Does tokenization of real world assets solve or create problems?

I once came across an opinion on real world assets tokenization that read “tokenization of RWA is not efficient” and if I'm interpreting the statement correctly, this should mean that the said individual believes that the tokenization of real world assets (RWAs) creates additional problems and does not make efficient, said assets.

This is a delicate topic, I'll admit, but it's rather a very simple one to address.

First thing we have to do is make a list of what constitutes “real world assets” or at least what most people generally think of when RWA is mentioned.

This is what we have:

Stocks
Real estate
Private credit
Every physical asset and item you can think of.

Now it's not uncommon for people to misunderstand “real world assets” to simply mean “physical assets” — that is, assets that can be held or felt, like gold, land, etc.

The reality is that this is only just a part of what's being referenced when the phrase “real world assets” is thrown around.

Stocks for example are not something you can hold in your hands, but they are very much a RWA, so in essence, real world assets is just a more neutral sounding way to talk about traditional assets and markets.

Why is it necessary to understand the difference?

It's necessary because when the concept of tokenizing real world assets is viewed through the lens of physical assets, it's much easier to form an opinion of inefficiencies around it, given the highly marketed goal of tokenization being: ownership and control, which I'll add is being understood by many to mean attaining a level of leverage similar to current benefits of investing in crypto assets.

When you buy Bitcoin and store it in a non-custodial wallet, you understand that you are solely in control of said Bitcoin.

But it's difficult to imagine that a tokenized land held in your wallet as a NFT gives you total control over the land in the same way.

This right here, is the problem, and as I previously mentioned, it's easy to address.

Tokenization does make efficient

Tokenization does bring traditional assets to new layers of efficiency. I'll explain this using stocks and real estate.

To make this brief, I'll jointly explain the tokenization of stocks and real estate by using an instance where a real estate company is publicly traded(owned). Now how do we tokenize the real estate company and how does that improve it?

You see, tokenization of the company has to come in two parts. The first is to tokenize the ownership of said company and the second is to tokenize its properties.

When we tokenize the ownership of the company, we make room for a vast number of people to buy into the company. In a more formal term, we've enabled “fractional ownership” of the company, something that's native to crypto.

That said, we understand that the stock market comes with flaws such as information asymmetry where institutional investors/traders access leaks to trade ahead of the broader market. To put simply: insider trading.

Tokenization of ownership, rather that sticking to traditional stocks makes it easier for the world to keep tabs on how the markets are potentially being manipulated to make more informed investment decisions. This level of transparency is a factor of efficiency.

Beyond this, we also can consider that investment costs reduce significantly with settlement times being instantaneous. Again, that's efficiency!

Now it is important to note that this example explanation focuses on a company that's choosing to tokenize its ownership, not one with an active stock creating a tokenized derivative of it on-chain.

With that, of course, the tokenization of said stock comes with additional problems. So in the grand scheme of things, tokenization of stocks should be a full migration. There are zero reasons why the legacy version should remain.

Moving on, when it comes to tokenizing the properties owned and managed by the real estate company, we are mostly looking at NFTs for ownership reference, which should also pave the way for buyers to more easily track ownership history of properties, accessing past pricing to compare for fair value determination.

In addition to this, specific scenarios may allow the issuance of more fungible tokens. For example, if a property needs to be renovated or simply brought down for a new one to be put up, to raise capital, the specific property can have an “access token” issued — where buyers essentially earn access to future revenue from said property.

Evidently, we can see how tokenization can improve real world assets. The way it makes any of these markets efficient, differs according to the market.

So whilst in the case of real estate, the properties may be centrally managed, due to the ownership being tokenized and governance being based on-chain, it's far less likely that fraud or unethical business practices scales with this system.

Posted Using INLEO