Analysis of Tokenization Technology for Real-World Assets

Tokenization of real-world assets ( RWAs ) is a digital token on the blockchain that represents ownership or legal rights to tangible or intangible assets. Tokenization is broad in scope, including real estate, commodities, artworks, intellectual property, and financial instruments.

By implementing fractional ownership, tokenization enhances asset liquidity, allowing more investors to access investment opportunities that were previously limited to high-net-worth individuals. The immutable nature of blockchain ensures transparent ownership records, reducing the risk of fraud. Tokenized assets traded on decentralized exchanges bring unprecedented market accessibility and efficiency.

It is predicted that by 2030, the total market value of various tokenized assets (, excluding cryptocurrencies and stablecoins ), will reach 1-4 trillion USD. This does not include stablecoins to avoid double counting.

Current System

Tokenization of real-world assets refers to representing off-chain asset ownership in the form of digital tokens through distributed ledgers such as blockchain. This connects the asset's characteristics, ownership, and value to its digital form. Tokens serve as tools for digital ownership, allowing holders to claim ownership of the underlying assets.

Historically, physical certificates were used to prove asset ownership, but they were vulnerable to theft, loss, and other threats. Digital holding tools began to emerge in the 1980s, but were limited by the technology of the time. The financial industry shifted to centralized electronic registration systems, which improved efficiency but introduced new costs and inefficiencies.

System based on distributed ledger technology

The development of distributed ledger technology ( DLT ) makes it possible to re-examine digital securities or tokens.

DLT consists of protocols and frameworks that enable computers to propose and verify transactions over a network, keeping records synchronized. Decentralization reduces administrative burdens and minimizes the risk of system failures.

In traditional systems, multiple intermediaries handle transaction execution, clearing, and settlement. DLT systems simplify these processes through a single consensus mechanism.

Decentralized Solutions

Blockchain is a distributed ledger technology that operates through a decentralized network of computers. Tokens can be issued on private permissioned chains or public permissionless chains.

Private permissioned chains are controlled by a central entity, restricting access to specific users. Public permissionless chains do not require central authority control and are open to all users. Tokens issued on public chains can be integrated with DeFi protocols to enhance utility and value.

The choice of blockchain determines the level of control that the issuer can maintain. Public chains grant the issuer less control. The choice should align with the issuer's goals and the expected functions of the Token.

The key advantage of asset tokenization is the automation achieved through smart contracts. Smart contracts are programs on the blockchain that execute when specific conditions are met. This automates financial transactions and administrative tasks, reducing the need for manual intervention and intermediaries, while improving efficiency and security.

Tokenization Methods

The tokenization of real-world assets can be analyzed through two attributes: the form of the asset and ownership. The form includes the economic characteristics of the asset. Ownership verification requires off-chain or on-chain ledgers.

Digital augmented assets maintain ownership through off-chain ledgers, using blockchain tokens as digital representations. Native digital assets are essentially digitized, with tokens directly representing value and ownership.

There are four main methods of tokenization:

1. Direct ownership: Digital tokens themselves serve as official ownership records, applicable to digital native assets.

2. 1:1 asset-backed Token: The custodian holds the assets and issues tokens that represent direct rights.

3. Over-collateralized Token: Issuing asset tokens by using different assets as collateral.

4. Insufficient collateral Token: A token issued to track the value of an asset but not fully collateralized.

Advantages of Tokenization

Tokenization of real-world assets improves efficiency and transparency through DLT, automates processes, reduces costs, and eliminates intermediaries and counterparty risk. Key advantages include:

• Atomic Settlement: Smart contracts execute both stages of the transaction simultaneously, eliminating counterparty risk and improving speed and efficiency.

• Liquidity enhancement: Increases the transferability of assets, making non-tradable assets tradable.

• Reduce intermediaries: Smart contracts replace traditional intermediaries to verify data and automate processes.

• Achieving Automation: Smart contracts automatically execute tasks under predetermined conditions.

• Promote compliance: Standardization and automation of processes improve the efficiency of KYC, AML, and other compliance.

• Automated Market Maker: An asset pool managed by smart contracts automatically matches buyers and sellers.

Risks and Costs

Tokenization assets face challenges in technology and regulation. Technical risks include issues related to cybersecurity, scalability, and settlement. Regulatory issues involve anti-money laundering, governance, and identity verification.

In addition, there are challenges such as investor behavior, market dynamics, and the popularization of education. Environmental impact is also a concern.

Transitioning to a tokenization financial system involves significant costs, including infrastructure transformation, system integration, and educational activities. High energy consumption also brings financial and environmental challenges.

To fully realize the advantages of tokenization, it is necessary to address these multifaceted challenges.