Key Takeaways:
- RWA protocols enable fractional ownership of real-world assets – like real estate, bonds, commodities, intellectual property, fine art, and anything else – by splitting them into tokens and putting them on the blockchain.
- This allows more people to own these assets, improves liquidity, and allows for 24/7 trading.
- By reducing intermediaries, RWAs also create more inclusive and transparent financial systems.
- The future of RWAs looks promising, with more assets getting tokenized on-chain each month.
- It’s best to invest in RWA categories that you’re familiar with.
RWA Protocols: The Picks and Shovels of RWA
Real-World Asset (RWA) protocols are revolutionizing the financial landscape. Imagine tokenizing real-world assets – real estate, bonds, commodities, intellectual property, fine art, and anything else – and putting these tokens on the blockchain.
For example, you may not have the capital to buy a skyscraper in Dubai, but that skyscraper can be tokenized and sold on digital ledgers – like any other crypto token – so you can own a small percentage of the skyscraper.
The “rails” that run these RWAs are called real-world asset protocols, which make it easier for asset owners to tokenize and sell these RWAs. In addition to investing in RWAs, then, the intelligent investor can also look at investing in the RWA protocols themselves.
At Bitcoin Market Journal, our approach is to look less at specific investments within a category, and look at investing in the entire category. Investing in the top RWA protocols is a great example of this approach: in this guide, we’ll outline the investment opportunities for you.
These protocols are the “picks and shovels” that everyone else will use to hunt for gold.
The Categories of RWA Protocols
RWA protocols cover a wide array of sectors; here are the important categories for the intelligent investor.
Yield Bearing Stablecoins
Stablecoins are cryptocurrencies often tied to real-world assets like fiat currencies or gold. They maintain stability within the markets and are important tools for adding liquidity to the crypto market. (See our guide to Best Stablecoins.)
Yield-bearing stablecoins offer incentives and token rewards from holding the coin. MakerDAO, Frax, and Ondo are all yield-bearing stablecoin projects that generate yield (i.e., interest), and earn rewards based on amount, staking duration, and market demand.
This balance between earning rewards and maintaining stability creates a unique financial instrument that combines elements of both savings accounts and transactional currencies.
Non-Yield Bearing Stablecoins
Non-yield bearing stablecoins are stable digital assets that maintain their value but do not accrue interest. They’re mostly used for trading, remittances, and as a store of value for investors waiting for their next trade. Their stable value allows investors to move value between digital asset platforms and applications without having to worry about volatility.
Tether (USDT) and Circle (USDC) are the two most widely used stablecoins on the market with a combined market capitalization of nearly $150 billion. Both are backed by full reserves of real-world assets.
While non-yield bearing stablecoins like USDT and USDC don’t inherently offer interest, investors can earn yield on them through external services. (See our guide to Best Stablecoin Interest Rates.)
Underwriting Protocols
Underwriting involves assessing the value and risk of tokenized real-world assets, such as real estate and commodities, using that assessment to determine whether a loan should be approved, then specifying the interest rate, terms, and conditions of the loan.
Underwriting protocols in the RWA ecosystem facilitate the assessment and approval of loans backed by real-world assets. Through loan approval, they provide liquidity and ensure that the policy can be paid out by the borrower.
Maple Finance and Centrifuge are two projects leading the charge for underwriting RWA protocols.
Tokenized Funds
Tokenized funds represent blockchain-based shares of traditional funds, rather than a paper record of asset ownership held on a centralized database. This gives investors the benefits of enhanced transparency, streamlined settlements, and reduced fraud risk.
Tokenization propels traditional funds into the future. It’s like putting a V8 engine into a lawn mower body. While it doesn’t change the functionality, it does make everything go faster.
Both BlackRock (through its BUIDL Fund) and Franklin Templeton (through its FOBXX Fund) have both leveraged tokenization as a means to enhance operations, drive more efficient fund management, and allow for seamless peer-to-peer transactions. These are a sign of things to come.
Tokenized Commodities
Commodities may also be tokenized: everything from precious metals, to energy resources, to agricultural products. Especially when it comes to energy, tokenization removes logistical barriers and allows international investors to purchase commodities worldwide.
Tether Gold and PAX Gold offer digital tokens backed by physical gold. It merges the traditional stability of gold as an investment with blockchain technology to allow investors to trade the precious metal with ease.
Alternative Tokenization Protocols
Outside of stablecoins, underwriting investments, tokenized funds, and commodities, here are alternative protocols you should take note of:
RealT: RealT specializes in tokenizing real estate properties and making ownership more accessible to investors with less capital.
Tangible: Tangible tokenizes physical assets such as art, collectibles, and luxury goods. The protocol creates a blockchain-based marketplace for trading and investing in these assets.
Lofty: Starting as little as $50, Lofty is a tokenized real estate investment platform for digital tokens representing various properties in the United States.
Aktionariat: Aktionariat provides Swiss companies with digital tools to create and manage share markets directly on their website.
RWA Infrastructure Protocols
Infrastructure protocols are the backbone of any financial system. They provide the necessary tools, platforms, and standards to support seamless integration for the ecosystem. Infrastructure protocols ensure security and scalability, which are both vital for investor confidence.
When looking at infrastructure protocols, make sure to account for KYC/AML compliance, costs, and their ability to access global markets and different chains. Mantra and Polymesh are two prime examples of RWA infrastructure protocols.
Key Projects:
Mantra: Mantra (OM) is a Layer-1 blockchain platform that has captured significant attention within RWA tokenization. It’s capable of processing over 10,000 transactions at a time and can tokenize art, commodities, real estate, etc.
Polymesh: Polymesh is another Layer-1 blockchain built to support security tokens. It enhances the securities market by streamlining settlement processes, ensuring regulatory compliance, and enabling easy tokenization of high-value real-world assets.
The Revolutionary Impact of RWAs on TradFi
Real-World Assets (RWAs) are transforming traditional financial services, offering intelligent crypto investors new avenues for portfolio expansion and diversification.
Democratizing High-Value Investments: RWAs are breaking down barriers to elite asset classes. By fractionalizing valuable assets like fine art, real estate, or even rare collectibles, RWAs create accessible entry points for a broader range of investors.
Empowering Global Participation: The peer-to-peer nature of RWAs enables direct ownership and trading of tokenized assets, which presents investors opportunities for arbitrage and early adoption in emerging markets, for astute investors who can spot trends early.
Enhanced Cross-Border Transactions: RWAs enable faster, cheaper, and more transparent international transfers, speeding up global trade finance, remittances, and foreign investments, ultimately leading to more efficient global capital allocation.
The Future of RWAs: Key Trends for Investors
Mainstream Adoption and Liquidity Surge: As RWAs gain traction, we expect a surge in market liquidity. Early investments in platforms facilitating RWA trading could yield significant advantages as adoption accelerates.
Expanding Asset Classes: Intellectual property, carbon credits, and even personal data are poised to become new RWA frontiers. For investors, this expansion represents an opportunity to diversify into unique, previously inaccessible asset classes, diversifying your portfolio.
Tokenizing Everything: RWAs represent more than just another crypto trend; they’re a fundamental reimagining of asset ownership and trading. Intelligent investors will ask: what else can we tokenize? And how can I be one of the first?
Investor Takeaway
While RWAs can be used to fractionalize ownership over virtually any asset, investing in a project just because it’s an RWA is not a good investment strategy.
Instead, look for RWAs in investment categories that you are familiar with. If you know real estate, then by all means look at real estate RWAs.
For everyone else, look to invest in projects that build the foundational infrastructure or tools – the “picks and shovels” that future RWAs will be built upon.