Tokenization of Real-World Assets: Underlying Logic and Pathways for Large-Scale Application

The most prominent topic in the blockchain field in 2023 is undoubtedly the tokenization of Real World Assets (RWA). This concept has not only sparked heated discussions in the Web3 world, but has also gained significant attention from traditional financial institutions and government regulatory bodies in many countries, being regarded as a strategic development direction. For example, authoritative financial institutions such as Citibank, JPMorgan, and Boston Consulting Group have successively released their own research reports on tokenization and are actively promoting related pilot projects.

At the same time, the Hong Kong Monetary Authority clearly stated in its 2023 annual report that tokenization will play a key role in Hong Kong's financial future. In addition, the Monetary Authority of Singapore has joined forces with Japan's Financial Services Agency, a trading platform, DBS Bank, and many other financial giants to launch an initiative called "Guardian Program" to deeply explore the immense potential of asset tokenization.

Although the topic of RWA is at its peak, there are differences in understanding RWA within the industry, and discussions about its feasibility and prospects are quite controversial.

On one hand, there are views that RWA is nothing more than market speculation and cannot withstand in-depth discussion.

On the other hand, some people are full of confidence in RWA and optimistic about its future.

At the same time, articles analyzing different perspectives on RWA have emerged like mushrooms after rain.

This article aims to provide a deeper discussion and analysis of the current status and future of RWA by sharing perspectives on RWA.

Core viewpoint:

• The RWA logic in the crypto space primarily revolves around how to transfer the rights to the income generated by revenue-generating assets (such as U.S. Treasury bonds, fixed income, equity, etc.) onto the blockchain, using off-chain assets to collateralize loans to obtain liquidity for on-chain assets, and moving various real-world assets onto the blockchain for trading (such as sand and gravel, minerals, real estate, gold, etc.). This reflects a unilateral demand from the crypto world for real-world assets, facing many regulatory obstacles.

• The future development focus of Real World Asset Tokenization will be a new financial system utilizing DeFi technology, driven by authoritative institutions such as traditional financial institutions, regulatory bodies, and central banks, built on the Permission Chain (. To realize this system, it requires a computational system (blockchain technology) + a non-computational system (such as legal frameworks) + on-chain identity systems and privacy protection technologies + on-chain legal tender (CBDC, tokenized deposits, stablecoins) + a complete infrastructure (low-threshold wallets, oracles, cross-chain technology, etc.).

• Blockchain is the first effective technological means to support the digitization of contracts after the development of computers and networks. Therefore, it can be said that blockchain is essentially a platform for digital contracts, where contracts are the fundamental expression of assets. The token )Token( is the digital carrier of assets formed after a contract, making blockchain an ideal infrastructure for the digital expression/tokenization of assets, namely digital assets/tokenized assets.

• Blockchain, as a distributed system maintained by multiple parties, supports the creation, verification, storage, transfer, and execution of digital contracts and other related operations, addressing the issue of trust transmission. Furthermore, as a "computational system," blockchain can meet humanity's demand for "repeatable processes and verifiable results," which is why DeFi has become a "computational" innovation in the financial system, replacing the "computational" aspects of financial activities. The automatic execution realizes cost reduction and efficiency improvement while also enabling programmability. However, the "non-computational" aspects, which are based on human cognition, cannot be replaced by blockchain. Therefore, the current DeFi system does not encompass credit, and credit-based unsecured lending has not yet been realized in the current DeFi system. The reasons for this phenomenon include the lack of an identity system that expresses "relational identity" in blockchain and the absence of a legal system to protect the rights and interests of both parties.

• For the traditional financial system, the significance of Real World Asset Tokenization ) is to create digital representations of real-world assets (such as stocks, financial derivatives, currencies, equities, etc.) on the blockchain, thereby extending the benefits of distributed ledger technology to a wide range of asset classes for exchange and settlement.

• Financial institutions enhance efficiency by adopting DeFi technology, using smart contracts to replace the "computational" aspects of traditional finance, automatically executing various financial transactions according to predetermined rules and conditions, thus enhancing programmability. This not only reduces labor costs but also provides new possibilities for businesses in specific contexts, especially offering innovative solutions to financing challenges for small and medium-sized enterprises (SMEs), opening a door with great potential for the financial system.

• As the attention and recognition of blockchain and tokenization technology continue to strengthen in the traditional financial sector and among governments around the world, and with the continuous improvement of blockchain infrastructure technology, blockchain is moving towards integration with traditional world architectures and addressing real pain points in real-world application scenarios, providing practical solutions for actual scenarios rather than being confined to a "parallel world" that is disconnected from reality.

• In the future, under the framework of multiple different jurisdictions and regulatory systems, cross-chain technology will be particularly important for solving the problems of interoperability and liquidity fragmentation. Tokenized assets on the blockchain will exist on public blockchains and regulated permissioned chains operated by financial institutions, and cross-chain protocols similar to CCIP can connect tokenized assets on any blockchain to achieve interoperability, realizing seamless connectivity across all chains.

• Currently, many countries around the world are actively promoting legal and regulatory frameworks related to blockchain. At the same time, blockchain infrastructure, such as wallets, cross-chain protocols, oracles, and various middleware, is rapidly being improved. Central Bank Digital Currency (CBDC) is also continuously being implemented, and token standards that can express more complex asset types are emerging, such as ERC-3525. Coupled with the development of privacy protection technologies, especially the continued advancement of zero-knowledge proof technology, and the increasing maturity of on-chain identity systems, we seem to be on the eve of large-scale application of blockchain technology.

( 1. Introduction to Asset Tokenization Background

Asset tokenization refers to the process of representing assets in the form of tokens on programmable blockchain platforms. Typically, assets that can be tokenized are divided into tangible assets (such as real estate and collectibles) and intangible assets (such as financial assets and carbon credits). This technology, which transfers assets recorded in traditional ledger systems to a shared programmable ledger platform, represents a disruptive innovation for traditional financial systems and is likely to impact the entire future of human financial and monetary systems.

![A Comprehensive Explanation of RWA Asset Tokenization: Underlying Logic Clarification and Pathways for Large-Scale Application])https://img-cdn.gateio.im/webp-social/moments-718fce80a8042e4187c724e786710923.webp###

First, it is important to point out an observed phenomenon: "There are mainly two distinctly different groups regarding the understanding of RWA asset tokenization," which can be referred to as RWA in the crypto space and RWA in traditional finance. The RWA discussed in this article refers to the RWA from the perspective of traditional finance.

(# RWA from the Perspective of the Cryptocurrency Field

First, let's talk about RWA in the crypto space: RWA in the crypto world can be seen as the one-sided demand for real-world financial asset yields. The main background is under the ongoing interest rate hikes and balance sheet reductions by the Federal Reserve, where high interest rates significantly affect the valuations of risk markets, and the reduction of the balance sheet has greatly withdrawn liquidity from the crypto market, leading to a continuous decline in yields in the DeFi market. At this time, the risk-free yield of U.S. Treasury bonds, which is as high as around 5%, has become very attractive to the crypto market. Among them, the most notable is a certain institution's large-scale purchase of U.S. Treasury bonds this year. As of September 20, 2023, this institution has purchased over 2.9 billion worth of U.S. Treasury bonds and other real-world assets.

The significance of the institution purchasing US Treasury bonds lies in its ability to diversify the assets backing its issued stablecoin through external credit. Additionally, the long-term extra yields from US Treasury bonds can help stabilize the exchange rate of the stablecoin, increase the flexibility of its issuance, and incorporating US Treasury bonds into the balance sheet can reduce the stablecoin's dependence on a specific stablecoin, thereby decreasing single-point risk. Furthermore, since the income from US Treasury bonds will flow entirely into the institution's treasury, the institution has recently shared part of its US Treasury bond earnings, raising the interest rate of its stablecoin to 8% to boost demand for the stablecoin.

The approach of this institution clearly indicates that not all projects can be replicated. With the soaring price of the institution's token and the market's heightened enthusiasm for the RWA concept, various RWA concept projects have emerged, aside from some larger ones that follow a compliant route. Various real-world assets are being tokenized and sold on the blockchain through various means, including some rather absurd assets, leading to a mixed bag in the entire RWA sector.

The RWA logic in the cryptocurrency field mainly revolves around how to transfer the rights to the income generated by assets (such as US Treasury bonds, fixed income, stocks, and other asset income rights) onto the blockchain, how to put off-chain assets onto the blockchain to pledge for loans to obtain liquidity of on-chain assets, and how to move various real-world assets onto the blockchain for trading (such as sand and gravel, minerals, real estate, gold, etc.).

Therefore, we can find that the RWA in the crypto sector reflects a one-sided demand from the crypto world for real-world assets, and there are still many obstacles in terms of compliance. The institution's approach is essentially that the team enters and exits funds through compliant means and purchases U.S. Treasury bonds through formal channels to obtain their yields, rather than selling these yields on-chain. It is worth noting that the so-called RWA U.S. Treasury bonds actually on-chain are not the U.S. Treasury bonds themselves, but rather the rights to their yields. Additionally, this process involves converting the fiat currency yields generated by U.S. Treasury bonds into on-chain assets, which adds complexity and friction costs to the operation.

The rapid rise of the RWA concept is not solely attributed to the institution. In fact, a research report titled "Money, Tokens, and Games" released by a certain bank from the traditional financial sector has also sparked strong reactions in the industry. This report reveals the keen interest of many traditional financial institutions in RWA, while also igniting the enthusiasm of a large number of speculators in the market. They have been spreading rumors about major financial institutions soon entering this field, further elevating market expectations and the atmosphere of speculation.

)# RWA from a Traditional Financial Perspective

From the perspective of the crypto space, RWA mainly expresses the unidirectional demand of the crypto world for the asset yield of the traditional financial world. If we look at this from the perspective of traditional finance, the scale of funds in the crypto market is basically negligible compared to the tens of trillions of dollars in the traditional financial market. Whether it is U.S. Treasuries or any other financial assets, it is unnecessary just to have one more sales channel on the blockchain.

From a traditional finance (TradFi) perspective, RWA represents a two-way journey between traditional finance and decentralized finance (DeFi). For the traditional financial world, DeFi financial services that are automatically executed based on smart contracts are an innovative fintech tool. In the traditional finance sector, RWA is more focused on how to integrate DeFi technology to achieve asset tokenization, empowering the traditional financial system to lower costs, improve efficiency, and address the pain points existing in traditional finance. The focus is on the benefits that tokenization brings to the traditional financial system, rather than merely seeking a new asset sales channel.

It is necessary to distinguish the logic behind RWA. This is because RWA from different perspectives has vastly different underlying logic and implementation paths. First, there are different implementation paths in choosing the type of blockchain. The RWA of traditional finance follows a permission chain path, while the RWA in the crypto world follows a public chain path.

Due to the characteristics of public chains such as open access requirements, decentralization, and anonymity, they