The discussion around Real World Assets (RWA) going on blockchain started a number of years ago. It is something that holds great potential and could radically change how we interact with different asset classes.
For the moment, we are still in the exploratory stage. This is taking place both within major organizations such as investment banks along with start ups. The transition into the crypto world is going to be slow since there is so much regulation involved.
Basically, do not expect assets such as Apple or IBM to be traded in this manner unless it is some type of synthetic.
However, while the major assets are likely to continue as is, at least from the consumer perspective, there could be a host of other areas which serve as the starting point.
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Real World Assets: Part of the Tokenization of Everything
If we are going to eventually see the tokenization of everything, this is going to include real world assets.
It is likely we see a replication of what went before. This is typically how we operate with new technology.
In this instance, we are referring to taking an asset and, instead of operating on a private exchange, the trading occurs on a blockchain. At the basic level, this removes the ledger from private use to one of public. We also have the ability to include new asset classes.
Here is where we see a shift from the major to the outlier.
The first implementation of RWA is going to start with new or small issues. For example, let us say there is a large plumbing conglomerate. Instead of traveling the traditional path via the IPO, perhaps it pursues something different.
Of course, here is where regulatory hurdles exist.
For this reason, perhaps we could take a small company that is already publicly traded. This is often call "penny stocks". These are typically not on major exchanges but on what is called "pink sheets". Here is where we could have something that is primed to be located on blockchain.
The tokenization process could involve a swap. Basically there is a token issued for each share.
The Gold Mine of RWA
While many look at the starting point of RWA by focusing on stocks and bonds, the pot of gold is other assets.
This is a situation where we are looking at a completely different structure as compared to what we presently deal with.
For example, art is an asset class that is primed for tokenization. Many pieces are very valuable, i.e. have a high price. For this reason, it is an exclusionary world. While billionaire hedge fund manager Steve Cohen can drop $100 million on a painting, the rest of us are left out in the cold.
Tokenization changes this.
A piece could be tokenization, thus creating different tokens. In this instance, let's say that painting was broken up into 100 million. That means each would cost $1.
This changes the liquidity scenario completely.
If Cohen needed to fire sale the artwork, how many people could show up to give him $100 million? What would the price drop to in that instance?
Contrast that with the idea of selling 100 million tokens. How many people would be required to buy them? The liquidity is much greater. People all over the world could purchase a few. He could have his money if 1 million art loves ponied up $100 each.
Art is just one asset class suited for this. We also could see commodities, loans, intellectual property, and real estate.
Consider for a moment how much that equates to. We are discussing hundreds of trillions of dollars. Of course, a case could be made this is going to pale in comparison to the value generated in the digital world.
Either way, we are focusing upon a lot of money.
What is the Benefit?
Why would there be a need for the tokenization of RWA?
Here is where we see a major shift in society, especially if real estate is involved.
Some of the potential benefits of tokenization are as follows:
- transparency
- increased liquidity
- 24 hour trading
- inclusion
- reduce cost on asset management
This provides an enormous customer base as anyone who is involved in crypto would be able to acquire these assets. It also sets off a very powerful feature called fractional ownership.
At this point we see a major benefit provided.
Fractional ownership not only opens the door for more participants to provide capital but can also spread risk. When there is one owner, that individual sinks or swims with the asset. If the same person took that money and invested in 25 different tokens, all doing the same thing yet in different geographic regions, the risk is spread among the all those entities.
In other words, a blowing up in one market is not the end.
The same is true for the asset itself. More people are involved, taking on the risk associated with it. If business sours, they are going to all share in the loss. With a blended approach, most will be protected to some degree.
The Explosion of DeFi
All of this will come under the heading of decentralized finance (DeFi). It is where the major push is going to come from.
Naturally, we can look for TradFi to be involved. In fact, it is a safe bet considering that is how the regulators are going to approve the shift. We see the evidence of this with the ETFs.
Nevertheless, that was also an example of how TradFi entering did provide a major boost to crypto. The access through these products was greatly increased.
RWA can provide an even greater step forward. For example, the real estate market was estimated to be worth $325 trillion in 2020. If even a fraction of that ends up tokenized, we are looking at a major shift.
There is one other point to consider regarding this discussion. We have to move away from just looking at assets we have now.
A major area where I think this could apply is with robotics. If we are entering a time when we will see billions of robots manufactured, the question of ownership crops up. Who is going to own all of these?
To me, the idea of tokenization of a fleet of robots makes a lot of sense. Like the other assets, the benefits are obvious. People could own pieces of the "new" labor market, generating a return.
Before we see this, the infrastructure must be built. It is, however, an aspect to crypto worth watching. This will likely generate headlines as the regulatory battle will be fierce.
Nevertheless, the gears are already turning.