Blockchain Technology and Tokenization of Real World Assets: An Exploration of Underlying Logic and Pathways for Large-Scale Application

In 2023, the tokenization of real-world assets ( Real World Asset Tokenization, RWA ) became a hot topic in the field of Blockchain. Not only is there heated discussion in the Web3 world, but traditional financial institutions and government regulatory bodies in many countries also attach great importance to it, viewing it as a strategic development direction. Authoritative financial institutions such as Citibank and JPMorgan Chase have successively released research reports on tokenization and are actively promoting related pilot projects.

The Hong Kong Monetary Authority clearly stated in its 2023 Annual Report that tokenization will play a key role in the future of finance in Hong Kong. The Monetary Authority of Singapore, along with the Financial Services Agency of Japan, JPMorgan Chase, DBS Bank, and other financial giants, launched the "Guardian Project" ( Project Guardian ) to deeply explore the enormous potential of asset tokenization.

Despite the heated discussions on the RWA topic, there are still differences in understanding within the industry, and the discussions around its feasibility and prospects are quite controversial. Some believe that RWA is merely market speculation and cannot withstand in-depth discussion; others are full of confidence in RWA and are optimistic about its future. Meanwhile, articles analyzing different viewpoints on RWA are emerging like mushrooms after rain.

This article aims to share perspectives on RWA and conduct an in-depth discussion and analysis of its current status and future.

Core Viewpoints:

1. The future focus of asset tokenization in the real world will be driven by authoritative institutions such as traditional financial institutions, regulatory bodies, and central banks, establishing a new financial system based on a permissioned blockchain (Permission Chain) that utilizes DeFi technology. Implementing this system requires:

• Computational System ( Blockchain Technology )
• Non-computational systems ( such as legal systems )
• On-chain identity system and privacy protection technology
• On-chain fiat currency ( CBDC, tokenized deposits, fiat stablecoins )
• Complete infrastructure ( low-threshold wallet, oracle, cross-chain technology, etc. )

2. Blockchain is the first effective technological means to support the digitalization of contracts after computers and networks. Blockchain is essentially a platform for digital contracts, and contracts are the basic form of asset expression. The token (Token) is the digital carrier of assets after the formation of contracts, making blockchain an ideal infrastructure for the digitalization/tokenization expression of assets.

3. As a distributed system maintained by multiple parties, Blockchain supports operations such as the creation, verification, storage, circulation, and execution of digital contracts, addressing the issue of trust transfer. As a "computational system", Blockchain meets humanity's demand for "repeatable processes and verifiable results."

4. DeFi has become a "computational" innovation in the financial system, replacing the "computational" part of financial activities, achieving cost reduction and efficiency improvement while also enabling programmability. However, the "non-computational" part, which is based on human cognition, cannot be replaced by blockchain. Therefore, the current DeFi system does not encompass credit, and credit-based unsecured lending has not yet been realized in the current DeFi system. The reasons for this phenomenon include the lack of an identity system that expresses "relational identity" in blockchain and the absence of a legal system to protect the rights and interests of both parties.

5. For traditional financial systems, the significance of tokenizing real-world assets lies in creating digital representations of real-world assets ( such as stocks, financial derivatives, currencies, and equities on the Blockchain, thereby extending the advantages of distributed ledger technology to a wide range of asset classes for exchange and settlement.

6. Financial institutions enhance efficiency by adopting DeFi technology, using smart contracts to replace the "computational" aspects of traditional finance, automatically executing various financial transactions according to predetermined rules and conditions, thereby enhancing programmability. This not only reduces labor costs but also, in specific contexts, it can provide new possibilities for enterprises, especially offering innovative solutions to financing challenges for small and medium enterprises )SMSE(, which opens a door rich in potential for the financial system.

7. As the attention and recognition of blockchain and tokenization technology continue to strengthen in the traditional financial sector and among governments worldwide, and with the ongoing improvement of blockchain infrastructure technology, blockchain is moving towards a path of integration with traditional world architecture and solving real pain points in real-world application scenarios, providing practical solutions for actual scenarios, rather than being confined to a "parallel world" that is disconnected from the real world.

8. In the future landscape of multiple different jurisdictions and regulatory systems with permissioned chains, cross-chain technology will be particularly important for addressing interoperability and liquidity fragmentation issues. Tokenized assets on-chain will exist on public Blockchains and permissioned chains operated by financial institutions, and cross-chain protocols similar to CCIP can connect tokenized assets on any Blockchain to achieve interoperability and enable seamless communication between all chains.

9. Currently, many countries around the world are actively promoting legal and regulatory frameworks related to Blockchain. At the same time, the infrastructure of Blockchain, such as wallets, cross-chain protocols, oracles, and various middleware, is rapidly being improved. Central Bank Digital Currencies (CBDC) are also being continuously applied, and token standards that can express more complex asset types are emerging, such as ERC-3525. In addition, with the development of privacy protection technologies, especially the ongoing development of zero-knowledge proof technology, and the increasingly mature on-chain identity systems, we seem to be on the brink of large-scale application of Blockchain technology.

![In-depth Explanation of RWA Asset Tokenization: Underlying Logic Sorting and Large-Scale Application Implementation Path])https://img-cdn.gateio.im/webp-social/moments-7eba8a51d66cd568f8367b342de126ae.webp(

I. Introduction to Asset Tokenization Background

Asset tokenization refers to the process of expressing assets in the form of tokens on a programmable Blockchain platform, typically classifying tokenizable assets into tangible assets, such as real estate and collectibles, and intangible assets, such as financial assets and carbon credits. This technology, which transfers assets recorded in traditional ledger systems to a shared programmable ledger platform, represents a disruptive innovation for the traditional financial system and may even impact the future of the entire human financial and monetary system.

There are mainly two completely different views on the cognition of RWA asset tokenization, which can be referred to as Crypto RWA and TradFi RWA. The RWA discussed in this article is from the perspective of TradFi.

) RWA from a Crypto Perspective

The RWA in Crypto can be seen as the unilateral demand of the Crypto world for the yields of real-world financial assets. The main background is under the continuous interest rate hikes and balance sheet reductions by the Federal Reserve, where high interest rates significantly affect the valuations in the risk market. The reduction in the balance sheet has greatly extracted liquidity from the crypto market, leading to a continuous decline in yields in the DeFi market. At this time, the risk-free yield of U.S. Treasuries, which is as high as around 5%, has become highly sought after in the crypto market. Among these, the most notable is MakerDAO's substantial purchase of U.S. Treasuries this year. As of September 20, 2023, MakerDAO has purchased over 2.9 billion in U.S. Treasuries and other real-world assets.

The significance of MakerDAO purchasing US Treasury bonds is that DAI can leverage external credit to diversify the assets supporting it, and the long-term additional income from US Treasury bonds can help stabilize DAI's exchange rate, increase the elasticity of its issuance, and incorporating US Treasury bonds into the balance sheet can reduce DAI's dependence on USDC, thereby minimizing single-point risks. Moreover, since the income from US Treasury bonds will fully flow into MakerDAO's treasury, MakerDAO has recently also increased the interest rate of DAI to 8% by sharing part of its US Treasury bond income to boost the demand for DAI.

The approach of MakerDAO is clearly not one that all projects can replicate. With the skyrocketing price of the MRK token and the rising market sentiment surrounding the hype of the RWA concept, various RWA concept projects have emerged, apart from some larger, compliant RWA public chain projects. Various real-world assets are being tokenized and sold on the blockchain through all sorts of means, including some rather outrageous assets, leading to a mixed bag in the entire RWA sector.

The RWA logic of Crypto mainly revolves around how to transfer the rights to the income of income-generating assets ( such as US Treasury bonds, fixed income, stocks, etc., onto the chain, to use off-chain assets as collateral to obtain liquidity of on-chain assets, and to bring various real-world assets onto the chain for trading ), such as sand, minerals, real estate, gold, etc. (.

Therefore, we can find that the RWA of Crypto reflects the unilateral demand of the crypto world for real-world assets, which still faces many obstacles in terms of compliance. The approach taken by MakerDAO is actually the MakerDAO team using compliant channels to deposit and withdraw funds ) like Coinbase and Circle (, and purchasing U.S. Treasury bonds through formal channels to obtain their yields, rather than selling these yields on-chain. It is worth noting that the so-called RWA U.S. Treasury bonds on-chain are not the U.S. Treasury bonds themselves, but rather their rights to income. Moreover, this process also involves the step of converting the fiat currency income generated by U.S. Treasury bonds into on-chain assets, which increases the complexity and friction costs of the operation.

The rapid rise of the RWA concept cannot solely be attributed to MakerDAO. In fact, a research report titled "Money, Tokens, and Games" released by Citibank from the traditional finance sector has also sparked strong reactions in the industry. This report reveals the strong interest of many traditional financial institutions in RWA, while also igniting the enthusiasm of numerous speculators in the market. They are spreading rumors about major financial institutions soon entering this field, further elevating market expectations and the atmosphere of speculation.

![Detailed Explanation of RWA Asset Tokenization: Underlying Logic Sorting and Large-Scale Application Implementation Path])https://img-cdn.gateio.im/webp-social/moments-c98c5c4fd8f0ce493cc6ddaffd3f7c26.webp###

( RWA from a TradFi Perspective

From the perspective of Crypto, RWA mainly expresses the one-sided demand of the crypto world for the asset returns of the traditional financial world. If we look at it from the perspective of traditional finance based on this logic, the scale of funds in the crypto market is basically negligible compared to the scale of traditional finance, which can reach tens of trillions. Whether it is US Treasuries or any other financial assets, it is unnecessary to have an additional sales channel on the Blockchain.

Therefore, from the perspective of traditional finance, RWA is a two-way journey between traditional finance and decentralized finance. For the traditional financial world, DeFi financial services that are automatically executed based on smart contracts are an innovative financial technology tool. The RWA in the traditional financial sector is more focused on how to integrate DeFi technology to achieve asset tokenization, empowering the traditional financial system to reduce costs, improve efficiency, and address the pain points present in traditional finance. The focus is on the benefits that tokenization brings to the traditional financial system, rather than merely seeking a new channel for asset sales.

It is necessary to distinguish the logic of RWA. Because from different perspectives, the underlying logic and implementation paths of RWA are vastly different. First, in the choice of the type of blockchain, the two have different implementation paths. Traditional finance's RWA follows the path based on the Permission Chain ), while the RWA in the crypto world follows the path based on the Public Chain (.

Due to the characteristics of public chains such as no admission requirements, decentralization, and anonymity, the RWA of crypto finance not only faces significant compliance obstacles for project parties but also lacks legal rights protection for users when encountering adverse events like Rug pulls. Moreover, the rampant hacking activities impose a high requirement for user security awareness. Therefore, public chains may not be suitable for the tokenization issuance and trading of a large amount of real-world assets.

The traditional financial RWA-based permissioned blockchain provides basic prerequisites for legal compliance in different countries and regions. Meanwhile, establishing a KYC identity system on-chain is a necessary prerequisite for realizing RWA. Under the premise of having a legal system guarantee, institutions that own assets can legally and compliantly issue/trade tokenized assets, which is different from Crypto's RWA.