Digital assets stored on the blockchain have the potential to completely transform the asset management landscape. Sometimes called RWAs, real-world assets are tangible assets that exist in the physical or traditional financial world, such as real-estate, art, commodities, loans, and more. These assets have significant value in the global economy, but they can be highly illiquid, inaccessible, and inefficient to manage. Real estate is a prime example: globally estimated to be worth over $3.7 trillion – it’s one of the largest but also most illiquid asset classes in the world.
Luckily, with the advent of blockchain technology, RWAs can be represented by digital tokens (or tokenized) on the blockchain, eliminating many of these problems.
What’s more, RWAs can be used on-chain and integrated into DeFi ecosystems for various purposes: trading, borrowing, lending, staking, and as collateral for various protocols. This ultimately opens many new opportunities for asset owners, borrowers, lenders, and investors to access liquidity, diversify their portfolios, earn yield, and participate in the DeFi ecosystem and economy.
How Are Tokenized Real-World Assets Used In Asset Management?
Asset management is the management of various investments such as stocks, bonds, and real estate. Intent on increasing wealth, asset management aims to maximize returns while minimizing risk.
Many asset classes have traditionally been restricted to high-net-worth individuals and institutional investors owing to high barriers to entry and the complex nature of the investing industry.
This is changing with blockchain, as it’s now possible to “tokenize” or represent these assets on-chain with digital tokens. Known as security tokens, tokens representing financial securities bring many opportunities for issuers and investors.
For example, security tokens enable fractional ownership, allowing investors to invest in only a fraction of an asset instead of the entire thing. As a result, smaller investors can participate in historically elusive and high-value assets like real estate or art.
Reasons To Use Tokenized Real-World Assets For Asset Management
One just mentioned is increasing liquidity in the market by enabling fractional ownership and trading of assets that were previously illiquid. This also leads to greater price discovery, fair valuation, and a more efficient market.
Another reason is to automate the investment process via the use of smart contracts. Smart contracts are self-executing programs or protocols on the blockchain and can be used to automate asset transfers based on predefined criteria. This leads to greater efficiency, faster transactions, and significantly reduced cost and error.
Finally, security tokens bring transparency to the asset management industry. Public blockchains are immutable public ledgers providing all parties – whether investors, issuers, asset owners, auditors, or regulators – with real-time access to information about assets, their performance data, and their ownership.
Industries That Benefit From Real-World Assets In Asset Management
Any asset class can benefit from tokenizing real-world assets in asset management. Still, certain industries stand to be radically transformed, such as:
Real estate is primed to be one of the most tokenized asset classes. As mentioned, real estate is one of the largest asset classes in the world. It’s also one of the most illiquid and is characterized by high barriers to entry, regulatory hurdles, and expensive operational costs. By tokenizing real estate properties, asset owners can fractionalize their ownership and sell shares to investors who can benefit from rental income and capital appreciation. Tokenization also lowers the barrier to entry for real estate investing, as investors can access global markets with lower minimum and fees.
For asset management specifically, tokenized real estate can make it easier for asset managers to manage clients’ portfolios by enabling the use of smart contracts to execute investment strategies and enforce terms and conditions of trades. Through fractional ownership, global access, and innovations with blockchain technology, tokenized real estate can also provide asset managers with new markets and opportunities that were previously inaccessible or unfeasible. Finally, asset managers can use tokenized real estate to ensure the transparency and accountability of their operations as the blockchain provides a verifiable proof of ownership.
These benefits combined, tokenized real estate brings increased efficiency, transparency, and liquidity to real estate markets white reducing costs, operational time, and complexity.
Art is another illiquid asset class that has historically been accessible only to ultra-wealthy collectors and institutions.
As is possible with real estate, tokenization can enable the trade and exchange of fractional ownership for art, which is especially useful for high-value pieces that otherwise require large amounts of capital to acquire. The classic example is the Picasso painting Fillette au béret, the ownership rights to which was tokenized on the blockchain by Sygnum bank in 2021. The digital asset was divided into 4,000 tokens sold to more than 50 investors at roughly $1,040 USD apiece.
Tokens which represent art investments such as the Picasso painting are sometimes dubbed Art Security Tokens (ASTs).
Ultimately, ASTs enable the democratization of art ownership and appreciation, as anyone can buy and sell fractions of expensive art on secondary markets. For investors, this results in increased portfolio diversification and exposure to a previously exclusive asset class; for asset owners and issuers, this leads to a wider investor base and improved liquidity.
For artists and creators, tokenizing art can also be a way to raise funds for their work and retain a stake in its future value. Tokenization also improves transparency in the art market, as blockchain provides an immutable record of ownership and transaction history.
Another asset class prime for tokenization in asset management is commodities, which are physical goods such as precious metals (e.g. gold) and agricultural products (e.g. oil).
Commodities are often subject to price fluctuations from factors such as supply and demand, geopolitical events, environmental factors, and other market forces. As a result, commodities trading can be complex and risky, and requires specialized knowledge and infrastructure.
Commodities can be expensive or difficult to deal with in terms of delivery, storage, and maintenance. This makes them tricky and often expensive investments. However, fractional ownership via tokenization allows for trading of commodities in smaller units and ultimately the sharing of these burdens between multiple investors.
As with real estate and art, tokenization also brings advantages to the commodities market such as better transparency, increased liquidity, improved efficiency, reduced costs, wider access, and enhanced security. These advantages can help to eliminate many of the difficulties faced by the commodities market and bring to it more activity and depth.
What Benefits Do Tokenized Real-World Assets Offer Over Traditional Asset Management?
Liquidity: Transfer and exchange on blockchain frictionlessly, making transactions easier and faster while increasing market efficiency and transparency
Accessibility: Accessible by anyone with an internet connection, democratizing access to valuable assets that previously only the wealthy or accredited investors could participate in
Innovation: Integrated into DeFi protocols to offer novel services and products such as lending platforms, yield aggregators, synthetic asset baskets, collateral, etc. Enables users to leverage their RWA tokens to generate income, hedge risks, create exposure, and optimize their returns.
Security: Secured by the validity and immutability of the blockchain and its cryptography and consensus mechanisms. The rights and interests of token holders can also be protected by backing RWA tokens with legal contracts, audits, insurance policies, and other safeguards.
Impact On The Financial Industry
Leveraging the power of blockchain technology, RWAs will have a transformative impact on DeFi by offering yields that are sustainable, reliable, and backed by traditional asset classes. RWAs can also expand the pool of capital available for DeFi protocols and projects, as well as diversify the risk and return profiles of DeFi investors.
But it’s not just about DeFi! RWAs will also have a significant impact on traditional finance (TradFi) by increasing the liquidity, transparency, efficiency, and accessibility of the financial system.
According to estimates, the market size of RWAs in DeFi was around $2.3 billion USD in 2021–only a fraction of the reportedly $126 trillion USD global assets under management (AUM).
This number is expected to grow immensely as more and more RWAs are tokenized on the blockchain. Boston Consulting Group estimates that the value of tokenized real-world assets could reach $16 trillion USD by 2030.
Overall, the coming years will be huge for RWA tokenization as more solutions and standards emerge to address the existing challenges and opportunities of the asset management market.
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