Key takeaways

  • Tokenizing real-world assets (RWAs) like real estate, commodities, wine or art involves creating blockchain-based tokens that represent ownership, enabling easier and more accessible trading of traditionally illiquid assets.
  • Key advantages include increased liquidity, fractional ownership, reduced need for intermediaries and enhanced transparency due to blockchain’s traceability.
  • The main steps to tokenization are asset selection, legal compliance, creating smart contracts, issuing tokens and establishing a secondary market for trading these tokens.
  • Ethereum is secure and widely adopted but has higher fees and slower speeds. Solana offers high transaction speeds and lower costs, making it ideal for high-volume trades, although it has a smaller ecosystem.

Real world asset (RWA) tokenization represents a revolutionary way to bring tangible assets like real estate, art, commodities and intellectual property into the digital financial ecosystem. Tokenization involves creating digital representations (tokens) of physical assets on a blockchain, enabling them to be traded, owned fractionally and accessed by a wider range of investors. 

Tokenizing RWAs allows assets typically locked into slow-moving, high-barrier markets to benefit from blockchain’s speed, transparency and accessibility.

Why tokenize real world assets (RWAs)?

The main drivers for RWA tokenization are increased liquidity, accessibility, transparency and global reach. Traditional asset classes, like real estate or fine art, often have illiquid markets due to high costs and restricted access.  

By converting these assets into tokens, they become accessible to a broader investor base, even allowing fractional ownership. Additionally, tokenization provides a way to standardize and improve processes, lowering costs related to intermediaries and legal procedures.

Here is a list of benefits of tokenizing RWAs.

  • Liquidity: Tokenization enhances liquidity by enabling assets to be traded on blockchain platforms 24/7. Tokenized assets can be sold in portions or in full, allowing owners to unlock value without lengthy sales cycles.
  • Accessibility and fractional ownership: Tokenization enables fractional ownership, breaking down high-value assets into smaller shares that are affordable for a broader audience. For example, owning a portion of a commercial building, rare artwork or luxury asset is possible through fractional token ownership. In increasing the base of investors who can access a previously exclusive asset or asset class, tokenization could help improve liquidity. This in turn helps with pricing efficiencies.
  • Transparency and security: Blockchain’s immutable ledger system makes each transaction traceable, reducing the risk of fraud and increasing transparency. Smart contracts also automate compliance and ownership updates.
  • Reduced intermediaries: The tokenization process cuts out traditional intermediaries like brokers or legal agents, reducing costs and making asset transfers faster and more efficient. This often enables real-time settlements for onchain assets. 
  • Unlock liquidity: Capital markets typically operate on a T+2 basis, where if T is the time of execution of a transaction, T+2 days is when the transaction is settled and assets are exchanged. Therefore, organizations involved in the transaction lose two days of liquidity of the assets being swapped. This in turn affects yields that firms make on these assets. When a new mechanism of settling in real-time (T) is enabled, it unlocks a lot of liquidity that capital markets and their participants can use more effectively.
  • Efficient transfer of ownership: Tokenization on blockchain allows for easy, quick transfers of ownership and can even integrate secondary markets where asset-backed tokens are traded. While efficient transfer of ownership is critical, being able to track ownership through the history of an asset can be helpful to assess credibility, and in some cases even price the asset better. This is particularly true with high-end assets like art and precious stones.
  • Better risk management: As mentioned above, instant settlements can help reduce liquidity risks. However, tokenizing mainstream capital market assets can also help reduce counterparty risks. If all the assets of a firm are onchain, the real-time solvency state of the firm can be easily identified before someone enters a transaction with them. This can help establish confidence in a market during a period of crisis similar to the global financial crisis of 2008.

Steps in tokenizing a real-world asset

To tokenize an RWA, the following steps are generally involved:

  • Step 1 - Asset selection and valuation: Identify and appraise the asset to determine its tokenizable value. This may involve working with valuation firms to establish a reliable price benchmark.
  • Step 2 - Legal compliance and structuring: Ensuring compliance with regulatory requirements is critical. Tokenization needs to adhere to local laws and regulations surrounding ownership and security, which often involves working with legal and financial experts to create a compliant structure.
  • Step 3 - Asset digitization and smart contract development: A smart contract (self-executing code on the blockchain) is created to manage the asset’s rules and transactions, defining ownership terms, access rights, compliance requirements and dividend distributions if applicable.
  • Step 4 - Token issuance and distribution: Tokens are minted on the blockchain representing the asset. The tokens are then distributed to investors either through public sales (like an initial coin offering or ICO) or private placements.
  • Step 5 - Secondary market creation: For increased liquidity, a secondary market for the tokenized asset may be established on compatible exchanges, enabling holders to buy or sell tokens as desired.
  • Step 6 - Tokenization tooling: As blockchains develop token standards to enhance support for RWAs, it is critical for an ecosystem to be created for these token standards to be enhanced with tooling. Money managers do not generally possess the extensive technological capabilities to have these tools in-house. Therefore, tooling to onboard common RWAs could go a long way to drive mainstream adoption.
  • Step 7 - Ongoing compliance and management: Continued regulatory compliance, updates and maintenance of records on the blockchain are essential, especially to keep assets secure and aligned with evolving regulations.

Ethereum vs. Solana: A Comparison for RWA tokenization

Both Ethereum and Solana have embraced RWA tokenization with innovative standards and products. Tokenizing RWAs on Ethereum and Solana comes with distinct advantages and challenges. Here’s how they compare:

Network efficiency and speed

  • Ethereum: The Ethereum network, known for its decentralized security, processes around 15-30 transactions per second (TPS). This speed can be limiting when tokenizing high-demand RWAs, especially when network congestion occurs.
  • Solana: With a focus on scalability, Solana achieves upwards of 1,000 real transactions per second, making it ideal for tokenizing assets where real-time transactions and high-volume trading are anticipated. These efficiencies matter particularly when highly liquid asset classes like foreign exchange are moved onchain.

Transaction costs

  • Ethereum: Ethereum’s high gas fees have been a well-documented challenge for users. Although Ethereum’s various upgrades aim to reduce costs, they are still substantial compared to Solana.
  • Solana: Solana’s transaction fees are extremely low, often less than $0.01 per transaction, making it highly cost-effective for tokenizing assets and performing complex operations affordably.

While Solana has an advantage here, there are trading platforms on Solana like Zeta Markets that have chosen to create their own app chains to achieve efficiencies on top of what Solana already provides. 

Ecosystem and project maturity

  • Ethereum: As the leading blockchain for decentralized applications (DApps), Ethereum has a large ecosystem and extensive support for projects looking to tokenize RWAs, with protocols like Centrifuge. Ethereum typically has an advantage with many of these innovations. In the case of RWA tokenization, Ethereum standards ERC-3643 was created to support this new paradigm. 
  • Solana: Solana, while newer, is rapidly growing and gaining traction for RWA tokenization due to its high efficiency and lower costs. 

Regarding ecosystem maturity, Solana is lagging behind Ethereum. There are several projects that are tokenizing RWAs, but the ecosystem is still nascent. For instance, Paypal has used its internal technology capabilities to build on top of Solana to launch the PYUSD stablecoin.

Developer and community support

  • Ethereum: Ethereum boasts a large developer community, contributing to extensive documentation, toolkits and support for new projects.
  • Solana: Solana’s community is smaller but growing quickly, with increasing developer resources and support as the ecosystem matures.

Ethereum vs. Solana – A Comparison for RWA tokenization

Here are some examples of projects and some data on the market opportunity around the tokenization of RWAs. 

  • Ethereum: Centrifuge is a decentralized platform for RWA tokenization on Ethereum, enabling businesses to finance real-world assets like invoices and real estate. As of 2024, Centrifuge has helped tokenize over $250 million in assets. RealT offers tokenized real estate on Ethereum, allowing fractional ownership of properties. With over 200 properties tokenized, RealT enables users to earn rental income and trade fractions of properties easily.
  • Solana: Ondo Finance and several other projects on Solana have led the tokenization initiatives across different asset classes. Leveraging Solana’s speed and affordability, they make trading accessible to retail investors.

RWA tokenization is reshaping how assets are bought, sold, and managed. By making high-value assets accessible, tokenization democratizes investment and brings liquidity to traditionally illiquid assets. While Ethereum remains a popular choice for RWA tokenization due to its extensive ecosystem, Solana is emerging as a cost-effective, high-speed alternative, especially suited for high-volume transactions.

With continuous advancements in blockchain technology, RWA tokenization has the potential to redefine asset ownership, investment access, risk management and liquidity at scale. The coming years could see explosive growth in this field, with Ethereum and Solana both playing significant roles in shaping the market’s future.

However, any major transformation of traditional assets is a multi-decade and even perhaps a multi-generational initiative. The pace at which RWA tokenization adoption happens is yet to be seen.

Written by Arunkumar Krishnakumar