Tokenization is an intriguing part of the blockchain system. It involves transforming assets or utilities into digital tokens. Real world assets (RWA) are tangible assets like gold, real estate, and carbon credits that are converted into digital formats for trading. – What is a Real World Asset?
RWAs have proven to be extremely useful in the DeFi sector. The incorporation of RWA into DeFi is frequently praised as a prime illustration of how traditional finance assets can seamlessly merge with DeFi.
How Do It Work?
Let’s first understand how RWAs work in DeFi. How can we verify that RWAs truly represent real-world assets? The process involves off-chain formalization, information bridging, and RWA protocol demand and supply.
Off-chain formalization
Before a physical asset can be added to a digital ledger, it is essential to clearly establish its value, ownership, and legal status in the real world.
To estimate the worth of a RWA, several factors are considered, including market price, performance history, and physical condition of the asset. Additionally, the asset must have clear legal ownership, which is supported by deeds or invoices.
Information bridging
During this stage, we undergo the tokenization procedure, where the asset’s details are transformed into a digital token. The token’s metadata contains information about the asset’s worth and legal ownership. Thanks to the transparency of the blockchain, anyone can confirm the token’s genuineness by examining its metadata.
When it comes to assets that are regulated or considered securities, it is crucial to use regulatory technologies. This can involve working with licensed security token issuers, following crypto-specific KYC (Know Your Customer) and KYB (Know Your Business) standards, and utilizing cleared security token exchanges.
RWA protocol demand and supply
In the final stage, which revolves around demand and supply, DeFi protocols that prioritize RWAs become active. They serve two purposes: firstly, they facilitate the creation of new RWAs, thereby increasing the availability of these digital assets. At the same time, they also strive to attract investors who are keen on purchasing and trading these assets.
By using this three-part method, RWAs are transformed from theoretical ideas into essential elements of the DeFi ecosystem, bringing real-world value and legal structures into the decentralized digital space.
Advantages of Using RWAs in DeFi
- Liquidity boost
- Fractional ownership:
- Transparency
- Inclusivity
Limitations of Using RWAs in DeFi
- Regulatory complexity
- Security concerns
- Scalability
Conclusion of What is a Real World Asset Article
RWAs bring new possibilities to DeFi, expanding its reach and appeal. They offer the potential for a financial landscape that combines traditional and decentralized finance. However, there are challenges to overcome, such as meeting regulatory requirements and maintaining market trust.