Asset Tokenization: Underlying Logic and Large-Scale Application Pathways

The most eye-catching topic in the blockchain field in 2023 is undoubtedly the tokenization of real-world assets. This concept has not only sparked heated discussions in the Web3 world but has also received significant attention from traditional financial institutions and government regulators in many countries, being regarded as a strategic development direction. For example, several authoritative financial institutions have successively released their respective research reports on tokenization and are actively promoting related pilot projects.

At the same time, the Hong Kong Monetary Authority clearly pointed out 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, along with the Financial Services Agency of Japan and several financial giants, has launched an initiative called the "Guardian Project" to deeply explore the enormous potential of asset tokenization.

Despite the fact that the topic of RWA is at its peak, there are differences in understanding RWA within the industry, and discussions regarding its feasibility and prospects are quite controversial.

On one hand, there is an opinion that RWA is merely market speculation and cannot withstand in-depth discussion;

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

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

This article aims to share insights on RWA and to conduct a deeper discussion and analysis of its current status and future.

Core Viewpoints:

• The future key development direction for the tokenization of real-world assets will be a new financial system based on a permissioned blockchain, driven by traditional financial institutions, regulatory bodies, and central banks. To realize this system, what is needed is a computational system ( blockchain technology ) + a non-computational system ( such as legal systems ) + on-chain identity systems and privacy protection technology + on-chain fiat currency ( CBDC, tokenized deposits, fiat 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, developed after the advancement of computers and networks. Therefore, it can be said that blockchain is essentially a platform for digital contracts, and contracts are the fundamental expression of assets. The token (Token) serves as the digital carrier of assets after the formation of contracts. Thus, blockchain has become the 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, circulation, and execution of digital contracts as well as other related operations, addressing the problem of trust transfer. 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 within the financial system, replacing the "computational" aspects of financial activities. Automated execution not only reduces costs and increases efficiency but also enables programmability. However, the "non-computational" aspects, which are based on human cognition, cannot be replaced by blockchain. Therefore, the current DeFi system does not yet encompass credit, and credit-based unsecured lending has not been realized in the current DeFi system. Reasons for this phenomenon include the current lack of an identity system in blockchain that expresses "relational identity" and the absence of a legal framework to protect the rights and interests of both parties.

• For the traditional financial system, the significance of Real World Asset Tokenization( lies in creating digital representations of real-world assets) such as stocks, financial derivatives, currencies, and equities 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 in traditional finance, automatically executing various financial transactions according to predetermined rules and conditions, thus enhancing programmability. This not only reduces labor costs but also, in specific situations, it can provide new possibilities for businesses, especially offering innovative solutions to financing challenges for small and medium enterprises (SMSE), which opens a highly promising door for the financial system.

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

• In the future, under a landscape of multiple jurisdictions and regulatory systems, cross-chain technology will be particularly important for solving interoperability and liquidity fragmentation issues. Tokenized assets on the blockchain are expected to 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 universal connectivity across all chains.

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

I. Introduction to Asset Tokenization Background

Asset tokenization refers to the process of expressing assets in the form of tokens on a programmable blockchain platform, typically categorizing tokenizable assets into tangible assets like 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, is a disruptive innovation for the traditional financial system and may even affect the entire future financial and monetary system of humanity.

First, an observed phenomenon must be raised: "There are mainly two distinctly different groups of views on the cognition of the tokenization of RWA assets," referred to as Crypto RWA and TradFi RWA, while the RWA discussed in this article is from the TradFi perspective.

( RWA from a Crypto Perspective

First, let's talk about RWA in Crypto: RWA in Crypto is referred to as the one-sided demand for the yield of real-world financial assets in the Crypto world. The main background is under the continuous interest rate hikes and balance sheet reduction by the Federal Reserve, where high interest rates significantly impact the valuation of risk markets, and balance sheet reduction has greatly withdrawn liquidity from the crypto market, leading to a continuous decline in yields in the DeFi market. At this time, the nearly 5% risk-free yield on U.S. Treasury bonds has become highly sought after in the crypto market, with the most notable action being MakerDAO's large-scale purchases of U.S. Treasury bonds this year. As of September 20, 2023, MakerDAO has purchased over 2.9 billion in U.S. Treasury bonds and other real-world assets.

The significance of MakerDAO purchasing U.S. Treasury bonds lies in the ability of DAI to diversify the assets it supports through external credit. Additionally, the long-term extra income generated by U.S. Treasury bonds can help stabilize DAI's exchange rate, increase the elasticity of its issuance, and incorporating U.S. Treasury bonds into the balance sheet can reduce DAI's dependence on USDC, minimizing single-point risks. Furthermore, since the income from U.S. Treasury bonds will flow entirely into MakerDAO's treasury, MakerDAO has recently shared part of its U.S. Treasury bond income to raise DAI's interest rate to 8% in order to boost DAI's demand.

The approach of MakerDAO is clearly not something that all projects can replicate. With the skyrocketing price of the MRK token and the heightened market enthusiasm for the RWA concept, various RWA concept projects have emerged, apart from some larger projects that follow a compliant route. Many real-world assets are being tokenized and sold on the blockchain in various ways, including some rather outrageous assets, leading to a mixed bag of quality in the entire RWA space.

The RWA logic of crypto mainly revolves around how to transfer the rights to the income generated by assets ) such as U.S. Treasury bonds, fixed income, stocks, etc., onto the blockchain, to collateralize off-chain assets in order to obtain liquidity for on-chain assets, and to move various real-world assets onto the blockchain for trading (, such as sand and gravel, minerals, real estate, gold, etc. ).

Therefore, we can see that the RWA of Crypto reflects the unilateral demand of the crypto world for real-world assets, which still faces many obstacles in terms of compliance. The approach of MakerDAO is essentially that the MakerDAO team enters and exits funds through compliant channels and purchases U.S. Treasury bonds through formal means to obtain their yields, rather than selling these yields on-chain. It is worth noting that the so-called RWA U.S. Treasury bonds on-chain are not the U.S. Treasury bonds themselves, but rather their rights to yields. Additionally, this process also involves the step of converting the fiat currency yields generated by U.S. Treasury bonds into on-chain assets, increasing the complexity of operations and friction costs.

The rapid rise of the RWA concept is not solely due to MakerDAO. In fact, a research report released by a certain bank in the traditional financial sector has also caused a strong reaction in the industry. This report reveals the strong interest of many traditional financial institutions in RWA, while also stimulating 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 raising market expectations and the atmosphere of speculation.

( RWA from a TradFi Perspective

From the perspective of Crypto, RWA mainly expresses the unilateral demand of the crypto world for the asset returns of the traditional financial world. If we build on this logic and look at it from the perspective of traditional finance, the scale of funds in the crypto market is basically negligible compared to the market size of trillions in traditional finance. Whether it is U.S. Treasuries or any other financial asset, it is unnecessary to have an additional sales channel on the blockchain.

Therefore, from the perspective of traditional finance ) TradFi (, RWA is a two-way rush 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 financial technology tool. The traditional financial sector focuses more on how to combine DeFi technology to achieve asset tokenization, in order to empower the traditional financial system, reduce costs, improve efficiency, and address the pain points of 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 of RWA. Because RWA from different perspectives has vastly different underlying logic and implementation paths. First, in choosing the type of blockchain, the two have different implementation paths. Traditional finance's RWA follows the path based on the Permission Chain (, while the RWA in the crypto world is based on the Public Chain ).

Due to the characteristics of public chains such as no access requirements, decentralization, and anonymity, RWA in crypto finance not only faces significant compliance obstacles for project parties, but also leaves users without legal rights protection when encountering negative events like Rug pulls. Furthermore, the rampant hacking activities demand a higher level of security awareness from users. Therefore, public chains may not be suitable for the tokenization and trading of a large number of real-world assets.

The permissioned chains based on traditional financial RWA provide the basic prerequisites for legal compliance in different countries and regions. At the same time, conducting KYC on-chain to establish an on-chain identity system is a necessary prerequisite for achieving RWA. Under the protection of a legal system, institutions that own assets can issue/trade tokenized assets in a compliant and legal manner. Unlike Crypto's RWA, the assets issued by institutions on permissioned chains can be native on-chain assets rather than mapping to assets that already exist off-chain. The transformation potential brought by this native on-chain financial asset RWA will be enormous.

In summary, the core viewpoint of this article is that the future key development direction of Real World Asset Tokenization ( will be driven by traditional financial institutions.