Crypto has many buzz words, and recently you may have heard about RWA. So what exactly is it? The term "real world asset" (RWA) in the context of cryptocurrencies refers to a tangible object that has been digitally preserved and made accessible (tokenized) for usage in decentralized finance (DeFi). DeFi is an ecosystem of decentralized, centralized-free financial applications that operate on blockchain networks like Ethereum. DeFi uses peer-to-peer (P2P) networks, smart contracts, and cryptography to develop a more open and inclusive financial system.
Depending on the source, the estimated cumulative value of potential real world assets (RWAs) is anywhere from $300 to $800 trillion. These assets are a terrific method to use blockchain technology to extract value because they are connected to physical investments and assets that reside in the real world. Let’s take a closer look at what they are and how they work.
The two categories of RWAs in cryptography are fungible and non-fungible. In other words, you can trade one unit for another of the same item without it losing value because fungible assets are interchangeable and divisible. Stablecoins, digital tokens backed by fiat money or other assets, or tokenized commodities like gold or oil are a few examples.
Assets that are non-fungible are distinct and indivisible. Each component of the item has unique qualities and value. NFTs (non-fungible tokens), which are electronic tokens that signify ownership rights to a particular physical or digital commodity, such as works of art, music, or collectibles, are one example.
If we’re just representing assets out in the real world, how are RWAs any different or better than the actual real world assets?
An NFT is a special digital token that represents ownership of physical assets in the real world. actual world asset NFTs are directly connected to the actual world, as opposed to other digital assets like cryptocurrency or virtual goods. The advantages and difficulties that come with this trait set them apart from other NFTs. These are a few advantages of real-world asset NFTs.
Scarcity and Proof and Ownership: RWA NFTs can prove ownership of abundant or hard-to-verify real goods and establish digital scarcity. By confirming the ownership and validity of objects like artwork or collectibles, they build a digital record of ownership and value on a blockchain.
Democratized Access and Higher Liquidity: As NFTs, these physical assets are now easier to own and trade - for example, think of rare paintings which may require specialized environments for storage. As a result, the entrance barrier is lowered and the asset's liquidity is increased. They also make it possible to break an asset into smaller pieces that may be sold and acquired by numerous people all over the world on a global marketplace - again, you can think of very expensive works of art that normal people would not be able to afford as a whole.
Value Realization: By utilizing NFTs in a novel way, unused physical assets can be turned into sources of yield. Owners of such assets can, for instance, make passive income by lending or renting them to other users on a DeFi platform or by fusing them with other digital components to produce fresh modes of expression or utility. Overall, this leads to less downtime or on yield generation.
This sounds great, why hasn’t this already taken over?
Securing Ownership Claims: To guarantee the enforceability and security of ownership rights, legal and technological solutions are necessary. For NFTs to define the transfer, enforcement, or revocation of ownership rights in the event of disputes or fraud, clear legal frameworks are required. The actual object and digital token must be connected using a trustworthy mechanism. It’s true that there are many security breaches in the crypto space, and this needs to and will continue to improve.
Complex Regulatory and Compliance Concerns: For individuals working with NFTs, navigating regulatory uncertainties and compliance issues can be difficult. Depending on the region of the buyer, seller, and blockchain network operation as well as the asset's physical location, they must take various laws and regulations into account. These laws may regulate securitization, taxation, and anti-money laundering. The technology has allowed ease of execution, but a solid regulatory framework is yet to be established.
In summary, while the space and product is evolving, it is certain to grow in use and popularity as the overall crypto industry matures.