RWAs on Kadena: A Scalable and Secure Way to Bring Traditional Assets on Chain

Imagine a world where you can own a piece of Picasso, a slice of a Manhattan skyscraper, or a fraction of a government bond. Envision a more compliant global asset market with faster settlement time, more liquidity, and lower costs. That's the promise of real-world asset tokenization, a ground-breaking idea shaking up how we think about investing and financial infrastructure as we know it today.

Tokenizing these assets unlocks a multitude of benefits. Suddenly, anyone can become a real estate investor, an art collector, or a bondholder – no million-dollar down payment required. This newfound accessibility opens the door for a wider audience to participate in markets that were once out of reach.

But it's not just about who can play; it's about how the game is played. Blockchains open the doors for faster, smoother transactions. Forget weeks of paperwork – buying and selling these assets can happen in seconds.

What are RWAs?

Real-world assets (RWAs) are digital representations of real-world assets as tokens. Think of traditional assets like bonds, equities, or currencies and tangible assets like real estate. Tokenization gives owners digital rights to an asset, offering several advantages over paper-based titles and transactions. Stablecoins, such as USDC and USDT, are another example of RWAs, with a current supply of ~$150 billion at the time of this writing.

Some of the benefits of tokenization include:

1. Increased liquidity and transferability
2. Near-instant settlement
3. Fractionalization of ownership
4. Lowered asset management costs
5. Automated regulatory and legal compliance checks
6. Audit trail and ownership history

Contemplating the above benefits, you can easily see how tokenization would benefit an industry like real estate, especially for commercial real estate buildings.

Yet, even beyond fractionalization, blockchain's speed, easier compliance, lower cost, more accountability via audit trailing, and higher liquidity can bring RWAs to center stage.

While the promise of RWAs is growing significantly, especially with key investments, strategy implementation, and high industry forecasts from BlackRock, JP Morgan, and Citibank, the industry is limited by technology. The high value and large volume of real-world assets—which represent trillions of dollars across art, real estate, and other financial instruments—need a secure and scalable blockchain to garner mass adoption.

As we’ll discuss later, Kadena’s Chainweb and Pact offer several key advantages that make them uniquely positioned to help usher in the next era of asset tokenization.

Overview of the significance and impact on the financial industry

The emergence of public blockchains in the 2010s made the tokenization possible without the need for intermediaries. Despite early challenges with tokenization on blockchains, the advent of smart contracts has introduced the capability for complex asset tokenization. Today's tokenization efforts build on these developments, driving regulatory and technological improvements and broadening the scope and efficiency of global asset management and participation.

Further, blockchain ensures verifiable transactions and allows immutable record-keeping. Tokenization advancements have made markets more accessible and fair, especially in global transaction processes.

Real-world asset tokenization is an emerging market, but its roots go deeper than you might think. Here's a breakdown of its history and evolution:

Initial Concepts and Early Implementations of RWAs

The concept of tokenization existed before blockchain. In the early 1990s and 2000s, it focused on data protection. Businesses would use tokens to represent sensitive data while ensuring security and compliance.

Milestones in Development and Adoption

• Smart Contracts (1994): The first generation of smart contracts was invented by Nick Szabo in the mid-1990s. In Szabo’s words, a smart contract is: "a set of promises, specified in digital form, including protocols within which the parties perform on these promises."
• E-Gold (1996): This early attempt at digitizing gold using tradable certificates foreshadowed the concept of tokenizing real-world commodities for retail markets. Though E-Gold ultimately failed, it sparked interest in the potential.
• Blockchain (2014-2017): Over 20 years after Kadena advisors Stuart Habert and W. Scott Stornetta invented the proto-blockchain to solve the digital time-stamping problem, the mainstream emergence of blockchains such as Ethereum provided a secure and transparent platform for tokenization.
• Early Challenges (2017-2020): While enthusiasm was high, several challenges arose. The technology was still maturing, regulations remained unclear, and explaining the concept to potential investors proved difficult. Many early initiatives struggled to gain traction.
• Market Shift and Growing Adoption (2020-Present): As blockchain technology matures and regulations evolve, real-world asset tokenization is gaining new momentum. Lessons learned from earlier attempts pave the way for best practices and regulatory frameworks. Today, we see a more measured approach to overcoming the initial hurdles.

Market Size
As of March 27th, 2024, the RWA token market cap is around $8 billion (CoinGecko). Additionally, the market size of tokenized financial assets (treasuries and bonds, private credit, and real estate) reached $1.6 billion on February 8 (Galaxy). However, the industry is still in its early stages and is predicted to grow exponentially.

The finance industry has a wide range of forecasts to predict RWA growth through 2030.

In the coming decade, analysts forecast that RWA tokenization could reach between $3.5 trillion and $10 trillion in a "bull case" (21.co via Coindesk). According to the same article, Bank of America said that the blockchain-enabled tokenization of RWAs could overhaul existing financial infrastructure.

Additionally, JP Morgan has predicted that the crypto market can reach $16 trillion, with RWAs being a major catalyst for this growth.

If true, these forecasts still represent a fraction of the total addressable market.

Recent Trends
In March 2024, the world’s largest asset management firm, BlackRock, announced the launch of a tokenized fund with a portfolio of “money market” instruments. They chose the tokenizing firm Securitize as a partner, with on-chain analysts pointing out that they sent $100M worth of stablecoin USDC to Securitize (Milk Road). The fund is called the “USD Institutional Digital Liquidity Fund.”

Traditional financial products such as money market instruments going on-chain represent a growing trend in the larger RWA landscape of Wall Street products being integrated with “blockchain rails.”

BlackRock’s portfolio includes securities such as:

• Commercial paper
• Certificates of deposit (CDs)
• Floating-rate notes
• Time deposits
• Fully secured repurchase agreements

“We believe the next step going forward will be the tokenization of financial assets… It’ll be on one general ledger for every investor…” Larry Fink, BlackRock’s CEO said.

As the world’s largest asset manager, BlackRock is setting the trend for other asset managers to adopt blockchain for asset tokenization.

Overview of Different RWA Tokenization Use Cases

Art: Andy Warhol On Chain
Freeport, a custodian of high-value art pieces, tokenized a famous Andy Warhol painting, "Rebel Without a Cause." They divided ownership of the painting into 1,000 digital tokens.

Real Estate: St. Regis Aspen Resort
RSRV, a hotel ownership platform, launched its first hotel property on its marketplace – The St. Regis Aspen Resort. RSRV allows accredited investors to purchase equity in hotel properties. On RSRV, investors will have the new and unique ability to redeem their shares for room nights at a fixed rate.

Tokenizing Fund Commitment: The World Bank, BIS Innovation Hub, and Swiss National Bank
The World Bank collaborates with the Swiss National Bank and the BIS Innovation Hub to tokenize various countries' fund commitments. The current format for providing funds is paper-based. However, tokenization has the potential to usher in the digitalization of token fund commitments to boost efficiency.

How Kadena’s technology enhances these use cases
With Kadena’s Chainweb and Pact smart contracts, the above use cases can be enhanced through scalability and security. Chainweb can scale to accommodate the massive projected total volume of real-world asset transactions, while Pact provides the security necessary to automate logic for the highly sensitive infrastructure of these assets. Furthermore, Pact smart contracts are fully upgradable and human-readable, meaning functionality can be enhanced when necessary, and more people can understand them. The latter is particularly helpful in the case of RWAs because they reflect real-world assets that ordinary people can utilize.

Real-world assets like fine art and real estate need scalable security. It’s already horrible to have any amount of crypto stolen from your account. However, the stakes become much higher when you add tangible and traditional assets with significant utility in the real world.

Only Kadena can securely scale with the ability to deliver the bandwidth that real-world assets need to go live and on-chain, broadening accessibility and serving all of humanity.

In Conclusion

The growing interest from big banks and the ballooning market value of tokenized assets speaks volumes about the potential here. This could be a game-changer, rewriting traditional asset management and investment rulebooks.

The success story is still being written, and it’s far from over. Continued advancements in blockchain technology and a clear, supportive regulatory framework will be crucial for widespread adoption.

With Chainweb and Pact, Kadena is particularly well-positioned to onboard more RWA projects that could benefit from our tech.