Shermin Voshmgir: March 24, 2024
This is an excerpt from the book Money, NFTs & DeFi. Other books in this series are: “DAOs & Purpose Driven Tokens” & “Web3 Infrastructure.” Read more on all books and previous editions here.
As BlackRock enters the asset tokenization race with a new fund on the Ethereum Network I would like to draw the attention to the importance and magnitude of tokenizing real world assets - eventually blurring the lines between money, finance & the real economy
MONEY WITH ATTRIBUTES
Blockchain networks enable the tokenization of any asset of the real and virtual economy. Any physical good or share in a small- or medium-sized company can be tokenized and subsequently divided into representative tokens, which could be traded on an open market – all this at a fraction of what it would cost in the client-server world and with much more public accountability than was previously possible. This is likely to create completely new market dynamics and redefine our concept of what constitutes money, finance or the real economy.
While early crypto assets had fungible characteristics, such as tokens that represent currencies or commodities, real-world assets very often have unique properties, and are therefore non-fungible, which is why they are often referred to as non-fungible tokens. Tokenization of real-world-assets (aka RWA) can also facilitate the attachment of unique properties to previously fungible asset classes, thereby creating new personalized asset classes.
The tokenization of RWA can replace entire back offices of asset management with smart contracts, which can make asset management more efficient and simplify the implementation of fractional ownership. Tools that represent various types of assets today, such as other digital certificates or paper certificates, are likely to be substituted by Web3 tokens over the next decade. First use cases are already emerging. Selected examples will be analyzed in more detail in this post.
DEFINITIONS
Tokenization of assets refers to the process of creating a Web3-native digital certificate for any physical object, financial asset or digital file. The tokens represent the physical or digital counterpart and are collectively managed by a public blockchain infrastructure or similar distributed ledger.
- “Asset token” is an economic term that refers to any type of asset – whether digital or physical.
- “Real-world asset” is used to describe physical assets such as commodities, physical art, real estate, or securities.
- “Security token” is a legal term that specifically refers to a type of asset token that is classified as a security according to financial market regulations. The interpretation of what constitutes a security, however, is subject to national legislation.
- “Non-fungible tokens” (NFTs), has recently become popular, mainly being used by mass media to describe digital art tokens, but this is a misappropriation of the term. While NFTs can represent digital or physical art, they can also represent any other type of non-fungible asset or identity-based digital certificates. Non-fungible tokens are unique in nature, and represent assets that have more complex properties than fungible assets. They come attached with a set of metadata that describe the unique properties of that asset and have a more complex rights management logic built into the token contract. Many real world assets have non-fungible properties.
REAL-WORLD ASSETS
Tokenization of RWAs can provide more market transparency and liquidity than existing economic and financial systems currently offer. Due to the frictionless settlement infrastructure a public and permissionless blockchain network provides, the transaction costs of developing and managing the rights attached to the digital certificates representing these assets can be significantly lower compared to what it would cost in state-of-the-art systems.
Tokenization of RWA can significantly reduce fraud or corruption along the supply chain of goods, services, and financial transactions. Tokenization can also increase the divisibility and liquidity, lower costs of price discovery, and create less fragmented markets, especially for real life assets that currently do not have high market liquidity. This reduces market friction, allowing more efficient marketplaces for certain assets: art or real estate, for example, usually have high economic buy-ins and can use tokenization to issue fractional ownership tokens.
Real estate and art are asset classes that were not easily divisible before, and whose property rights can now be fractionalized at lower transaction costs than with established systems. Divisibility refers to the fact that one acquires a fraction of an asset, and if that fraction is designed to be transferable, this could generate more demand from a larger potential pool of buyers.
The more easily divisible an asset is, the more transferable it becomes, as it can attract more investors with less economic means, increasing the market liquidity of that specific asset market. Consequently, the tokenization of real-world assets could be a breeding ground for completely new use cases, business models, and asset types that were not economically feasible before, and potentially enable new value-creation models.
While the tokenization of real-world assets could lead to an additional market capitalization of trillions of Euros into the Web3, it needs a few prerequisites such as
- A well-defined regulatory environment for the respective asset token classes
- Online exchanges specialized in the relevant asset tokens
- Trusted custodians who manage the physical assets in the case of co-ownership of RWA.
Examples of asset tokens in general and RWA in particular
- Use Case 1: Security Tokens
- Use Case 2: Real Estate NFTs & Fractional Ownership
- Use Case 3: Art NFTs
- Use Case 4: Collective Ownership & Micro-Investments
- Use case 5: Energy Tokens
- Use case 6: Data Tokens
- Use Case 7: Attention Tokens
- Use Case 8: CO2 Tokens
Read more on the potential and challenges of the above mentioned use case in: Money, NFTs & DeFi.
REFERENCES
This link will lead you to a website that contains all the references to the source materials used for the research of the chapter, and should also provide a reading list for all those who are interested in a deeper dive into the topics presented.