Tokenization, in the cryptocurrency realm has been gaining steady traction. But beyond the buzzword lies an intriguing concept - Real-World Asset (RWA) Tokenization. This process is far more than just another blockchain application; it's about revamping our understanding and execution of ownership in the digital age.
In my last article, I painted a picture of the possibilities asset tokenization can unlock for digital and real-world assets. Frankly, it is a challenge to be concise about the power and reach of this relatively new technology. To recap, tokenization essentially provides a way of unambiguously verifying ownership of an array of assets using blockchain technology. Imagine steroid-enhanced digital receipts that live on the blockchain. Tokenization intersects with smart contracts to streamline, automate processes, increase trust and transparency, revolutionize industries, and offer access for all to financial tools, services and options that historically have only been available to the hyper-wealthy.
As tokenization is a digital technological process, its application to real world assets might not be initially intuitive, but the potential of tokenization to impact how we own, exchange, and use real world assets is vast. There are “profound implications in regards to ownership, which translates to impacts to aspects of private property in general… and when an aspect of our day-to-day reality as enormous as private property and ownership is modified, we are talking about something truly game-changing.” So let’s pop the hood on real-world asset tokenization: explore more deeply how it works, how it’s being used, how it could be used, and what it will take to get to the tokenization promised land.
As I talked about this more thoroughly in my last article, the tokenization process assigns a digital token as a corresponding proxy to an asset, be it digital or otherwise. The token in and of itself does not hold any value. Its purpose is to confirm and store the ownership information of the asset it relates to, making that ownership visible to any and all users of the blockchain, and thereby establishing the ownership in a verifiable manner that is essentially beyond dispute. Behind that fairly straightforward functionality lies an array of changes and potential waiting to be unlocked, some of which have already begun to take root while others remain essentially inevitable but have yet to present themselves at the level of impact they promise. (If you’re interested in a bit of a refresher on this, check out my previous tokenization article linked above)
This form of RWA ownership has been around for a long time, but with the help of tokenization, it can be taken even further. As it sounds, fractionalized ownership is essentially owning part of something, depending on what that something is and the platform you own it through. These items could be possessions you own and interact with in your life or valuables invested in to diversify your portfolio. Historic examples include vacation homes, timeshares, and luxury items like boats or planes, as well as investment assets like art, stock and fashion items. Previous to blockchain and tokenization, fractionalized ownership relied on complex contracts and agreements to navigate the maze of logistics necessary to pin down percentages, access, limits, etc. This analog method of defining and managing fractionalized ownership of RWA is cumbersome, confusing, and often requires lawyers to manage the necessary processes.
RWA tokenization, on the other hand, is streamlined, transparent, and highly accessible. By assigning a digital token to a real world asset, the process of managing, verifying, and transferring ownership is instantaneous, trustworthy, and convenient (once you’ve familiarized yourself with the process, that is). To see this in action, check out companies like Paxos, a company that made news recently for partnering with Paypal to introduce the Paypal stable coin for payments (PYUSD). They also offer investors the ability to get into gold by buying tokens or fractions of tokens. RealT is another interesting firm that allows users to buy, sell, and trade tokens in real estate holdings, as well as earn a proportional percentage of rental income on properties you hold and also get a piece of property appreciation.
Peer-to-peer loans can be managed and executed using RWA tokenization to allow for better interest rates, lower loan-to-value ratios, and an expanded array of what can be used as collateral. As the name suggests, peer-to-peer loans feature individuals (not financial institutions) offering the money, meaning the loaner may see the loanee’s collateral as something worth owning, versus a financial institution only seeing it as something they will sell if the loan is not repaid. Check out 4K protocol and Arcade to learn more.
Funding Projects (Via Revenue Shares)
(Note: you cannot sell part of your company this way without receiving approval from the SEC, as selling equity makes your token a security.)
For the first time, you can easily and simply offer revenue sharing on a project to those who want to buy into it. This is very important for projects with large startup costs, as project developers have the ability to gauge demand and get cash in before actually having to invest a large sum of money in something with an as-yet unproven market. This may make you think this is a problem only for tech start-ups which should seek VC funding, but many small businesses have high start-up costs. Imagine you want to start a landscaping business. How much does it cost to purchase the tools, equipment, supplies, and insurance required for that field? Buying all of that on savings or loans is a high bar to clear before even beginning to pursue clients and turn a profit.
(This may lead some to point out that you can fund projects through Indiegogo or similar sites, but that isn’t actually the case. As you can see here, per the Securities Act of 1933, they don’t allow it.)
In my opinion, one of the most interesting projects in this space is LandX, which allows farmers to raise capital by tokenizing their crops while holders get to diversify their portfolios. This jumps out as an amazing use case as 98% of farms in the US are family owned, and we are losing farmland at an alarming rate because the economics of the business do not make sense. (Surprisingly, it makes even less sense for vertical farms.)
Picture your basement, shed, storage unit, or wherever you keep all the items that don’t make it into regular use in your daily life. A lawn mower, power tools, exercise equipment, the old car you don’t want to sell but never drive. The list goes on. These items may possess sentimental value for you, but sitting in storage, how do they contribute positively to your bottom line? We tend to undervalue our assets: once we buy them, their economic value seems diminished. After all, you can’t return them to where you bought them or sell them for the same price you paid, so it seems once the money is spent, we are handcuffed to our possessions until they stop functioning, and we throw them away or get tired of not using them and give them away.
RWA tokenization offers a new option: what if you could rent them out when you weren’t using them? At first, that concept may sound absurd or unrealistic. But this is a strategy the hyper-wealthy already employ. As I mentioned in my previous article when a billionaire buys a private jet, they don’t keep it resting (and rusting) in a hangar until they’re ready to take a trip - they rent it out. The same goes for luxury real estate, art, etc. Through peer-to-peer loans or fractionalized ownership, there is no reason why the average person couldn’t do this with their rarely used possessions.
Imagine your neighbor was launching a business with heavy start-up costs, like a salon or construction company. Now imagine if you could rent out the assets you own but don’t use to those business owners, allowing them to save on their upfront costs and you to turn the asset’s value into actual income for you.
This essentially creates an inventory and market of things that can be used as collateral, sold, traded, etc. Imagine what this can do to reduce waste, from the sale of new products and from the expiration of products. Instead of your old dishwasher going to a landfill when you get a newer one, through tokenization, you could resell it to not only offset some of the cost of replacing it, but also provide a discounted option to someone who can’t afford the same unit brand new AND it results in less manufacturing. Imagine what this means for people listing things they no longer want or need: this creates a new source of income.
At the end of the day, a well-structured marketplace serves a pivotal function: diminishing information asymmetry, thereby leveling the playing field between buyers and sellers. Initially, consider the auto industry. Before the web, car dealers enjoyed an advantage due to consumers' limited access to information. Platforms like Edmunds disrupted this by offering aggregated car pricing data, empowering consumers to make informed decisions. In the same vein, Carfax brought transparency to used car purchases by providing detailed vehicle histories.
Building on this, resolving information asymmetry has a cascading effect: it not only informs consumers but also expands their horizons. When individuals have access to a broader range of information, they naturally become aware of products or services that they might not have previously known existed or had limited local access to. This comprehensive view ensures that their needs are better met. For instance, someone might have only been aware of products available in their local stores. However, in an expansive marketplace, they might discover alternatives sourced globally that are more aligned with their preferences or needs. This isn't merely about broadening options in the way marketers have tried to do (which this study by Sheena Iyengar and this HBR synopsis confirm isn’t actually helpful) —it's about providing everyone an equal footing in terms of product awareness and accessibility.
Now, it is necessary to note that to do this properly will require some form of insurance to value items if they are destroyed or damaged and for people to actually look for a rental solution. A logistical infrastructure would need to be built for this to exist at a notable scale, but with the possibility of reliquifying the value of items the average person has already purchased, the potential benefits are enormous.
Let’s leave behind the optimistic dreamer and talk about the reality of the world. Despite the present-day capabilities of RWA tokenization, most people (including those who could benefit from its potential) have no awareness of this technology, and those who do might naturally doubt these claims. So how do we get to the promised land of fully activated, fully integrated, and fully actualized RWA tokenization?
The first barrier to cross is the development of an infrastructure capable of managing these processes and a user interface that is functional enough for the average person to use. This will be a big lift, and on new technology that still has a relatively small pool of engineers and coders trained to do this. RWA tokenization doesn’t HAVE to take place exclusively in a blockchain environment (which is part of the as-yet relatively ‘niche’ space of web3), but for this to work at scale, the process needs to be easy, and smart contracts, which live on the blockchain, give us a way to handle complex logistics easily.
The logical question this leads to is: who will build it? If I knew that, I would probably already be a successful early-stage investor and spend my time “sweat working” with a bunch of other founders, kite-surfing off of Maui, (or exchanging blood with my infant son to make sure I don’t ever age). While I don’t know the answer to this, I do know that some companies are starting the process, and we have mentioned them above. Whichever company does manage to produce and present these services in a navigable, intelligible way stands to be the next eBay or Amazon or Facebook. (To any would-be founders reading this, maybe you can answer this call!)
The second primary barrier is the mindset shift necessary to permit wide-scale adoption and engagement. After all, the average person doesn’t have a clear understanding of most web3 technologies, let alone ever conceptualized tokenization or imagined that the things they own could have a longer economic life cycle than has ever been the case before. Furthermore, we may imagine a bias against ‘secondhand’ purchases or rentals. It’s possible when you started reading this article, your initial reaction was, ‘I don’t want to borrow some stranger’s lawn mower.’
These mindsets may be ingrained, but that doesn’t mean they are carved in stone, and precedent abounds of significant and sometimes rapid paradigm shifts where technology is concerned. Consider the rapid adoption of credit cards, mobile and smartphones, and the use of dating apps. Or for something more recent, the cultural and professional evolution brought about by the pandemic: remote working. All of these transitions seemed impossible… until they happened.
When a clear value presents itself, a market will emerge. and given the level of economic difficulty being experienced globally, combined with the sustainability issues and environmental concerns stacking up in our era, the benefits of RWA tokenization and the modifications and innovations of ownership that it presents ought not to be ignored.
The world of RWA tokenization is rich with possibilities, awaiting the right blend of technology, entrepreneurship, and public acceptance to unleash its full potential that could pave the way for reduced waste, both in terms of production and expiration of products. With new income sources opening up for individuals and businesses, this framework promises financial inclusivity and dynamism.
Future articles will explore additional aspects of tokenization and its intersections with other web3 innovations. I hope that this article has shed further light on what RWA tokenization has to offer and encourages you to learn more about it and other web3 technologies. If you’d like to learn even more about it, check out these informative articles: