The crypto industry gave birth to numerous niches to find the "next big thing" that could make it a $3 trillion market once again. As the latest on-chain data shows, the highest potential currently lies in using a core mechanic of blockchain to bridge the market to the well-established world of real-world assets, also known as RWA tokenization.
In crypto terms, RWA tokenization denotes the process of creating "digital twins" of material and monetary assets by using blockchain technology and smart contracts to transform them into on-chain assets. Virtual RWA protocols link the crypto ecosystem and traditional finance (TradFi). RWA tokenization encompasses not just prominent asset types like financial goods, real estate and precious metals but also intangible assets like intellectual property. With the power of tokenization, almost any asset may be fractionalized, and its ownership can be automated, transparent and cost-free.
As of November 2023, the total value locked (TVL) in DeFi protocols in the RWA category was more than $5 billion, based on available data. Tokenization opens a market for previously non-tradable or hard-to-trade asset classes, resulting in a growth of over 600% year to date.
Most RWAs, such as fine art or real estate, are out of the price range of the middle and lower-middle classes. Blockchain now defies the status quo by providing a democratic answer. Just like how one Bitcoin can be divided into millions of Satoshis, the secret potential of illiquid assets can be unlocked by tokenizing and splitting RWAs into parts via blockchain — paving the way for new markets where intangible assets like intellectual property or natural resources rights can be traded. Additionally, this concept enables collectors to acquire shares in fine art objects.
It's no secret that a key driver of the next bull run will be the inclusion of traditional finance. RWA tokenization creates a direct link between DeFi and TradFi. It helps onboard people who don't have access to or capital to invest in high-class assets, expanding the market to include a whole new profile of investors and traders.
The Sum of the Parts Is Greater Than the Whole?
For people who want to invest in valuable assets without having to shoulder the responsibility of full ownership, "fractional ownership" provides the next best way. For example, a crowdsourcing platform partially facilitates the sale of shares in rare autos. In the context of fractional ownership, there are many examples. Holding a print of the most well-known painters, like Andy Warhol, David Hockney, Keith Haring and others is available on websites that sell fractional shares. Fractional models based on blockchain technology make investing in fine wine, gold, silver and platinum bullion simple and accessible.
Facilitated by the two-way connection between TradFi and DeFi through blockchain, asset tokenization has the potential to take down the economic barriers for alternative financing models. Put another way, tokenizing an asset makes it possible for those who cannot afford to buy fine art or real estate to own a specific asset share. The value of the market and transaction volume can rise rapidly when low-income people enter the ecosystem.
Regarding the size of the investment market, the cryptocurrency world pales in comparison to the RWAs. However, combining these two categories can potentially create an infinite playground. While tokenized real-world assets make investing more accessible to a broader spectrum of investors, decentralized applications offer a sizable financial space with unprecedented flexibility. It will be advantageous for both businesses and people.
As the on-chain data from the last couple of months shows, liquidity is soaring as the demand for tokenized RWAs grows. The next phase might see asset trading in secondary markets, taking the cryptocurrency industry to unprecedented heights. Smaller investment quantities might psychologically allow newcomers to the industry to move more at ease and fearlessly. Investors who remain cautious about crypto because of volatile price actions can find comfort in the stability of real-world assets.
Financial markets will benefit significantly from integrating blockchain-based divisible RWA models, which can completely change the nature of investing. Tokenization will facilitate worldwide involvement by splitting ownership and eliminating market entry obstacles. As the next big thing, it will open up new prospects for institutional and retail investors.
Asif Kamal is the founder of Artfi, an art technology company harnessing the power of NFTs and blockchain to allow collectors to own a stake in works of art.
(Opinions expressed in this article are the author's own.)
