In the world of decentralized finance (DeFi), asset tokenization has emerged as a developing trend, supporting the mainstream adoption of crypto. The concept of tokenizing real-world assets has opened the crypto world to everyday investors, capturing a new user base that would otherwise remain unrealized.
Asset tokenization is the process of representing real-world assets as digital tokens on a blockchain. The digital tokens are then used to represent the ownership and legal rights of the real-world asset.
Crypto projects have long been tasked with proving their worth and value to investors — a process often held back by skepticism and a sea of coins with no real purpose other than luring investors in.
Additionally, crypto assets suffer from high volatility thanks to the lack of solid backing traditionally enjoyed by fiat currencies and other conventional assets.
However, because they are tied to real-world assets, tokenized assets have the advantage of intrinsic value and, as such, require less effort to convince investors of their value. They also have relatively little price swings because they have a direct relationship and utility in the actual world.
As investors dive in and commit funds, here are some key aspects they should keep in mind.
5 Things to Know About Tokenized Real World Assets
1. The Assets That Can be Tokenized
The tokenization of real-world assets began with real estate, precious metals, collectibles, bonds, and equity, as well as funds such as the one from Hamilton Lane, a private equity manager. However, over time, the kind of assets that can be tokenized have diversified to include a wide range of goods and commodities.
Currently, investors can also acquire tokens of agricultural produce, such as coffee beans and wine, and infrastructure, such as those used in energy and transportation, like ships and airports. Valuables such as in-game assets, along with esport and event-based assets, can also be tokenized.
Data has also emerged as one of the valuable commodities that can be tokenized, with decentralized data exchange platforms being used to enable secure and transparent data exchange.
2. Transfer of Specific Rights vs Transfer of Ownership
When venturing into a tokenization project, investors have to understand the kind of rights they acquire by purchasing the project’s tokens. Depending on the nature of the real-world assets being tokenized, tokens can either grant an investor rights to the asset or ownership of the asset.
In the case of intangible assets such as a music license, tokenization grants the investor rights to the song and not ownership. As such, music rights can be concurrently licensed to millions of people.
A client who “buys” a recording from iTunes, for instance, is actually obtaining a license, or the right, to listen to the music under certain conditions, not actually gaining ownership.
On the other hand, tokenizing a tangible asset like a real estate property or fine art could mean the transfer of ownership of part of the property equivalent to the number or value of tokens held by an investor.
In other cases, the tokenization of a real estate property could only signify that certain restricted rights are transferred to the token holders and not necessarily the complete sale of the property. The tokens, therefore, grant an investor the right to use a certain area for a given amount of time.
Given the differences that exist in the meaning and value the tokens hold for the investor, investors need to research and understand what exactly they gain from acquiring a project’s token.
3. Liquidity and Market Access
Like any other crypto asset, the investor needs to assess the liquidity of the project. This could entail performing one’s due diligence to ensure that the token issuers actually own the asset backing the project.
It is also important to evaluate the market access of the token. Sometimes, projects present investors with limited trading options, which restricts them and makes it difficult for them to trade the tokens when they want to.
Investors should, therefore, check to ensure that the tokens are listed for trading on multiple exchanges and marketplaces. Additionally, the exchanges should be reputable and regulated. While this does not assure the reliability of the project, it gives a sense of credibility since exchanges also perform their due diligence before listing tokens.
4. Risk Management
By virtue of their existence in the crypto space, asset tokens are also susceptible to some form of volatility, which increases the risk involved with them. While the risk might be potentially lower than that of other fully-fledged crypto assets, investors should be strategic in their investment, factoring in the risks involved.
Similar to investing in crypto assets, investors ought to diversify their investments so as to spread their risk. In the event an investor only wants to invest in tokenized assets, diversification is still possible by dividing their funds among different real-world asset classes.
5. Regulatory Compliance
The process of tokenizing assets, as well as the sale of asset tokens, involves compliance with regulatory requirements. However, these requirements vary in various jurisdictions as different authorities perceive them differently.
Therefore, to avoid being caught in legal feuds with authorities, investors should ensure the assets are legally tokenized, and the issuer is also operating in compliance with the regulations in place.
For instance, if the tokens being offered represent ownership in the asset, securities laws may be applicable in the US. Additionally, selling tokens or enrolling in a token marketplace typically needs adherence to Anti Money Laundering (AML) and Know Your Customer (KYC) rules.
Issuers in such a case will, therefore, require clearance from the US Securities and Exchanges Commission (SEC) before operating.
Real-world asset tokens are an emerging class of assets that bridges the world of blockchain with traditional finance. Given how long the world of finance has been awaiting such a convergence, asset tokens are poised for profound growth and adoption.
While Maker Dao, the issue of MKR, the crypto token, and Chainlink (LINK), a renowned oracle protocol, are two of the leading RWAs ecosystem, the sector is buzzing with fresh ideas and new projects that are daring to push against the glass ceiling.
A fundamental part of this expansion will be seen in the regulatory sector, where governments and authorities are working to develop regulatory frameworks to guide the class. This clarity is expected to accelerate the rate of absorption by investors and increase involvement by traditional finance institutions.
Additionally, the ongoing increase in the types of assets that can be tokenized is only bound to grow as more institutions witness the progress of assets that are currently available. This expansion will not only increase the value of the asset token markets but will also capture a new group of investors, increasing adoption.
Industry forecasts paint a promising picture for the future of tokenized real-world assets. Currently valued at $300 billion, the asset tokenization market is projected to be worth at least $10 trillion by 2030, according to Roland Berger.
This significant rise in value will represent a 40-fold increase in the value of tokenized assets from 2023 to 2030.