One of the most exciting trends in blockchain is the emergence of tokenized real world assets, which represent on-chain versions of traditional, physical assets spanning everything from bonds and invoices to real estate and commodities.
RWAs will be pivotal to blockchain’s future. Larry Fink, CEO of the powerhouse hedge fund BlackRock, has called tokenization the “next generation for markets” and believes it will emerge as the bedrock of our future financial system.
Blockchain protocols are scrambling to support RWAs. Chromia has developed the LDAP protocol specifically for regulatory-compliant tokenized assets that span the capital supply chain, while MakerDAO has embraced tokenized collateral as the foundation of its stablecoin DAI. The Layer-1 blockchain Avalanche has invested millions to support its vision for RWAs, and Centrifuge has already established a thriving marketplace for tokenized assets.
Chromia
Chromia’s Ledger Digital Asset Protocol, or LDAP, can play a key role in ensuring RWAs meet the compliance expectations of traditional financial institutions. It’s leading the way in terms of improving the transparency and compliance of RWAs.
One advantage of LDAP is it’s not encumbered by the data storage limitations of EVMs, which generally max out at 40 megabytes. This is too restrictive for RWAs, which require supporting documentation such as investment prospectuses, investment reports and so on.
With its relational database capabilities, LDAP makes it possible to bring more of these documents on-chain, eliminating the need for an external database. Chromia also eliminates the gas fees associated with blockchains, reducing the costs of transactions. Moreover, transactions on Chromia’s LDAP are time-stamped and signed cryptographically, and a multi-signature approval process can be integrated to boost security when required.
Additionally, LDAP offers full compatibility with all EVM-based chains, and its unique architecture supports programmable compliance features, paving the way for the integration of complex rule sets including KYC and AML at the token level. Meanwhile, its smart contracts allow essential tasks such as minton tokens, transfers and whitelisting to be fully automated, so there’s no need for intermediaries to be used in the tokenization process.
MakerDAO
MakerDAO began life as a simple DeFi lending and borrowing protocol but is increasingly seen as a frontrunner in RWAs, with tokenized U.S. Treasury bonds helping to diversify its revenue streams.
The protocol’s flagship product these days is its stablecoin DAI, which is increasingly reliant on RWAs for collateralization. The issuance process of DAI, which is pegged to the U.S. dollar, requires overcollateralization. Whereas it was traditionally collateralized by digital assets exclusively, MakerDAO has diversified into RWAs to help DAI scale and mitigate counterparty risks. MakerDAO issues loans in the form of DAI to financial institutions to invest in real-world projects like infrastructure and real estate. Those institutions then repay the loans with interest.
In this way, DAI is backed by future interest from loans, enabling more of it to be minted, increasing its circulation without the need for extra collateral. It’s a novel approach that can elp MakerDAO to dramatically expand the adoption and utility of DAI.
Avalanche
Avalanche is a versatile L1 blockchain that spans use cases such as DeFi, NFTs, blockchain gaming and more, and it’s becoming a key player in RWAs thanks to its rapid throughput, near-instant transaction finality and low costs.
One key advantage of Avalanche is its unique architecture, which allows for the creation of private subnets for each tokenized asset. These subnets mean transactions can be processed off-chain much more rapidly and with minimal fees, and they can be customized in various ways for each specific asset, ensuring they meet the needs of investors and industry regulators. Last year, the Avalanche Foundation committed $50 million towards the creation of tokenized assets on its L1 infrastructure.
Centrifuge
One of the most vibrant marketplaces for RWAs is Centrifuge. It was one of the first-ever RWA protocols to start bringing physical assets on-chain. Through its decentralized RWA marketplace, businesses can tokenize various assets, such as unpaid invoices, bonds, IOUs and real estate, and use it as collateral to secure short- and long-term capital loans. Investors can deposit into various pools, which are designed to cater to different risk-reward profiles.
With Centrifuge, RWAs are minted as digital assets that can be used as collateral to issue interest-bearing stablecoins, and once those assets are on-chain, they can be transferred freely via its blockchain-based marketplace and utilized in a growing ecosystem of DeFi services.
Advantages of RWAs
The success of these projects underscores how real-world asset tokenization is making rapid progress. WIth RWAs, investors can participate in more efficient, lower cost and less restrictive on-chain markets for almost any kind of asset, including art and collectibles, bonds, commodities, stocks and shares, precious metals and more. Assets can be traded directly between two parties, and they can also be fractionalized, increasing liquidity in markets that were traditionally highly illiquid.
Key advantages of RWAs include lower costs due to the removal of middlemen like brokers, banks and lawyers; more rapid and efficient transactions for assets that could previously only be processed during working hours; a lower barrier to entry for investors; and increased transparency, with greater accountability and more trust.
The Future Of Financial Markets
These advantages are so compelling that a growing number of traditional financial institutions are buying into RWAs, seeing them as the future of financial markets. As the technology matures and projects like Chromia cement compliance structures for RWAs, the regulatory landscape can be streamlined, leading to the tokenization of many more traditional assets.
RWAs therefore promise to democratize more investment opportunities, allowing retail investors to access markets that were previously exclusive to high-net-worth individuals, hedge funds and banks. Thanks to the unique capabilities of blockchain, financial markets can eliminate the hurdles of high transaction costs, illiquidity and limited access, allowing everyone to participate in high-level finance.
