Tokenized Real World Assets, or tokenized RWAs in crypto, are real-world assets represented as tokens on the blockchain.
In concept, it’s straightforward. In practice, it’s pretty nuanced.
In this article, we take a developer's perspective on:
As we mentioned, crypto tokenized RWAs are real-world assets represented as tokens on the blockchain. But this leads to some questions:
Real-world assets (RWAs) are typically anything found outside of the blockchain. That’s it. So this means anything off-chain: houses, cars, stocks, bonds, pizza, CrossFit gyms, barbells, 45-lb plates—you get the picture.
What makes assets, tokenized is a much trickier question — but let’s take a step back. You can typically categorize any tokenized asset by identifying its three traits:
So long as the asset being tokenized is off-chain, it makes it a real-world asset, and we can focus on #2 and #3.
All tokenized assets need to be “backed” by something.
There needs to be something behind the token in order for the token to represent the asset. Don’t worry about how the backing is achieved, we will cover that soon. And if you’d like, skip down to the “What are some current tokenized RWA projects?” to see some more solid examples.
For now, imagine backing as a magical property where the tokenized RWA is always worth the same as the asset it represents, and all legality associated with the physical asset is reflected in the token. For example, if you sell the token, you’d have to sell the car, too. We will address this “backing” problem in this article soon.
Composibility.
Simply put, it’s MUCH easier, faster, and more efficient to trade and do business with tokens and tokenized RWAs that it is today with real world assets, contracts, etc.
For example, if you want to tokenize your car and launch our Car NFT. How would we do this using the traits described above? Well, let’s say we are going to “back” our car NFT with the car itself (don’t stress how we back our token yet).
Great! Next, we’d have to address the backing type. Since we are backing the Car NFT with the car itself, we’d say the backing type is directly backed.
Now, you may wonder, “Well, hang on a second. Of course, the token should be backed by the actual car! How would it be backed otherwise?”. Let’s look at another example
Let’s take our same Car NFT now, and let’s say we wanted to forge the legalities of the car. We didn’t really care about who owned the car; instead, we just wanted a Car NFT that always reflected the price of the real-world car. If we sell the token on-chain, we should get the dollar amount of the car in the real world.
Well, what we could do is instead of backing our Car NFT by the actual car, we could back it by the car’s value in dollars and say that “anytime you like, you can sell your Car NFT for the dollar amount that the car is worth.” The Car NFT token would still be worth the same value as the actual car, but it’s no longer backed by the car itself. Dollars back it! So, in this setup, our traits are:
With this setup, we still have a Car NFT that has the same value as the car, but it’s technically no longer backed 1 to 1 with the car. We call “indirectly backed” tokenized RWAs “synthetic assets.”
We can have our Car NFT backed by other stuff, too! Well, why don’t we make it cypherpunk and back it by crypto! We could say “at anytime, you can trade this Car NFT for it’s value of the car in USDC or ETH.” Boom! We now have a synthetic tokenized RWA backed by cryptocurrency!
Now, obviously, we can’t have a Car NFT that is directly backed with on-chain collateral because the car itself is off-chain!
There are some “weird” maybes you could hypothesize about this by saying, “The Car NFT is backed by a different Car NFT that is backed by the car itself,” and maybe that would make this category “real”, but we digress.
Now, for each of the categories above, each comes with a unique methodology to back them, each with its own pros and cons.
For the off-chain collateral indirectly backed models, in order to “back” our Car NFT by the car itself, there needs to be some sort of centralized “link” between the chain and legalities of the actual asset. This often requires a lot of centralized risk. We see this play out in the crypto space right now with tokens like USDC. USDC is a tokenized representation of the real-world USD dollar.
The way the USDC tokens keep their value, is that Circle says “at any time, you can exchange 1 USDC for 1 USD.” This way, the tokens always have their value and can be traded on exchanges.
The off-chain collateral, indirectly backed tokenized RWAs have the same setup as their directly backed cousins, except they are backed by “other stuff”. USDT is a good example of a tokenized RWA that is indirectly backed.
USDT has the same backing methodology as USDC, where a user can swap 1 USDT for 1 USD.
Of course, this means that there is a lot of trust placed in the Circle/Coinbase team. And there are a lot of legal hurdles the teams must jump through since they are not decentralized.
LUSD (liquity) is a good example of a tokenized RWA that is synthetic in nature. It’s a stablecoin like the others, but it’s collateral is fully on-chain and decentralized.
This is where (in our opinion) you get into the more interesting stablecoins. You can have a tokenized RWA without the issues of centrality, all you need is a Chainlink price feed. The way these types of tokenized RWAs keep their value peg is that the protocols say “At any time, you can swap 1 LUSD token for the USD equivalent in ETH from a vault.” The way this exchange is set is by using decentralized price feeds to get the price for the ETH.
The downside here, is that now, you don’t have the same legal hurdles (you’ll probably still have some), but you lose the ability to be directly backed by the asset itself. This creates risk where if the price of the collateral explodes or tanks, you could see the value of the tokenized RWA also explode or tank.
Right now, the most popular tokenized RWA projects are used every day, and are in high demand. Stablecoins are an excellent example of tokenized RWAs.
These are all examples of crypto tokenized RWAs, where the asset is the USD. But there are more projects looking to make a splash as well, let’s take a look at other examples of a list of tokenized RWAs
Ondo Finance is a project building tokenized treasury bills. With an on-chain token, people can access the yield of a US T-bill.
Maple Finance is an example of a project making tokenized borrowing and lending.
To build tokenized RWAs, you need to follow the above steps:
We have an example repository called rwa-creator with some examples of how to make tokenized RWAs using TSLA stock. I also created a walkthrough video on Chainlink Labs YouTube if you’d like to learn more!
Chainlink Functions and Chainlink Price feeds are the two power-house projects that enable these to be built. Right now, price feeds are already used to power decentralized stablecoins, but Chainlink Functions can be used to do more of the directly backed centralized setups as well — while reducing the amount of centrality! Check out the repo and YouTube video to watch a walkthrough.
Chainlink price feeds allow the “price feed exchange” backing methodology to work with ease, and functions and make API calls to off-chain services (in a decentralized manner) to facilitate the off-chain selling or buying of the underlying asset the tokens represent.
Right now, the biggest hurdle is dealing with non-fungible tokens. And with NFTs, there are two main hurdles:
How do we guarantee that when you sell a token representing a physical asset, the actual item also changes hands? Picture a scenario where Bob digitizes his swanky $10 million estate into a non-fungible token (NFT) and sells it to Fred. Once the sale is through, Fred demands the keys to his new mansion. If Bob plays dumb and refuses, what’s stopping him? Right now, many would shrug and say “magic” — there’s no real enforcement linking that token to the tangible property.
Fungible assets, like USD are easier to side-step this problem, because we can just use an exchange to get the underlying value of the tokens. But non-fungible assets like houses and cars we still haven’t seen amazing breakthroughs in fixing this issue.
We’ve mentioned price feeds are a great way for tokenized RWAs to retain their value, but for nonfungible tokens, this is a lot harder. How can you get a fair price on a house? After all, something is really only worth what someone else is willing to pay for it.
In the future, I expect projects to overcome many of these legal challenges and build sophisticated setups. Chainlink Functions will facilitate much of this, and I’m quite excited to see what everyone builds.
In this article we've learned about what crypto RWAs or tokenized real-world assets are. We've seen multiple examples of real-world tokenized assets, how they work, how they're backed as well as a list of RWAs projects, as well as other key concepts such as:
