Exploring Real World Assets (RWA) within Decentralized Finance (DeFi)

RWA, which stands for Real World Asset, has emerged recently, as an application of blockchain and Decentralized Finance (DeFi). The term RWA refers to the assets that exist in the real world and can be tokenized in the blockchain network. Once such assets are tokenized within a blockchain network, it bridges the traditional financial system with the Decentralized Financial system. There are plenty of benefits associated with tokenizing the Real World Assets and Liabilities that we have explored in our recent article in Homecubes blog. 

RWA connects the assets in the real world to the digital world by tokenizing the assets and applies DeFi to bring all financial services in the real world to the digital world.

Some types of RWA

Almost all assets that exist in the real world are convertible to RWA by tokenization within a blockchain network. However, the most popular RWAs that are about to revolutionize the traditional way of investment and ownership are detailed below.

1- Tokenized Real Estate

The real estate sector is one of the most popular and valuable markets around the world. But at the same time, it is one of the most illiquid markets. The biggest entry barrier for investors in the traditional method is having access to a large amount of money. Furthemore, the market is normally limited to consumers or investors who live nearby and surrounding areas.

Blockchain makes the real estate market more efficient by utilizing DeFi and property tokenization and through enabling fractional ownership as well as eliminating intermediaries such as banks, insurance companies, lawyers and brokers. 

2- Tokenized Commodity

Commodities refer to natural products such as oil, gold, wheat, rice, etc. that are being consumed globally and have a universal value. Most commodities such as gold are utilized to diversify investors’ portfolios against inflation. However, the logistics and storage issues and costs have always been a problem to invest in such assets. DeFi and asset tokenization can be a value-added solution for investing in commodities. For instance, a tokenized gold which represents one ounce of gold in the blockchain can get the job done for inventors without worrying about the safe storage place.

3- Tokenized Financial Instruments

Financial instruments or securities play a pivotal role in financing and investment in the traditional financial markets. Public or private sector bonds, stocks and other financial derivatives are all falling under financial instruments. There are quite a lot of limitations and barriers to investing in financial instruments that make it complicated for ordinary investors. By tokenizing financial instruments, investors can have unlimited access to them across blockchain, where those tokens can be traded and invested in. Like other markets, the financial instrument markets can benefit from blockchain advantages such as more liquidity, better accessibility and transparency.

Downsides of RWA in DeFi

Despite the advantages and values associated with RWA Within DeFi, there are serious risks and concerns that you as a user must be aware of, for the sake of safeguarding your money. The regulatory risks are the main concern associated with RWA. Even though the governments across the globe are working hard through legislation to regulate RWA, it is not yet finalized. The market is seriously suffering from lack of regulation and clear legislation for RWA in terms of ownership, authenticity and tax laws. Besides,  for some types of RWA like tokenized commodities, finding a safe way to ensure a consistent reserve for issued tokens on each commodity hasn’t been successful yet. As such, you must be vigilant when investing in RWA and check the local regulations to safeguard your investment. For further information on UAE regulation on asset tokenization, you may read our recent article.

How does RWA work?

Here are the main structure and roadmap that must be going through for creating RWAs of any type within DeFi.

• Off-chain formalization

As the first step, some processes must be done off-chain. The ownership of the underlying asset, its fair market value and the legal framework as well as token issuance process must be clear. The process of storing the asset in the blockchain can not be done without finalizing the off-chain formalization.

• Information bridging

At this phase, all important information about the underlying asset including ownership status, market value and authenticity must be converted to metadata in order to store in the blockchain network.

• RWA protocol demand and supply

DeFi protocols pave the way for investors to trade the RWA tokens within a blockchain network, a NFT marketplace or an exchange. DeFi protocols also regulate the demand and supply for RWAs and ensure they work perfectly with terms and conditions.

Final words from Homecubes

Real World Assets are increasing in popularity due to many advantages for many parties. It benefits investors and entrepreneurs and makes markets more efficient by bringing better liquidity and transparency.

Homecubes is working hard with experienced blockchain developers as well as the Dubai government officials to make fractional real estate ownership through tokenization possible in Dubai. 

Homecubes commits to provide a legal, secure, fast and easy to use platform for investors to enjoy investing in the Dubai real estate market.

We will launch our platform soon after ensuring all technical and legal requirements are in place. You may follow us on social media to be among the first investors who will take advantage of such a great opportunity. 

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