In the early days, cryptocurrency existed solely as a virtual economy run by virtual currencies that derived their value from their users, supply, and demand.
This lack of solid backing caused them to be highly volatile and difficult — perhaps little more than a gamble — to investors.
However, cryptocurrency has continually evolved to develop utility, links, and connections to the traditional finance (TradFi) world, drawing its value from it.
One of the emerging narratives is real-world assets (RWAs), which are traditional finance assets that are tokenized into blockchain-based digital tokens. The digital tokens are then used to represent the ownership and legal rights of the real-world asset.
These tokens enable the physical assets to be accessed, traded, and managed virtually and more transparently by leveraging blockchain’s immutability.
So far, financial institutions have tokenized assets such as cash, commodities, equities, bonds, credit, artwork, real estate, and intellectual property.
In the tokenization of RWAs, Chainlink, the largest blockchain oracle by total value secured, has risen as a fundamental bridge between RWAs and their respective physical assets. As an oracle, Chainlink’s main role is to provide off-chain data from TradFi to the digital tokens and smart contracts in decentralized finance (DeFi).
Without some form of oracle service, data retrieval is impossible, and DeFi and TradFi are unable to communicate, making tokenization impractical. To facilitate and support the RWA ecosystem, Chainlink offers three features that address the ecosystem’s needs.
The Cross-Chain Interoperability Protocol (CCIP)
According to Chainlink, the protocol enables smart contracts to securely transfer the world’s value across public and private blockchain networks—creating an Internet of Contracts where value is automatically exchanged when certain conditions are met.
As a result, the protocol is increasingly being sought after by financial institutions and RWA projects alike to enable secure connections to blockchains, increasing accessibility.
Given their connection to TradFi assets, RWA digital tokens heavily rely on external information on the assets to accurately reflect their values. For this reason, Chainlink offers Functions and Data Streams that deliver RWA data in real-time to on-chain protocols through API connections to smart contracts and on-chain validation contracts.
Data Streams and Data Feeds underpin on-chain markets with financial market data around commodities, equities, forex, indices, economic data, business financials, and cryptocurrencies. On the other hand, Functions are created to synchronize and publish on-chain any off-chain events such as standing settlement instructions, corporate actions, proxy voting, ESG data, dividends, and interest that affect the value of the physical asset.
Together, the duo enables substantial information to be provided to both investors and financial institutions regarding the value of the digital tokens and any decision surrounding it.
Proof of Reserves
Aside from facilitating the transfer of data and value within the RWA ecosystem, Chainlink also offers a crucial service that verifies the on-chain assets backed by off-chain assets in DeFi projects.
The proof of reserves increases transparency about the value of a project and provides a way to protect the user if the value of off-chain assets diverges from assets tokenized on-chain.
To leverage the features provided by Chainlink, various decentralized and TradFi institutions have launched projects on the platform, tokenizing various RWAs from real estate to precious metals such as gold.
Among the most recent and significant assets to be tokenized is gold. Considering its place in the foundations of TradFi, the tokenization of gold has revolutionized the stance of the TradFi world towards blockchain, accelerating its rate of acceptance and absorption.
While there have been other indirect forms of tokenized gold in the crypto space, such as Exchange Traded Funds (ETFs), none of them led to the actual ownership of gold. However, various institutions’ recent tokenization of gold enables true ownership of real-world gold.
As such, acquiring a digital token of gold means the holder can claim real gold of equivalent value from the TradFi institution. This development has made gold available to anyone who wants to own it in small quantities — without needing to arrange delivery or install a vault in their house.
This is because gold custodians have created digital tokens each representing small amounts of gold, such as 0.001 troy ounces by HSBC. This way, owners of the physical gold bars can sell it off fractionally, in smaller amounts than if they were looking to sell the whole physical asset.
Chainlink has also been used to tokenize real estate by a project named RealT. RealT issues tokenized shares of commercial and residential real estate that trade on exchanges in the form of ERC-20 tokens.
Each token represents a share in a specific property. This makes real estate more accessible to investors and easier to trade.
Additionally, the tokenization of real estate enables more than one person to share ownership of a house — fractional ownership — enabling investors to hold value in real estate without necessarily owning the entire property.
Using Chainlink, RealT receives information on parameters such as the location of the property, the market value, rental income, and other factors that affect the price of the property. This information is made available to all investors, which helps them make more informed investment decisions.
Art has also been tokenized by Artory on Chainlink to utilize the set of advantages it provides. Artory issues tokenized art tokens that track the value of works of art, making art more transparent and accessible to investors.
The project uses Chainlink to integrate data on the market value for works of art from various sources, including exchanges, auctions, and galleries. Using this data, Artory can calculate the value of tokenized art tokens.
The data also contains the sales history data for the various works of art held by Artory. This history not only keeps a record of former owners of the art, ensuring the legitimacy of the piece, but it also affects the price of the piece as it reflects on the era of its creation and its uniqueness.
Lastly and more crucial is data on the condition of the art pieces. The data is collected from various insurance companies and art experts, enabling accurate artwork pricing.
Real-world assets are now more accessible to billions of people worldwide because of fractionalized ownership enabled by tokenization, which permits smaller-value purchases like a fraction of a gram of gold.
This has opened up the finance sector to more trades as more people can meet the lowered threshold of purchases.
Tokenization has also brought about provenance tracking and auditable data trails to confirm the authenticity of RWAs. This is made possible by storing immutable ownership records on a blockchain ledger, removing the need to rely on custodians holding paper certificates.
Investors have consequently gained trust in the legitimacy of these assets, increasing investment and the adoption of crypto at large.
Aside from lowering the threshold required to hold various assets, thus allowing more investors to buy them, using Chainlink also enables connection to many other blockchain networks, enabling the asset to be digitally traded to more people.
This increased access, in turn, results in a surge in the liquidity available for various assets in the TradFi realm and economy.
RWAs have become the bridge that leads TradFi investors into the DeFi economy. As such, the increased tokenization of a diverse variety of real-world assets has also steadily increased their adoption by users and investors.
In all this, Chainlink and all such oracles continue to play a fundamental role in enabling the practicality of tokenization. Using the information oracles provide, RWAs can maintain accuracy in their pricing, which lends to their reliability by investors from the TradFi sector.
As is the case with the crypto industry, more advancements are expected to take place to better streamline the process of tokenizing assets as well as trading and exchanging them on all blockchains.
The growth of RWAs on Chainlink has massively impacted LINK, the ecosystem’s native token, enabling it to rally by over 164% in 2023.