The blockchain realm has come a long way since its humble beginnings with the introduction of Bitcoin. Although ambitious, blockchain technology served the simple purpose of holding and transacting value online back in the day. Nevertheless, its potential developed with Ethereum’s deployment—thanks to smart contracts that let developers build any financial use case they wanted, underpinned by blockchain’s benefits.
As this technology continues to revolutionize finance and any industry it touches,
Everything will be tokenized and connected by a blockchain one day.
Fred Ehrsam
So, digital asset tokenization can encompass all the world’s assets to provide the advantages of blockchain, effectively removing the obsolete processes endured while interacting with them.
A Look at Digital Asset Tokenization
The relevance of blockchain technology is understood far and wide. Blockchain networks are decentralized ledgers that breed transparency, immutability, and openness. The most popular blockchain application, cryptocurrency, is widely used thanks to said properties. In fact, cryptocurrency has long been an alternative to traditional financial assets and the financial system surrounding those assets due to its underlying properties.
However, that does not limit blockchain advantages from being rubbed off on traditional assets.
Logically, other assets holding value because of their uniqueness, like collectibles, or those that are not interchangeable, like real estate, can be tokenized. While those comprise non-fungible assets, fungible assets, like securities and commodities, can also be taken on-chain. The ability of blockchain to represent any asset can fundamentally transform how RWAs get transacted and everything associated with transacting them.
The Benefits of Digital Asset Tokenization
Think of how cryptocurrency eliminated the need for third parties to make payments. The results were low transaction fees, fast transaction speeds, and a trustless, transparent infrastructure. Users were able to move away from archaic centralized infrastructures that lacked transparency and were prone to fraud.
Tokenization Breeds Low Costs, Control, and Transparency for Users
Tokenizing assets on the blockchain brings users the same advantages. Tokenized assets ensure lesser dependency on centralized intermediaries, if not complete independence from them. With that, transacting RWAs like real estate, financial instruments, art, and more on-chain is less expensive, thanks to the absence of administrative costs spent on third parties.
Taking assets on-chain also offers holders more control. The assets are linked to their crypto wallets, enabling them to transact with wallets around the globe at any time. The cryptographic security protection of transactions far outweighs traditional security measures, allowing blockchain users to rise over issues like forgeries.
Simultaneously, transactions recorded on blockchains are tamper-proof for everyone to see and offer total transparency- thanks to cryptography again. Anyone can check asset flows and track the returns generated by said assets, keeping fraudulent practices at bay.
Moreover, blockchain transparency and smart contract innovation allow for proving provenance. Buyers can verify if they are acquiring assets from legitimate counterparties. Everything on the blockchain is verifiable – users can transact objectively based on thorough due diligence rather than placing trust in others and hoping for the best.
Onboarding Assets On-Chain Enhances Their Accessibility and Liquidity
Beyond that, tokenized assets are very accessible. On-chain versions of traditional assets can easily be bought, sold, and traded worldwide. The reduction in fees and excessive third-party interference alongside simple cross-border transacting capabilities opens the floodgates to counterparties not interested in dealing with the assets through traditional channels. High costs and third-party permission often prevent them from conveniently indulging in off-chain assets.
The increased accessibility with tokenized assets even paves the way for increased liquidity. RWAs can be listed across popular exchange platforms, letting interested buyers effortlessly grab them. That shifts the interaction with traditional assets from siloed, centralized environments to on-chain interoperable infrastructure. The result is open access to on-chain versions of the assets and their effortless movement across crypto wallets.
Moreover, tokenization allows the fractionalized ownership of on-chain assets, meaning RWAs are purchasable in smaller parts. It presents possibilities like owning fragments of assets that are usually not divisible. Simply put, tokenization lets buyers with lighter wallets acquire fractions of assets that are hard to sell wholly, making illiquid ones easier to trade and sell. Ergo, taking assets on-chain significantly bolsters their liquidity.
With tokenization, something like a rare watch can be represented on-chain and divided into thousands of tokens. Interested parties can thus snap up any number of tokens they like, one, a thousand, or anything between and beyond, and expect their value to grow proportionally to their stake in the watch. Therefore, on-chain tokenization enhances liquidity with all kinds of assets, reducing the volatility of their prices and eventually stabilizing markets.
Integrating Traditional Assets into DeFi
But why stop there? Blockchain technology is known for revolutionizing the financial landscape. Nothing aided that more than DeFi (Decentralized Finance), a subset of finance originating from blockchain technology. Tokenizing traditional assets makes it possible to take them to the DeFi ecosystem, giving rise to innumerable opportunities.
RWAs can be utilized as collateral on borrowing protocols, locked in staking pools and yield farms for profits, and traded seamlessly on DEXs (Decentralized Exchanges). The possibilities are endless as the DeFi ecosystem is highly versatile and often leads to new developments.
RWAs can inspire a new direction for DeFi, pushing developers to create protocols mirroring real-world use cases and entirely novel ones not conceptualized yet. DeFi’s composability will allow users to extract maximum value from traditional assets like never before. Tapping into capital-efficient applications at various layers and compounding returns with every layer from a single investment can now be imagined.
Custodians to Shape the Safe Utilization of Tokenized Digital Assets
With all the advantages RWAs bring over traditional asset types, encouraging users to jump into the blockchain realm requires solutions that make using the assets safe and secure. Institutional investors and enterprises wanting to deal with immense RWA liquidity need custody solutions mirroring traditional custodians.
Self-storage wallets work for retail investors dealing with smaller asset values. But think of those storing and often moving massive amounts of tokens between DeFi strategies, effecting trades between various wallets, and handling RWAs on behalf of clients by overseeing numerous withdrawal and deposit requests.
With digital asset custodians, big-ticket RWA utilities will experience the same levels of security as their non-tokenized versions in traditional finance. Thanks to the high-level security protocols and MPC wallet (Multi-Party Computation) devices used by custodians to store RWAs, worries of hacks and exploits when using blockchain-based value are no longer relevant.
They also make moving assets between storage systems and external wallets highly convenient. Digital asset transfers can become complex due to the various parts of enterprise storage systems. However, top custodians like Anchorage and Liminal merge the efficiency needed to carry out enterprise functions with digital assets, with highly secure storage and transfer capabilities.
Digital Asset Tokenization Is on the Way to Becoming Web3’s Biggest Utility, Soon
Digital asset tokenization holds the potential to metamorphose traditional finance. It is envisioned to become Web3’s biggest use case by value by bringing trillions of dollars worth of assets into the blockchain ecosystem.
No assets are exempt from the revolution as everything can be tokenized into RWAs to benefit from blockchain-based tenets like decentralization, transparency, and openness. A well-established digital asset custody vertical will immediately help onboard large-scale users.
What was once an alternative to the traditional financial system now encompasses it to offer the world revolutionary utility. Diving into the blockchain and Web3 ecosystem has never been this interesting.