Tokenization is one of the most promising domains in the blockchain universe. It aims to bring a large number of off-chain or real-world assets onto the blockchain. Tokenization involves representing 'real-world assets' (RWAs) such as real estate, financial instruments, commodities, and artwork on the blockchain.
Traditionally, real-world assets face transactional frictions such as slow transfer times, limited liquidity, custodial costs, and high intermediary fees. With the advent of blockchain technology, however, these challenges can be overcome. By using a decentralized and immutable ledger, we can represent ownership and exposure to real-world assets (RWAs).
Tokenizing RWAs offers several benefits, including near-instant settlement, un-censorable ownership rights, and the ability to fractionalize exposure. It is these advantages that have generated excitement among market participants and developers in this space.
This article will explore the following topics:
- An overview of tokenization and its significance
- Increasing institutional interest as a precursor to widespread growth
- The integration of tokenized assets within the DeFi ecosystem
- Oracles and their importance in tokenization
- The future of RWA tokenization
It is becoming evident that on-chain RWAs are not a temporary trend, but rather a fundamental shift in how we conduct transactions and transfer value.
Why Is Tokenization Important?
Tokenizing RWAs brings many advantages, including:
- Fractionalization: Tokenized assets can be fractionalized into any denomination, significantly increasing liquidity by expanding retail access to the original asset.
- Global Liquidity: Buyers and sellers can be located anywhere in the world. Geographical proximity is no longer a limiting factor.
- Cost Reduction: Tokenization reduces the need for intermediaries and streamlines processes such as accounting and custody, saving costs for investors and issuers.
- Operational Efficiency and Automation: Ownership verification, dividend distribution, and regulatory compliance processes can be automated using immutable code. This feature helps lower costs, reduce human errors, and improve overall operational efficiency.
Consider the gold industry, which has a market size of around $12 trillion. Purchasing physical gold presents numerous challenges for buyers, including minimum purchase amounts, high intermediary fees, risk of theft, counterfeit risk, and geographical restrictions. While instruments like gold ETFs offer more convenient digital trading options, they are limited in terms of availability and accessibility across different regions. In simpler terms, these instruments cannot reach the approximately 1.4 billion unbanked individuals worldwide.
Tokenizing gold addresses these issues by allowing anyone with an internet connection to obtain exposure to physical gold instantly. By converting the ownership of gold into digital tokens on a blockchain, the barriers that have traditionally hindered gold investment are significantly reduced, if not eliminated entirely.
Tokenized RWAs offer several unique benefits specific to digital or on-chain assets. Unlike traditional RWAs like real estate and fine arts, which have relatively stable valuations, they tend to be illiquid and inaccessible to many buyers due to slow transfer times and high entry costs. Tokenization can address these issues by introducing transaction efficiency. Furthermore, fractionalizing exposure to RWAs can enable greater market participation at lower entry costs.
Institutional Adoption
Innovations such as the internet, cloud computing, and electronic trading were largely driven by initial institutional adoption. Tokenization is no exception, and institutional interest in it has been rapidly growing.
Some notable examples from 2023 include:
- Korean banks collaborating to issue $27B in tokenized bonds.
- The Hong Kong government issuing $100M in tokenized green bonds.
- Goldman Sachs releasing a new tokenization platform.
- Siemens issuing a 60M Euro tokenized bond.
- Blackrock actively exploring tokenizing stocks and bonds.
Tokenization is expected to take time to reach maturity, and there are several barriers to overcome, including institutions needing to align new tokenization standards with existing legacy systems, resistance from established players, and regulatory uncertainty. However, the future for tokenized RWA innovations is promising.
DeFi Adoption
DeFi protocols focusing on RWAs have proliferated in 2023. Their objective is to bring traditional financial assets onto the blockchain, enabling them to be utilized as foundational components for other DeFi applications. These innovative protocols can attract a growing user base interested in diversifying their assets on-chain.
RWA-focused DeFi platforms can serve both institutions and individual consumers. The ultimate goal is to bridge the offerings of traditional finance with the decentralized world. These decentralized applications typically impose KYC checks and restrictions for their users in order to comply with regulations.
Below, we will examine several well-known tokenized RWA platforms.
1. Matrixport
Matrixdock is a digital assets platform by Matrixport that provides institutional and accredited investors with transparent access to DeFi services for tokenized real-world assets. They are a significant player in the space, with over $700M in outstanding loans and $5B in monthly traded volume.
Matrixdock recently launched tokenized short-term US treasury bills under the ticker STBT. The token lives on the ERC-1400 standard, which restricts it to accounts that have passed the appropriate KYC and AML standards. Readers can explore the public Dune dashboard which tracks the adoption of STBT.
2. Ondo Finance
Ondo Finance is a decentralized asset management platform for a range of institutional-grade financial products, including stablecoin alternatives backed by money markets. Ondo launched its V1 in August 2021 and its V2 in January 2023. Their V2 offers users access to tokenized exposure to US treasuries, high-yield income, short-term bonds, and money markets.
Ondo Finance V2 has gained significant traction since its inception in early 2023, with $150M in TVL to date. CoinBase and Clear Street support Ondo Finance as legal custodians for held assets.
3. Backed Finance
Backed Finance is an infrastructure provider that issues users “Backed Assets” or bTokens to represent ownership of tokenized assets, including treasury bills of varying lengths, high-yield corporate bonds, and the S&P 500 index.
The Backed Finance platform enables professional investors to buy or sell bTokens, while token holders may redeem them. The platform is currently live on Ethereum, Gnosis, and Polygon, with plans to expand to more EVM-compatible networks.
4. Open Eden
Open Eden provides investors with on-chain exposure to a pool of short-dated treasury bills through their TBILL token. OpenEden enables users to instantly mint TBILL tokens through their TBILL Vault. The platform focuses on large-scale clients with institutional-oriented deposit limits for the issuance of new TBILL tokens.
Oracles and RWAs
The value of tokenized assets is closely linked to their real-world counterparts. It is essential to have accurate price and market data for these real-world assets reliably and continuously delivered on-chain. This is why blockchain oracle networks like Pyth Network are necessary for tokenized RWA services. Without access to this data, it would be impossible to ensure the value and validity of tokenized assets on-chain.
The Pyth Network is the largest first-party oracle network. The oracle network aggregates and delivers proprietary financial data from over 85 institutional and decentralized market participants to more than 35 blockchains. By focusing on first-party data, which is created and owned by active participants in price discovery, the Pyth Network provides low-latency access to high-quality data sources.
In contrast, legacy oracles typically depend on a network of intermediary nodes that are incentivized to retrieve data from public sources and reach consensus. While this reporter network design is flexible, it also comes with accountability risks, data legality risks, and additional frictions such as data transmission fees and delays.
The Pyth Network's first-party data architecture is optimized to provide real-time data, such as RWA pricing, including commodities and foreign exchange pairs. Currently, smart contract developers can utilize Pyth Price Feeds for gold (XAU) and silver (XAG), which are particularly popular markets in the broader DeFi ecosystem.
As more RWAs make their way on-chain, the Pyth oracle solution will continue bringing these asset prices on-chain securely and transparently.
The Future of On-Chain RWAs
The tokenization industry is still in its early stages, and it is likely that we will see unpredictable changes in its evolution. At the very least, we can anticipate a larger quantity and diversity of RWAs being moved onto the blockchain. Additionally, we can expect the emergence of intriguing applications:
- Tokenized fine arts will create new investment opportunities and enable users to showcase their art collections on the blockchain. This will also pave the way for new products like diversified investment funds, as well as online communities for art collectors with similar interests.
- Tokenized accounts receivables enable companies to secure loans using receivables as collateral. This enhances liquidity and cash flow management while creating new financial opportunities.
- New forms of currencies will be supported by combinations of tokenized assets. For instance, a currency backed by tokenized real estate and gold could experience annual value growth, resistant to inflation.
- DeFi protocols will integrate RWAs (Real-World Assets) into their suite of services and innovate new products based on them. This will involve serving existing markets in innovative ways, such as introducing new derivative contracts or empowering investors to create new investment portfolios.
The most significant realization is that these assets are composable, which means they can be used throughout the rest of DeFi. This is an often overlooked feature of DeFi, as the unrestricted integration of cryptocurrencies and smart contract code will drive innovations that would be impossible to achieve in traditional finance. While we are already witnessing interesting advancements, such as cross-chain applications with features like yield optimization, blockchain technology is still in its early stages, and we have only just begun to explore its full potential.
Pyth Network and On-chain RWA’s
Tokenization is revolutionizing the finance landscape by converting real-world assets into digital tokens on the blockchain, combining stability and transactional efficiency. While still in its early stages, the fact that high-profile institutions are adopting tokenization indicates its strong potential, despite existing challenges.
The tokenization of real-world assets (RWAs) requires precise and up-to-date data to accurately represent these assets on the blockchain. Oracles such as the Pyth Network play a critical role in this process, serving as a bridge between on-chain and off-chain worlds. The Pyth oracle solution specializes in providing financial data with high quality and low latency, sourced directly from reputable market players. As the tokenization of RWAs continues to grow, the importance of these oracles in ensuring integrity and reliability becomes even more significant.
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