Why do you need RWA? Detailed explanation of the principles of real world asset tokenization (RWA)

Real World Assets (RWA), in currency parlance, refer to physical or tangible assets that will have intrinsic value in the real world, including loans, insurance contracts, and commodities and real estate Assets such as these are tokenized through blockchain technology. Each Token represents a share, stake or ownership of the underlying asset.

We hope to make traditional assets more convenient for online transactions and investments, have the tamper-proof characteristics and transparency of the blockchain, and even be integrated into the DeFi ecosystem (fewer intermediaries), with a broader market place.

Why do you need RWA?

If we take traditional finance as an example, on-chain RWA is equivalent to putting capital on the chain and securitizing it. Consider the success of securitization in the 1990s as an example of how regulatory improvements can transform capital formation.

Securitization is a system for creating, aggregating, storing and spreading risk. By proposing benchmarks (terms, risk, etc.) that assets must meet, we significantly increase liquidity and funding sources. Mortgages, business loans, and consumer loans were institutionalized and deployed through securitization, resulting in more affordable financing for consumers, companies, and homebuyers.

To put it in vernacular, it is better to say that many people cannot afford the current house price if they buy it in full, but with a loan, basically most people can afford it.

Thirty years later, on-chain securitization can be said to be much the same; financial markets have not yet developed enough to effectively adapt to the Internet. Borrowing costs are higher than they should be due to a network of middlemen including investment banks, custodians, rating services, servicers and others. Most assets cannot be securitized, and international financing markets remain inaccessible to most business owners.

If the encryption industry wants to have an impact on traditional business operations, it must solve the problem of industry value transfer, and RWA is an important transformation process.

Examples of assets that can be tokenized

1. Real estate

Traditional real estate investment is loved globally for its ability to maintain value and long-term investment returns; however, the real estate market is also Known for its poor liquidity. However, through the tokenization of RWA, transparency and liquidity are expected to be improved.

In addition, it is expected that the entire property will be divided into multiple shares in the future, making it easier for multiple people to hold a piece of real estate at the same time and lowering the investment threshold. In addition, through the automated execution of smart contracts, it can also be more convenient to distribute dividends from rental income or sales proceeds. (Regulations need to be further improved)

2. Public investment products

include the tokenization of physical commodities such as gold, oil, and agricultural products. This allows investors to trade and hold these assets more conveniently without actually holding physical assets. (Traditional finance already optimizes transactions in this area, but RWA is expected to further optimize it)

3. Intellectual property rights

includes software code, copyrights and patents. Tokenization can facilitate the licensing and commercialization of intellectual property rights. Artists may choose to sell partial interests in their works to raise funds while retaining some control over their creations.

4. Loans and Collateral

Use physical assets as collateral for lending. For example, tokenizing cars or machinery can be used to secure loans and increase the liquidity of assets.

Advantages of RWA

• Improving liquidity and transaction efficiency: through tokenization, assets (such as real estate) with insufficient "liquidity" in the past can be converted into divisible And easy-to-trade tokens help improve market liquidity.

• Increased transparency, security: Blockchain provides a tamper-proof ledger of ownership and transaction history, making asset management more secure and transparent.

• Easier access to investment opportunities: RWA on the blockchain enables more people to invest in high-value assets by lowering minimum investment amounts and entry barriers.

• Financial product innovation: RWA opens the door to front-end financial products, such as fractional ownership and asset-backed loans, which can lead to a more dynamic financial market.

In general, RWA is not a very unique new invention, but it is expected to improve the transaction efficiency and transparency of traditional finance through the blockchain and create a more efficient market. .

RWA’s operating principle

According to the RWA research report proposed by Binance, a complete RWA system requires: off-chain standardization, asset information integration, and a DeFi protocol designed for RWA.

• Off-chain standardization

Before integrating real-world assets into the digital ledger, their asset value, ownership must be determined in the physical world Belonging and legal status. When estimating the value of RWA, factors such as market price, performance history and the physical condition of the asset need to be considered. Additionally, the asset must have undisputed legal ownership, evidenced by documentation such as a deed or invoice.

• Asset information integration

At this stage, the tokenization process will be carried out to convert asset information into digital tokens. The asset’s value and legal ownership information will be embedded in the token’s metadata. Due to the transparency of the blockchain, anyone can verify the authenticity of the token through relay data.

• Design RWA’s exclusive DeFi protocol

The DeFi protocol specially designed for the RWA financial model not only helps users trade, but also It is convenient to obtain information related to off-chain assets, which can attract more investors.

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