RWA: tokenization of Real World Assets, the future of finance?
Dec 18, 2023
Tokenization of Real World Assets, the future of finance?
The Tokenization of Real World Assets (RWA) is one of the trends currently energizing the cryptocurrency industry. Highly favored by giants of traditional finance, it could revolutionize our way of interacting with financial assets through blockchain technologies. Dowgo explains everything in this article.
What is the tokenization of RWA?
Tokenization of real assets is a process that aims to digitally represent an asset through one or several tokens on a blockchain. From financial securities to real estate, art pieces, or luxury items, any asset can be tokenized on the blockchain.
Although this trend really emerged in 2023, it is not new. The first example of real asset tokenization is none other than the company Tether, which enabled the issuance of the dollar on the blockchain in the form of a USDT stablecoin. As of the writing of this article, this represents 90 billion dollars digitized on the blockchain.
Obviously, the use cases are now much more numerous and continue to become more specific as the cryptocurrency ecosystem institutionalizes. According to Bank of America (BoA), tokenized assets have the potential to revolutionize current financial infrastructure and create a more efficient system. This view is shared by the renowned Boston Consulting Group, which predicts that this market should reach 16,000 billion dollars by 2030.
How does the tokenization of RWA work?
Before delving into the advantages and use cases of real asset tokenization, it is essential to understand how they work. This can be summarized in two parts: formalizing information in the real world and connecting it to the blockchain.
The first step is to formalize what needs to be digitally represented on the blockchain. Obviously, when talking about tokenizing real estate, it's not a piece of the apartment that is integrated into a blockchain. It is necessary to identify what is being represented, its legal and juridical framework, and its value.
The second step is to connect these data with the blockchain. In other words, all data related to the asset are integrated forever into the metadata of the token. Thanks to the transparency of the blockchain, anyone can verify their authenticity at any time.
Moreover, it is essential to maintain a connection between the real asset and its digital representation, especially for reasons of price evolution. For this, there are oracles, technological tools that fulfill this role of a bridge between the blockchain and the real world.
Why is tokenization considered the future of finance?
Tokenization on the blockchain brings numerous advantages to real-world assets, especially when their entry price is high and they are reserved for a certain financial elite. Here are the main advantages of real asset tokenization:
Accessibility: Tokenization allows for the division of high-priced assets, such as real estate or luxury items, into several tokens. Thus, investment is made much more accessible to average investors.
Liquidity: For the reasons mentioned above, tokenized assets are made liquid as they are more easily accessible and therefore exchangeable. Additionally, the blockchain is open to all, 24/7.
Transparency and Security: Thanks to the blockchain, transactions are transparent, as are the information associated with the real asset. Plus, they are secure, and immutable.
Automation: Smart contracts can automate many operations, including the distribution of returns to holders.
Speed and Efficiency: Using the blockchain for financial transactions is advantageous as the usage costs are lower and the execution speed is incomparable with what traditional tools can offer.
As you have understood, tokenization on the blockchain is considered the future of finance mainly because of its ability to democratize investment. By making traditionally inaccessible assets more affordable and divisible, it allows a greater diversity of investors to participate in the market.
Furthermore, tokenization contributes to making financial markets more efficient thanks to the speed and ease of tokenized transactions. This innovation paves the way for new financial services and enhanced economic growth.
The main use cases of tokenization
To put it simply, real asset tokenization applies in areas where accessibility is complicated for unqualified investors or those with limited financial resources. Here are some of the main use cases:
Real Estate: By dividing real estate properties into tokens, investors can more easily expose themselves to the real estate market and receive a portion of the rents each month.
Art: The world of art or collectibles is often reserved for insiders and difficult to access for all as the prices of works reach astronomical amounts. NFTs have proven it, the blockchain can facilitate the buying and selling of artworks.
Luxury Goods: The same observation applies to the luxury goods market, such as watches or wine, for example.
Company Shares or Startups: Offering company shares in the form of tokens for fundraising is one of the first use cases to have emerged.
The case of Dowgo
Currently, there is an increasing use of the concrete application of real asset tokenization, and this sector is constantly evolving. In the case of Dowgo, the platform targets the renewable energy market and proposes to tokenize participation in wind and solar parks. Thus, investors have the opportunity to buy a token representing a portion of green energy that generate a return associated with the production.
While investment in this market is traditionally reserved for insiders, with an entry ticket of around 100,000 euros, it will now be possible to invest starting from 1 euro and without geographical restrictions.
Thanks to installations counting electricity production in wind parks, Dowgo proposes to connect the real world to that of the blockchain and allows investors to continuously follow the energy production associated with their investment. Thanks to the blockchain, they can easily and at a lower cost receive the payments of monthly returns by the local electrical network. Finally, the secondary market would allows anyone to buy or sell tokens.
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In summary, the tokenization of real world assets on the blockchain presents itself as a revolution in finance, making investment more accessible, transparent, and efficient. By dividing and digitizing various assets in the form of tokens, it is now possible to open markets previously inaccessible to a wider public. Like Dowgo, many initiatives are already redefining traditional investment methods.