Summary of RWA Thesis: Outlier Ventures (Part 1)
A TALE OF TWO TRENDS
Tokenizing Real World Assets (#RWA) has the potential to transform various sectors, such as investing, asset management, manufacturing, real estate, and art. It is estimated that the total addressable market for #RWA tokenization could reach $10 to $15 trillion by the end of the decade, which is attracting major institutional participants. By converting physical or intangible assets into digital tokens on a blockchain, liquidity, accessibility, decentralization, efficiency, and ownership of multiple asset types can be enhanced. Some existing use cases include tokenized bonds, however, the growing trend of digitizing assets, including real estate, carbon credits, and company assets, could soon move on-chain.
“I believe the next generation for markets, the next generation for securities, will be tokenization of securities. Distributed ledgers will bring instantaneous settlement and change the whole ecosystem” — BlackRock CEO Larry Fink
Real World Asset tokenization has gained significant interest since 2019, driven by institutional investors, hedge funds, and asset managers. Advancements in blockchain scalability, security, and interoperability are being used to pilot new tokenization projects. The evolving regulatory environment is shaped by robust frameworks, such as the UK’s Electronic Trade Documents Act, which aligns with blockchain applications for #RWA tokenization. The combination of progressive regulation, technological advancements, and enhanced transmission mechanisms, such as Central Bank Digital Currencies (CBDCs) and stablecoins, marks a promising new era in #RWA tokenization.
Tokenizing is the process of creating a digital copy of any asset on the blockchain.
The process of tokenizing #RWA is influenced by two distinct trends, which make it challenging to comprehend its overall advantages and effects. These two trends, namely the digitization and financialization of assets, are long-term patterns unfolding over the past few decades.
• Digitalization of assets: transforming physical assets into digital formats or moving digital assets onto new infrastructure to unlock even more benefits.
• Financialization of assets: reengineering cash flows, investment opportunities, and capital formation by turning any asset into a financial instrument.
Digitalization: In the search for more efficiency, assets become digital and intangible, as tokenization unlocks more benefits from being represented in token format on the blockchain. Intangible assets can still benefit from digitalization when moving to a different database or infrastructure, unlocking new benefits. With 75% of all data stored globally generated over the past five years, Outlier Ventures and Phyken Network are optimistic that the value in the digital world will exceed the physical world in the near future.
Financialization: The token representing the #RWA asset is highly programmable, with automatically executable actions embedded in the token’s smart contract code. This allows for the easy and low-cost reengineering of cash flows, investment opportunities, and capital formation associated with tangible assets previously not considered financial instruments.
There are three critical reasons for the optimistic scope of #RWA:
- More mindshare and activity from a more extensive set of players actively trying out the technology. Improvements in the infrastructure and tooling required for tokenization of #RWA.
- Regulatory improvement to cater to the tokenization of #RWA over the past years, and we only expect this to accelerate as more stakeholders openly express interest.
- Countries, except the US, are making progress in regulating cryptocurrencies. This boosts institutional investors' confidence to explore these technologies. A robust regulatory framework is essential for large-scale asset tokenization. General regulations governing digital assets, like the UK’s Electronic Trade Document Act, are critical to tokenizing real-world assets.
Conclusion
Tokenization is quickly transforming the financial industry. Major financial institutions, such as DTCC, Clearstream, and Euroclear, have launched pilot projects to explore the potential of this technology. Tokenization technology drives regulatory conversations and integrates off-chain assets into smart contract capabilities. Tokenizing real-world assets (#RWAs) is a crucial step to unlocking the computational economy of blockchain technology and enhancing the efficiency and effectiveness of blockchain-based smart contracts. This new economic paradigm, facilitated by #Web3 technologies, increases economic complexity and wealth, making blockchain technology an essential tool in the financial sector.
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RWA tokenization and fractionalization protocol focused on bringing green and renewable energy assets on-chain.
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Written by: https://medium.com/@rjkesavchandar
