The State of Real-World Asset Tokenization in 2023 and Beyond — A Lot Has Changed

8 min readDec 7, 2023

2023 has been a year of remarkable evolution in the crypto market. The focus has shifted from cryptocurrencies and NFTs to the tokenization of real-world assets, marking a significant milestone in the journey of Web3.

The tokenization of real-world assets involves representing physical assets digitally on a blockchain. This process has gained significant traction in 2023, transforming the way we perceive ownership and trade. From real estate to commodities and even intellectual property, a wide range of assets are being tokenized, making them more accessible and liquid than ever before.

In addition to making assets more accessible, tokenization also adds a layer of transparency and security to the process. Every transaction is recorded on the blockchain, providing a clear audit trail. This has significant implications for industries like real estate and art, where provenance and authenticity are crucial.

Real-world asset (RWA) tokenization has also seen some interesting trends in 2023. One of the key trends is the rise of fractional ownership. Tokenization allows assets to be divided into smaller units, enabling more people to invest in assets that were previously out of reach. This has democratized access to investment opportunities and has the potential to reshape the financial landscape.

Another trend is the integration of tokenized assets with decentralized finance (DeFi) platforms. This allows tokenized assets to be used as collateral for loans or to earn interest, further expanding the utility of these assets.

However, the journey towards widespread adoption of asset tokenization is not without its challenges. Regulatory hurdles, technological complexities, and issues of trust and understanding are some of the obstacles that need to be overcome.

As we navigate through 2023, it’s clear that the crypto market is evolving beyond cryptocurrencies. The tokenization of real-world assets is a significant step towards a more inclusive, transparent, and efficient financial system. It will be interesting to see how this trend evolves in the coming years.

Understanding Real-World Asset Tokenization

Real-world asset tokenization is a process that transforms physical assets into digital tokens on a blockchain. This innovative financial practice is gaining traction due to its potential to increase liquidity, accessibility, and efficiency in traditional markets. Let’s delve into the key components and workings of the on-chain tokenization process:

1. Asset Selection:

Any tangible or intangible asset with inherent value can be tokenized. This includes, but is not limited to, real estate, currencies, commodities, art, securities, and more.

Assets are chosen based on their liquidity, divisibility, and the legal framework surrounding their ownership.

2. Legal Framework:

Before tokenization, a legal framework is established to define ownership rights, transfer mechanisms, and compliance requirements.

Smart contracts are often employed to automate and enforce these legal agreements, ensuring transparency and security in transactions.

3. Tokenization Process:

Asset Evaluation: The chosen asset undergoes a thorough evaluation to determine its value, potential income streams, and associated risks.

Special Purpose Vehicle (SPV) Creation: In some cases, an SPV may be created to hold the asset and issue tokens. This legal entity helps ring-fence liabilities and streamlines the tokenization process.

4. Blockchain Integration:

Selection of Blockchain Platform: The asset is then integrated into a blockchain platform. Ethereum, Solana, Binance Smart Chain, and others are popular choices.

5. Token Issuance:

Creation of Tokens: Tokens representing ownership rights to the asset are minted on the blockchain. Each token corresponds to a fraction of the total asset value.

Token Distribution: These tokens are then distributed to investors or stakeholders based on their investment.

6. Trading on Secondary Markets:

Liquidity Creation: The tokens can be traded on secondary markets, enabling investors to buy, sell, or trade their ownership stakes.

7. Monitoring and Governance:

Real-time Monitoring: Blockchain’s transparency allows for real-time monitoring of the asset’s performance and value.

Governance Mechanisms: Token holders may have voting rights through governance mechanisms encoded in the smart contracts, enabling them to participate in decisions related to the underlying asset.

Real-world asset tokenization holds the promise of unlocking new avenues for investment, democratizing access to traditionally illiquid assets, and streamlining financial processes. As technology and regulatory frameworks evolve, the on-chain tokenization process is poised to become a transformative force in the financial industry.

Real-World Asset (RWA) Tokenization: A Growing Frontier

Real-world asset (RWA) tokenization is experiencing a surge in attention, with an increasing number of real-world assets successfully being tokenized on blockchain platforms. This transformative trend includes a diverse range of assets, such as the US dollar, US Treasury bills, Yield-Bearing investments, Art, Real Estate, and various Commodities.

Advantages of Tokenization

The momentum behind RWA tokenization is fueled by several advantages:

- Lower Barrier for Entry: Tokenization opens up investment opportunities to a broader audience, breaking down traditional entry barriers.

- Cross-Border Opportunities: Investors can explore new opportunities globally, transcending geographical limitations.

- Quicker and Cheaper Transactions: The tokenization process facilitates faster and cost-effective transactions.

- Enhanced Transparency and Liquidity: Trading tokenized assets on blockchain platforms provides improved transparency and liquidity.

Market Sizing and Industry Statistics:

The market for RWA tokenization is gaining substantial traction, with a notable market capitalization. As of May 2023, the estimated market capitalization for RWA tokenization businesses stands at $2.15 billion, with $700 million dedicated to DeFi tokenization protocols. These figures, derived from a US Federal Reserve research paper, represent a subset of public blockchain projects.

As of October, the RWA tokenization industry boasts 68 centralized and 39 decentralized players. Categorized by Centralized Finance (CEFI), the projects cover a spectrum of asset classes, with real estate, equity, private credit, fixed income, commodities, and forex among the supported categories. On the DeFi side, there are projects spanning credits and loans, real estate, luxury goods, fixed income, carbon credit, equities, gold, insurance, and automotive.

Current State of Asset Tokenization in DeFi

DeFi Project Focus and Chain Dominance:

Within the DeFi sector, there is a notable focus on credits, tokenization, derivatives, infrastructure, stablecoins, insurance, and commodities. Of the 39 DeFi protocols, 25 are run on the Ethereum chain, with others distributed across Polygon, Celo, Arbitrum, Gnosis, Algo, Solana, BNB, Optimism, and AVAX.

Notable Tokenization Framework Projects:

In the blockchain space, a multitude of projects are delving into the realm of tokenization. Some of these initiatives are leveraging blockchain level standards like ERC-3643 and ERC-1400, which are gaining some traction. However, the market is currently fragmented, with each tokenization project employing its own unique set of non-standard or proprietary smart contracts and processes. Many of these are designed around or derived from existing standards such as ERC-721, ERC-1155, among others. As of now, it remains to be seen which of these projects will be successful in garnering widespread adoption.

Tokenization of US Dollar Currency and Treasury Bills:

Stablecoins like USDT, USDC, and DAI represent prominent examples of tokenized US dollar currency. Additionally, initiatives like ONDO Finance and ST USDT tokenization contribute to the tokenization of short-term US Treasury bonds, providing a low-risk yield on the blockchain.

RWA-Based Lending and Credit Protocols

Projects like Centrifuge and Goldfinch are pioneering RWA-based lending in DeFi. The protocol enables the lending of money via DeFi pools to finance real-world assets and investments. This mechanism allows investors participating in these pools to earn yield derived from real-world assets and investments. It’s a transformative approach that brings together the world of decentralized finance and traditional financial institutions.

Advantages of RWA-Based Lending

RWA-based lending in DeFi presents several advantages. It offers higher yields compared to traditional DeFi protocols, provides diversification opportunities, and has the potential for undercollateralized loans, addressing a common limitation in traditional DeFi lending. Additionally, it instills higher investor confidence due to the investments being tied to tangible physical assets.

Total Value Locked (TVL) Overview:

The DeFi landscape has been in stealth mode since June 2022, with no significant uptick witnessed in the Total Value Locked (TVL), which has remained around the $100 billion mark. However, a different narrative has been unfolding for protocols based on Real-World Assets (RWA).

These RWA-based protocols have seen a substantial increase in their TVL during the same period, growing from a modest range of $200–300 million to an impressive $5.7 billion. This trend underscores the growing momentum of RWA-based protocols in the DeFi landscape.

Current State of Asset Tokenization in CeFi

Tokenization involves converting different types of assets into a digital token on a blockchain. Each type of asset contributes to the Total Value Locked (TVL) in the market. Here’s a breakdown of the current state of asset tokenization based on diverse asset classes:

Commodities: The TVL for commodities is $1.1 billion, featuring projects like PAXG and XAUT.
Securities: Securities have a significant TVL of $371.02 million, with projects including Ondo, MatrixDock, Backed, Aktionariat, and OpenEden.
Real Estate: The TVL for real estate totals $159.25 million. Notable projects in this category are ReatT, Tangible (real estate-backed stablecoin), and LOFTY.
Credit: Credit has a substantial TVL of $6.5 billion, comprising projects like Maker, StUSDT, and Maple.

Although securities might currently represent a lesser adoption compared to other asset classes, the tokenization of securities represents a very high market opportunity worth around $14 trillion.

Traditional vs Tokenized Securities

Traditionally, managing financial assets involves a system that often needs to be checked for errors. But with tokenization, we can use programmable tokens on a shared platform. This way, there’s no need for a central entity, and people can directly access assets.

Investor Interest in Tokenized Securities

There are two main types of tokenized securities projects being developed:

Standalone Products: These are new types of tokenized products like securitized funds and bonds.
Digital Twin Products: These are tokenized versions of existing investments and assets.

In India, there are projects like RealX and Property Share that are working on tokenizing real estate.

Challenges and Future Outlook

Despite gaining momentum, RWA tokenization remains a niche industry with regulatory concerns and a need for substantial real-world connections. However, major DeFi protocols are strategically focusing on RWAs to achieve sustainable yields and diversify their holdings. Rune Christensen, founder of MakerDAO, outlines Maker’s endgame plan, emphasizing the investment in RWAs to create a resilient portfolio backing their CDPs. Similarly, the future outlook for RWA tokenization in CeFi is also characterized by growth potential across commodities, securities, real estate, and credit.

In conclusion, the RWA tokenization landscape is evolving, offering immense potential for growth and disruption in traditional finance. As the industry navigates regulatory challenges, the synergy between decentralized finance and real-world assets continues to redefine investment paradigms.

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