterprises in developing countries. Companies that had difficulties raising funds in the traditional financial system due to lack of credit or collateral can now raise funds from global investors through RWA. This is an important change that can increase financial inclusivity and promote economic growth.
However, RWA is not a perfect solution. There are still challenges to be addressed. First, regulatory uncertainty. Many countries have not established clear legal status and regulatory frameworks for RWA. This is limiting the participation of institutional investors. Especially since regulatory approaches to RWA differ from country to country, there are difficulties in utilizing RWA in the global market.
Second, technical limitations. Current blockchain technology has shortcomings in terms of processing speed and scalability compared to traditional financial systems. In particular, high transaction fees due to congestion on the Ethereum network are hindering the efficiency of RWA. Layer 2 solutions and new blockchain platforms are being developed to solve this, but a complete solution has not yet emerged.
Third, the existence of centralized elements. Most RWA projects rely on centralized institutions for the storage and management of physical assets. For example, tokenized gold requires a custodian to store the actual gold. This conflicts with the decentralization philosophy of blockchain and can create a new form of intermediary risk. These centralized elements can become targets of hacking or fraud.
Fourth, the problem of valuation. For illiquid assets like real estate or artwork, it’s not easy to accurately assess their value and reflect it in token prices in real-time. This can affect the credibility and liquidity of RWA tokens. Also, the involvement of centralized institutions may be necessary in this valuation process, which is related to the centralization problem mentioned earlier.
Fifth, oracle dependency. RWA relies on external data providers called oracles to reflect real-world data on the blockchain. If the information provided by these oracles is inaccurate or manipulated, the credibility of the entire system can collapse. Therefore, building a reliable oracle system is crucial for the success of RWA.
Sixth, privacy issues. While the transparency of blockchain is an advantage, it can sometimes be a disadvantage. In particular, it may not be desirable for a company’s financial information or an individual’s asset information to be disclosed to everyone. Therefore, it’s important to build a balanced system that can protect privacy while sharing necessary information.
Seventh, the stability issue of smart contracts. Most RWAs are managed through smart contracts. If there are bugs in these smart contracts or they are hacked, significant losses can occur. In fact, in 2022, some RWA protocols experienced large-scale defaults due to vulnerabilities in smart contracts. Therefore, it’s very important to increase the stability of smart contracts and conduct regular audits.
Eighth, liquidity risk. If the trading volume of RWA tokens is not sufficient, investors may find it difficult to sell their assets when they want to. Especially in crisis situations, if many investors try to sell at the same time, prices can plummet. Therefore, securing and maintaining sufficient liquidity is important for the stability of the RWA market.
Ninth, the issue of linking legal ownership with token ownership. A clear framework is needed on whether owning an RWA token means legal ownership of the actual asset, and how to guarantee this. This can be an even more complex issue in cross-border transactions.
Finally, environmental issues. Some blockchain networks, especially Bitcoin and Ethereum, consume a lot of energy. This can be an important issue in the current situation where attention to environmental problems is increasing. Therefore, the development of more energy-efficient blockchain technology is necessary.
Despite these challenges, the RWA market continues to grow steadily. This indicates that the potential and advantages of RWA are significant. In particular, several positive changes have been emerging recently.
First, the regulatory environment is gradually improving. Many countries are preparing regulatory frameworks for RWA, and some have already passed relevant legislation. For example, the U.S. Securities and Exchange Commission (SEC) recently approved Bitcoin ETFs, and the European Union passed the Markets in Crypto-Assets (MiCA) regulation. These changes are laying the groundwork for more institutional investors to participate in the RWA market.
Second, technological progress is being made. Scalability and energy efficiency issues are gradually being resolved with Ethereum’s transition to Proof of Stake (PoS), the development of layer 2 solutions, and the emergence of new blockchain platforms. Also, with the advancement of Zero-Knowledge Proof technology, it’s becoming possible to balance privacy protection and transparency.
Third, participation of traditional financial institutions is increasing. Global financial companies such as JP Morgan, Goldman Sachs, and Franklin Templeton are conducting RWA projects. This is expected to increase the credibility of RWA and accelerate market growth.
Fourth, the scope of RWA application is expanding. Initially, it was limited to tokenizing fiat currencies or precious metals, but now it’s expanding to various assets such as real estate, artwork, intellectual property rights, and carbon credits. This can greatly expand the market size of RWA.
Fifth, user experience is improving. Early RWA projects were complex and difficult to use, but recently, projects providing user-friendly interfaces and simple transaction processes are increasing. This is contributing to increasing the accessibility of RWA for general users.
These changes are laying the foundation for RWA to grow further in the future. However, to ensure the successful development of RWA, several important challenges need to be addressed.
First, harmony with regulation is necessary. As RWA connects real-world assets with blockchain, it’s important to harmonize with existing financial regulations. This requires close cooperation between regulatory authorities and the industry. RWA projects should strengthen efforts to comply with regulations, while regulatory authorities should establish a balanced regulatory framework that does not hinder innovation.
Second, technological standardization is needed. Currently, RWA projects are using different technical standards, resulting in low interoperability. This can lead to market fragmentation and reduce liquidity. Therefore, the establishment of industry-wide technical standards is necessary. This can facilitate exchange and trading between various RWAs and increase market efficiency.
Third, enhancement of security and reliability is needed. As RWA deals with physical assets, a high level of security and reliability is required. Efforts should continue to increase the stability of smart contracts, enhance the reliability of oracles, and strengthen the security of centralized elements. It’s also important to gain investor trust through regular audits and transparent information disclosure.
Fourth, user education is necessary. As RWA is a new concept based on complex technology, many people may find it difficult to understand. Therefore, continuous education and promotion about the concept, operating principles, advantages and disadvantages of RWA are needed. This is important to enable more people to understand and utilize RWA.
Fifth, the connection with the real economy needs to be strengthened. The true value of RWA comes from its connection to the real economy. Therefore, it’s important to continue exploring how RWA can contribute to actual economic activities and to develop use cases that create tangible value.
In conclusion, RWA represents the convergence of blockchain technology and traditional finance. It’s not just the emergence of new investment products, but a process of making the essential functions of finance – ‘transfer and storage of value’ – more efficient and inclusive. The development of RWA will be an important indicator of how the financial system will evolve in the future. While there are still many challenges to overcome, the potential of RWA to transform our financial landscape is immense. As this field continues to evolve, it will be fascinating to see how it reshapes our understanding of assets, value, and financial systems.
For further reading and a more detailed analysis of the current state of Real World Assets (RWA) in the crypto space, readers are encouraged to refer to the comprehensive report published by CoinGecko:
“Rise of Real-World Assets: The Bridge between Real World Borrowers and on-Chain Loans” (2024) Available at: https://assets.coingecko.com/reports/Research/RWA-Report-2024-Rise-of-Real-World-Assets-in-Crypto.pdf
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