How Tokenisation of Real-World Assets Will Scale DeFi To A Global Level

While the crypto industry shivers in the bleak winter, the possibilities and ideas of blockchain adaption are growing in the Web 3 Space.

Crypto is not a short-term trend anymore, but so far, we have exclusively seen tokens that represent virtual value exchanged on a blockchain.

As of August 2022, decentralized finance (DeFi) protocols have $69 Billion in total value locked (TVL), which indicates that the sector is already upending the status quo in financial technology (FinTech).

However, most DeFi initiatives only exist and function within the DeFi space’s exclusive technological bubble. The DeFi sector and the parallel economies of legacy financial services industries have hardly ever interacted.

But it seems things are about to change! Marrying the real-world economy to the blockchain will offer new forms of financial products, new services, and new possibilities for institutional investors.

Tokenizing real-world assets will probably allow real economic growth to scale DeFi projects globally! But what does it mean to tokenize real-world assets (RWA)? Keep reading to find out.

What Does Tokenisation of Real-World Assets Mean?

The process of using blockchain technology to represent ownership or access to an asset as a tradable, on-chain token is known as “asset tokenization.” Asset tokenization can hypothetically refer to the tokenization of any material or immaterial thing possessing monetary value: everything from a work of art to a patent to an hour of a skilled worker’s time.

However, it most frequently refers to the tokenization of financial or fungible assets, such as shares in a company , real estate or a certain amount of gold.

As a result, asset tokenization is one of the most exciting applications of blockchain, with the potential for its growth to eventually embrace almost all human economic activity, which is projected to be worth well over $100 trillion yearly.

Real-World Assets & DeFi

Regarding potential connections to DeFi, RWAs represent a practically limitless and untapped market. Think about how non-fungible tokens (NFTs) can now be used to tokenize physical objects like real estate or non-physical things like invoices, making previously inaccessible liquidity worth trillions of dollars available.

Businesses having trouble financing can profit from bridging real assets to DeFi as an alternative financial source. Furthermore, the introduction of actual assets assures individuals who may have been watching from the sidelines and looking to join through a more secure way but have a more conservative risk appetite.

RWAs in DeFi offer consistent returns that are not influenced by the overall cryptocurrency market. RWAs’ integration into DeFi brings increased stability, equity, and accessibility that will facilitate widespread adoption. RWAs will play a crucial role in the development of DeFi and significantly impact the overall sector.

Benefits of Tokenisation of Real-World Assets

In addition to providing a decentralized alternative to a real-world commodity, service, or investment vehicle, tokenized RWAs also have the following advantages.

• Tokenized assets provide a clear path toward making many assets more valuable, accessible, and usable compared to their legacy equivalents.
• They provide a mechanism for off-chain data to boost their utilization inside the DeFi ecosystem.
• Bringing RWAs on-chain will provide a mechanism to break the inter-reflexive speculation cycle in crypto and DeFi. The uncertainty surrounding cryptocurrency tokens will remain, but it will no longer be the major narrative.
• DeFi requires an actual amount of demand tied to real-world objects. Tokenisation of RWAs is a step toward making this a reality, which will lead to the sustainability of DeFi and the creation of real-world value for people.

Has There Been Any Progress So Far?

Let’s be clear: Real-World Assets are already beginning to be tokenized. Around its height in 2022, Stablecoins were valued at $180 billion. Stablecoins are tokenized money that private companies like Circle have issued as an RWA(technically backed by the US government).

Here, the demand for RWAs is evident: It wouldn’t be incorrect to state that DeFi’s stablecoins now have the best product-market fit.

Another real world asset that can be found on the Ethereum Blockchain is Gold using the ERC-20 Token PAX Gold. It is being tokenized by Paxos, a US-regulated blockchain infrastructure company for digital assets where one token represents one fine troy ounce of a London Good Delivery gold bar, stored by Paxos in secure vaults in London.

Including more RWAs on the blockchain is the natural next step.

Are There Security Concerns?

While asset tokenization can increase the usefulness of a wide range of real-world assets and support growth and innovation within the DeFi sector, it is also a use case whose usage is heavily dependent on secure oracles.

As anyone familiar with the oracle challenge knows, any instance where a blockchain needs to communicate with the outside world can present potential risks and other complications, and asset tokenization — a process that relies on data and information generally off-chain — is no exception.

Secure oracles will be critical for asset tokenization to realize its full potential, as markets will require accurate information about the underlying assets in several key processes like minting, trading, regulating, and more. So far , Chainlink, the most widely used oracle solution in the blockchain space, is playing a key role in providing tokenized assets with reliable data.

Conclusion

Asset tokenization, though still in its infancy, is one of the most intriguing use cases for blockchain. But without reliable and secure oracles, tokenization will have a limited impact on the value it can generate on the blockchain and be vulnerable to risks associated with centralization, which undermines the entire value proposition it was intended to build.

Follow Tykhe Block Ventures and Heru Finance for more coverage on DeFi and its supporting Infrastructure.