What are real-world assets?

August 16, 2023

Web3

Written by: Algorand Foundation

Real-world assets (RWAs) represent some of the most compelling uses for blockchain technology and its ability to tokenize various items of value, whether physical, digital, or data-based. From art and collectibles to real estate, stocks and commodities, and personal data, various tangible and intangible assets can now be represented digitally on-chain through the issuance of tokens representing RWAs. Real-world assets unlock a novel means of transferring ownership, sharing revenue streams, and increasing liquidity for assets that were previously illiquid or non-commercial. Tokenization holds great potential to transform traditional asset classes and financial markets.

In this article, we will explore the growing trend of RWA tokenization and its implications. First, we define what constitutes a real-world asset broadly, encompassing physical, digital, and data-based items of value, and how blockchain facilitates fractionalizing these into digital tokens. We will then look at the benefits of asset tokenization and examine several industry examples and use cases across areas like real estate, commodities, intellectual property, art, travel, and more. 

What are real-world assets?

Real-world assets, or RWAs, refer broadly to any assets—whether physical, digital, or data-based—that derive their value from their existence outside of the blockchain. By tokenizing RWAs, you’re essentially creating a digital twin that exists on a blockchain. 

Stablecoins are the OG of real-world assets. Pegged to a fiat currency like the US dollar or euro, stablecoins provide a stable and liquid alternative to fiat currency. Beyond traditional currency, it’s possible to tokenize other financial assets, such as insurance, shares, securities, treasuries, equities, and indices. Tangible assets that can be brought on-chain are fairly limitless. Precious metals, raw materials, agricultural products, real estate, artwork, and music licensing can all benefit from tokenization. 

Discover real-world assets on Algorand.

Tokenization can provide enhanced transparency, increased liquidity, and improved access to real-world assets. Furthermore, by dividing assets into fractions through a process known as fractionalization, many individuals can own parts of high-value assets. This democratization fosters engagement, empowers smaller investors, and broadens wealth distribution, reshaping the landscape of asset ownership and investment dynamics.

Benefits of real-world assets

Efficiency: Tokenizing real-world assets allows fractions of high-value assets to be traded efficiently 24/7 on digital exchanges, bypassing brokers and facilitating fast, global transactions at scale. This streamlines processes like cross-border deals and automated redistribution of income/profits.

Trust: A key benefit of tokenization is that it allows atomic settlement of real-world assets (traded against tokenized fiat) without requiring a trusted third party to act as a clearing agent, as traditional clearinghouses and CSDs do today. Blockchain protocols facilitate who goes first in an exchange through intrinsic consensus mechanisms, increasing trust and efficiency in transactions.

Transparency: A public, immutable record on the blockchain provides full visibility into asset ownership and transaction activity. This establishes clear title and provenance while preventing fraud through open tracking of transfers, liens and other details.

Compliance: Smart contracts can automate regulatory requirements and KYC/AML checks for compliance. Digital tokens may also make it simpler to adhere to tax reporting obligations through integrated tools and public ledgers.

Cost: Cutting out middlemen reduces traditional transaction fees and documentation expenses. Ongoing token administration through blockchain consensus can bring down maintenance costs compared to physical assets and legacy record keeping.

Liquidity: Fractionalizing RWAs assets facilitates greater liquidity. The tokens that represent RWAs can be readily traded at any time. This constant tradeability forms a new secondary market for real-world investments that was not previously possible. 

Types of real-world assets

Stablecoins

Stablecoins are designed to maintain price stability relative to designated assets, like currencies or commodities. In real-world instances, stablecoins are used for cross-border payments and function as banking infrastructure for those without access and are increasingly growing in popularity worldwide. Examples of stablecoins on Algorand are: Circle’s USDC and Tether’s USDT. 

Real estate

Tokenizing properties allows people to invest in real estate globally through fractional ownership of assets like housing units or commercial buildings. Smart contracts are able to manage tenant payments and property expenses, and distribute proceeds to token holders. Lofty tokenizes residential real estate, such as houses and condos, and SliceSpace, commercial properties, such as offices and co-work spaces.

Commodities and precious metals

Tokenizing commodities facilitates new modes of investing in raw materials or precious metals. Meld enables gold and other precious metals to be tokenized on blockchain, so consumers can own physical gold in digital form. Projects like Agrotoken enable farmers to tokenize their grains, transforming them into digital assets that they can trade, exchange for supplies and services, and use as collateral for loans. Any product can be tokenized and traced through the supply chain using a platform like Origino.

Art and collectibles 

Blockchain facilitates the creation, ownership, and transfer of non-fungible tokens representing one-of-a-kind artworks, collectibles, and antiques that also exist in the physical world. This grants digital provenance and preserves scarcity. Artory is a project that brings art and collectibles on-chain. Tokenizing art also permits divisions of ownership; high-value art can be broken down into fractions, making the cost of investment much lower and more accessible.

Books and music 

Cultural works like books, music, and films represent a large market for tokenization as digital files on blockchain. Projects like Book.io are pioneering the issuance of ebook and audiobook RWAs that represent true ownership of the content. Music platforms, including Opulous, are minting digital music RWAs that enable true ownership of music for creators and fans. The tokenization of cultural assets offers immense potential to revolutionize business models for creators and reshape media consumption globally.

Intellectual property

Artists, writers, and inventors can issue digital tokens representing shares in future revenues generated from their works. Smart contracts can allocate tokens and recurring shares of licensing fees or sales to early supporters. For example, on ANote Music, investors can bid on shares of the royalties of music catalogs. Dequency enables musicians to sell the rights to use their work quickly and efficiently, with all transaction information recorded on-chain.

Vehicles

By tokenizing cars, boats, and planes, blockchain can handle seamless transitions of custody for vehicles and track their provenance as they change hands. Tokenization can also facilitate fractional ownership of luxury automobiles, yachts, and private jets, with their costs, usage schedules, and profits being split proportionately according to smart contracts.

Salaries and invoices

Blockchain applications are being developed to tokenize payroll and invoicing. This allows self-employed individuals and small businesses to use future income streams as collateral for loans or sell portions on secondary markets. For example, employees could access earned but unpaid wages, or freelancers could discount invoices in exchange for instant cash. Such platforms introduce welcome flexibility and unlock capital that may otherwise be inaccessible for months.

Consumer goods

Tokenizing high-value consumer products like electronics and luxury items enables fractional ownership and a resale market. This could take various forms: consumers may earn tokens for device usage over time, trade partial ownership fractions, or auction pre-owned goods. Brands benefit from additional ways to foster customer loyalty programs and retain asset value cycles within their ecosystems.

How are real-world assets being used in DeFi?

The growth of decentralized finance (DeFi) applications has created new opportunities to put real-world assets to work. By incorporating real assets, DeFi can mature into an inclusive financial system that bridges the traditional and crypto spaces, allowing DeFi to offer similar investments to traditional financial institutions. 

  • Lending and borrowing: Some DeFi platforms allow tokenized real estate, art, commodities, and other assets to be used as collateral for loans, typically at a loan-to-value ratio. Borrowers receive stablecoins or other tokens, while lenders earn interest.
  • Index funds: DeFi can enable passive exposure to baskets of RWA tokens within a single pooled investment. This diversifies risk across different tokens and asset classes.
  • Asset management: Autonomous funds protocols can deploy capital by trading RWA tokens, aiming to generate returns. 
  • Less risky investments: RWAs grant DeFi access to alternative asset classes, not just crypto-related assets. Asset types linked to real estate, commodities, art, or other physical goods may introduce less volatility than crypto-native assets.

Why real-world assets on Algorand?

Low transaction fees

Algorand is a cost-effective blockchain for managing real-world assets, reducing operational costs for creators and holders. Transaction fees on Algorand are a fraction of a cent. 

Point of sale in 3.3 seconds

Algorand transactions are settled fast with instant block finality, ensuring that RWA transactions are securely confirmed without delay or uncertainty. Final means final on Algorand. Once a transaction is completed, it stands as an unalterable truth.

No forking

Unlike other blockchains that can fork, Algorand never splits into alternative branches. This provides true finality, as validated transactions are never reverted on a dying fork. Owners can be certain that settled RWAs will remain transferred.

No downtime

Algorand has maintained 100% uptime since its mainnet launch, ensuring RWAs are always accessible and operational on its network. It has not experienced any unplanned downtime or network congestion issues that could disrupt real-world asset ownership and transactions.

Asset standardization

Algorand's native support for Algorand standard assets (ASAs) simplifies asset creation and deployment without the need for smart contracts, distinguishing it from other platforms.

Role-based asset controls

RWA creators can assign roles to different accounts, enabling features like freezing and clawback, which facilitate compliance setups commonly seen in regulated industries.

Security and scalability 

Algorand's layer-1 architecture and pure proof-of-stake mechanism provide robust security and reliability as RWAs scale.

Atomic transfers

Atomic transfers enable simultaneous payments and asset transfers within a single transaction, ensuring trustless execution—a crucial feature for high-value RWA transactions.

Examples of real-world assets on Algorand

TravelX is tokenizing airline seats, providing greater flexibility and efficiency when buying travel tickets. TravelX partners directly with major airlines to tokenize available seats on different flights. Through the platform, users can purchase airplane tickets as non-fungible tokens, which can then be conveniently traded or resold in a liquid secondary market if travel plans change. 

Ctrl Alt helps investors diversify their portfolios through alternative asset classes like green energy, films, private equity, and real estate. Through partnerships that manage these underlying opportunities, Ctrl Alt is then able to represent fractional ownership as digital assets. This provides everyday investors with accessible exposure to niche investments that are typically out of reach.

Koibanx is a LATAM asset tokenization and blockchain payments platform. Through Koibanx, users can transform a wide range of assets, such as real estate and stocks, into digital tokens on a blockchain.

Evident offers a multifaceted platform for financial activities. It allows users to easily establish Special Purpose Vehicles (SPVs) online, and to foster co-investment opportunities within their network. Additionally, Evident provides tools for companies to raise capital through asset tokenization.

Realio brings private equity, real estate, and other real-world assets to DeFi. It allows investors to gain exposure to private equity and real estate funds typically reserved for accredited or institutional investors. 

How are real-world assets tokenized?

Choose something to tokenize

Identify a real-world asset that holds value and could benefit from blockchain exposure and tokenization. It's important to properly vet any asset, considering factors like ownership, clear title, valuations, and existing partnerships. The right asset presents a clear value proposition for tokenization through increased access and liquidity. 

Seek regulatory approval

Before tokenizing an asset and making the tokens available for ownership, it is crucial to undergo compliance procedures and seek relevant regulatory approval. This helps ensure the digital tokens issued are legally recognized and can be enforced, avoiding potential situations where token buyers wrongly assume ownership of an asset without legal standing.

Choose a blockchain

The next step is selecting the blockchain network that is best suited to represent your asset. The blockchain will need to have smart contract capabilities that can govern ownership shares, transactions, revenue/expense distribution, and asset administration. 

Algorand's pure proof-of-stake protocol provides scalability and security well-matched to handle the transaction volumes associated with tokenized real-world assets. Its smart contract functionality and ability to host specialized applications make it an ideal blockchain infrastructure for projects issuing and managing digital representations of physical items.

Create a token/s on the blockchain

A digital token needs to be programmed by developers to become the blockchain-based representation of ownership shares in the real item. At this point, you need to make decisions around token standards, total supply, and distribution models, such as fractional or whole ownership units.

Issue the tokens 

Once programmed and tested, the smart contract mints the digital tokens, representing shares of the asset on the selected blockchain and containing underlying asset information that links it to the real-world item. This information can be photos or signed documents from owners to cryptographically tie the digital token to the off-chain item. 

Trade the token in Web3

Once minted, the tokenized assets can be listed and exchanged on decentralized applications and cryptocurrency exchanges, allowing fractional ownership and global liquidity. Smart contracts automate processes like transferring custody and revenue distribution as the linked tokens trade hands in the digital marketplace. This bridges the gap between traditional and blockchain-based economies.

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