Since the peak of the crypto market in November 2021, DeFi yields have been hot and cold. Embracing the intriguing possibilities of the bear market, where new opportunities await, innovation becomes the guiding light. DeFi innovators are charting a new course by turning to an alternative source of yield: Real World Assets (RWAs).
RWAs are gaining popularity as they serve as a bridge between traditional finance and the world of DeFi. Unlike other DeFi yield offerings that relied heavily on transaction volume and market activity to generate substantial returns, RWAs are introducing a fresh wave of DeFi products that derive their value from tangible assets.
These assets, which exist off-chain, encompass a wide range of traditional resources such as real estate, stocks, gold, credit, and other similar assets. Through tokenization, these assets are brought on-chain in the form of digital tokens. Tokenization is the process by which the ownership and rights of real-world assets are transformed into digitally recorded entries that can be reliably accounted for.
Tokenizing real-world assets gives owners greater flexibility and control over their wealth. With fractionalized ownership, investors can overcome the expensive barriers to entry that prevent them from investing in previously inaccessible asset classes.
RWAs allow for the splitting of ownership of traditionally big assets, like real estate or fine art, into smaller portions that may be bought and sold by various investors. This makes these assets more accessible, allowing a broader spectrum of investors to engage in these markets.
Let’s understand how fractional ownership works through a real-world example.
When you buy a flat in an apartment complex, you are participating in fractional ownership, as you own a portion of the overall property while sharing common areas and resources with other residents.
A more familiar and straightforward example of fractionalization is company stock. A company itself is non-fungible and indivisible, but its ownership can be divided into shares represented by stocks. Investors can then own a fraction of the company by holding a certain number of stocks, granting them proportional ownership rights and potential financial benefits.
Why Fractional Ownership?
Fractionalization enhances the liquidity of traditionally illiquid assets. By tokenizing and dividing the assets into fractional shares, investors can buy, sell, and trade these digital tokens more easily and quickly. This liquidity allows investors to exit their investments or diversify their portfolios more efficiently, without the need for substantial capital or dealing with lengthy transaction processes.
Fractionalizing real-world assets also enables investors to diversify their portfolios by owning fractional shares of different asset classes. It provides an opportunity to spread risk across a broader range of investments, reducing exposure to any single asset. Investors can choose to hold fractional shares in multiple assets, gaining exposure to different markets and potential returns.
Investors get to enjoy the benefits associated with ownership, such as potential capital appreciation, rental income, or dividends. Even with a smaller investment, individuals can participate in the financial rewards and economic growth associated with the underlying asset.
Fractionalized assets can be bought, sold, and managed digitally, eliminating intermediaries and reducing administrative expenses. This efficiency increases the accessibility of asset ownership while potentially lowering overall investment costs.
How Does Fractional Ownership Work?
Behind the scenes of fractionalizing real word assets typically involves a combination of blockchain technology, smart contracts, and tokenization.
Fractionalization leverages blockchain platforms like Ethereum or other similar decentralized networks. These blockchains provide a secure and transparent environment for recording and verifying ownership and transaction information.
Then enter smart contracts that automatically enforce the terms and conditions of an asset fractionalization, eliminating the need for intermediaries. Smart contracts ensure that the fractionalized asset is divided and distributed according to predefined rules and that the rights of token holders are protected.
And finally, tokenization converts real-world assets into digital tokens that can be easily divided, transferred, and traded on the blockchain. In the case of fractionalizing real-world assets, the assets are represented as digital tokens, often using standards such as ERC-20 or ERC-721 for fungible or non-fungible tokens, respectively. Each token represents a fractional ownership stake in the underlying asset. Remember: non-fungible means it is unique and not interchangeable with other tokens. Think of it as a digital version of receiving an IOU stating “you own X% of this Bored Ape/Crypto Punk.”
How Far Are We Along the Road to Fractionalize RWAs?
Successful integrations of tangible assets into DeFi have had a profound impact on the financial markets, revolutionizing the way we perceive and interact with traditional assets.
BlockInvest embarked on a groundbreaking collaboration with the Bank of Italy and Credit Agricole to initiate a trial of tokenized bonds for SMEs on a public blockchain. This groundbreaking endeavor formed part of the Fintech Milano Hub’s series of distributed ledger technology (DLT) trials, specifically focused on debt instruments issued by Italian SMEs, with a primary emphasis on bonds.
The tokenized bond solution devised by BlockInvest aimed to democratize investment opportunities in SME debt instruments, opening doors for individuals to participate. Although the tokenized bonds were made available on widely-used public blockchains like Ethereum and Polygon, they were exclusively accessible to accredited investors who met certain criteria.
BlockInvest also delved into exploring the concept of a secondary market using their unique blockchain standard, effectively ensuring seamless compatibility among tokens issued by diverse entities. This remarkable initiative resulted in a significant boost to the accessibility and liquidity of the SME bond market.
Polytrade is currently working with large global institutions such as JPM as well as regional banks & FIs on building institutional-grade products. We have built an RWA marketplace where investors can buy/sell/trade fractions of invoices of large corporations such as Walmart, IKEA, and Zara. Imagine a platform designed for digital art suddenly handling the transfer of ownership for a commercial building. The intricacies involved in verifying legal documents, conducting due diligence, and ensuring compliance with regulatory requirements.
Polytrade’s specialized infrastructure and focus on RWAs empower banks, institutes, and investors to confidently participate in the tokenization and trading of real-world assets. Built on Polygon, the RWA marketplace offers attractive APRs of 8-12% and bonus rewards to asset buyers on top of it.
These remarkable instances epitomize the successful integration of tangible assets into DeFi platforms, resulting in heightened accessibility, liquidity, and operational efficiency within the financial markets. By tokenizing assets, these platforms have enabled a wider range of individuals to partake in investment opportunities while simplifying and expediting the investment process. Ultimately, these developments have fostered a climate of innovation and growth within the decentralized finance ecosystem.
Fractional Ownership: Making Assets Accessible
Fractionalization offers increased accessibility, which is a significant advantage as it makes investing more affordable for individuals, thereby lowering the threshold to acquire specific assets. The collective ownership that comes with fractionalization allows a group of investors to own assets with traditionally high barriers to entry.
Fractional ownership is a progressive approach that significantly expands the market size and facilitates broader adoption and accessibility, enabling a larger audience to invest in asset classes in a simpler and more convenient manner.