Real-world assets (RWAs) are fungible or non-fungible tokens that represent traditional financial assets on the blockchain. RWAs can represent tangible assets such as real estate or intangible assets such as government bonds and carbon credits.^[1]

Overview

Real-World Assets (RWAs) refer to tangible or intangible assets that have value and exist in the physical world, such as real estate, machinery, copyrights, and certain contracts. Unlike digital or virtual assets, RWAs have a physical presence or a real-world utility, whereas digital assets exist solely in the digital realm.

In the DeFi space, RWAs are being used as collateral for loans and other financial products, bridging the gap between traditional and digital finance. RWA enhances the liquidity of assets that are typically challenging to liquidate, such as certain real estate investments. RWA also promotes partial ownership, enabling more people to invest in assets with higher entry barriers, democratizing investment opportunities traditionally limited to wealthy individuals or institutional investors.^[3]

In the rapidly evolving Web3 industry, tokenizing Real World Assets (RWA) involves digitizing ownership of physical and financial assets on the blockchain, significantly enhancing their liquidity and enabling partial ownership. This process holds immense potential for redefining value creation.^[3]

Tokenized RWAs by ERC-6960: Dual Layer Token

The most common tokens, ERC-20 and ERC-721 , are representing fungible (interchangeable) and non-fungible (unique) assets respectively. However, they fall short when it comes to representing fractional ownership of an asset. For instance, if anyone wanted to invest in a piece of real estate or a valuable piece of art, he/she would have to buy the entire asset. This is often too expensive for the average person. This is where ERC-6960 comes in.^[4]

• ERC-20 : Most common token standard used for fungible tokens. An ERC-20 token is a standard for creating and issuing smart contracts on the Ethereum blockchain. Fungible tokens are interchangeable, like currency. However, ERC-20 doesn’t support non-fungible or semi-fungible tokens, and it doesn’t allow for fractional ownership.^[6]

• ERC-721 : Standard for non-fungible tokens (NFTs). Each ERC-721 token is unique, making them perfect for representing ownership of unique items or assets. However, like ERC-20, ERC-721 doesn’t support fractional ownership.^[7]

• ERC-1155 : More advanced standard that supports both fungible and non-fungible tokens. It’s more flexible than ERC-20 and ERC-721, but it still lacks some features. It doesn’t have built-in support for fractional ownership, and managing diverse asset types within the same contract can be inefficient.^[8]

ERC-6960 is a token standard on the Ethereum blockchain which is designed to address the limitations of existing token standards. ERC-6960 represents real-world assets (RWAs) supporting fractional ownership, which means that a single asset can be broken down into smaller parts, each owned by a different person.  ERC-6960 provides a flexible framework for representing and managing tokenized RWAs. ^[4][5]

Benefits and Challenges

Benefits of Tokenization

RWAs bridge traditional finance and the digital space, allowing DeFi to serve customers and businesses providing following benefits.^[2]

• Liquidity: Tokenization can make traditionally illiquid assets, like real estate or art, more liquid. Fractional ownership allows smaller investors to participate in the market, increasing demand and liquidity. For example, several investors can own a share of a property through fractionalization.
• Accessibility: By breaking down barriers to entry, tokenization democratizes access to investment opportunities previously reserved for wealthy or institutional investors.
• Transparency and Security: Leveraging blockchain technology ensures all transactions are transparent, immutable, and secure. Every token transaction is recorded, making fraud or asset manipulation difficult.
• Cost-Efficiency: Tokenization can reduce the need for intermediaries, streamlining processes and potentially reducing costs.

Challenges

While RWAs offer several benefits, they also have limitations and challenges.^[2]

• Regulatory Landscape: The regulatory environment for tokenized assets is still evolving, and different governments may have varying rules and regulations concerning tokenized asset creation, issuance, and trading. Therefore, it might be challenging for RWA token issuers to navigate the legality of space.
• Valuation Complexities: Regular appraisals might be needed to ensure the token’s value accurately reflects the underlying asset, especially if the asset’s value can change over time.
• Custody Issues: Determining how the physical asset is stored, maintained, and insured can be challenging, especially when multiple token holders have a stake.

Types of Real World Assets (RWAs)

‍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. 
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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. 
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Commodities and precious metals

‍Tokenizing commodities facilitates new modes of investing in raw materials or precious metals 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.
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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.
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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.
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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.
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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.
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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.
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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.