Introducing Polytrade’s RWA Marketplace! A place where you can buy, sell, and manage real-world assets in a secure and user-friendly setting. With the ability to fractionate assets and trade parts of them, our marketplace offers more flexibility and liquidity than traditional NFT platforms. Before we dive into the platform, let’s break it down from scratch.
What is an Asset-based NFT Marketplace?
An Asset-based NFT Marketplace is a platform where Non-Fungible Tokens (NFTs) are created to represent ownership of real-world assets (RWAs) such as real estate, artwork, collectibles, or other valuable physical assets. These NFTs provide a unique and tamper-proof way of verifying ownership of these assets, making it easier for people to buy, sell, and trade them in a decentralized and transparent manner.
In an Asset-based NFT Marketplace, asset originators can create and trade NFTs that represent ownership of real-world assets, making it possible for individuals to invest in high-value assets that were previously only accessible to a limited number of people.
What are Asset Originators and Buyers?
Asset originators are individuals or organizations who create the asset and provide ownership rights for it. For example, an asset originator can list their invoice as an asset. It can be a small business owner who has provided goods or services to a customer on credit terms. In this scenario, the small business owner has an outstanding invoice that they expect to be paid for in the near future. However, rather than waiting for the customer to pay, the business owner could choose to sell the invoice as an asset on a real-world asset marketplace like Polytrade’s.
By selling the invoice as an asset, the business owner would receive a lump sum payment from a buyer who is willing to purchase the invoice at a discount. The buyer would then hold the NFT that represents ownership of the invoice and receive the full payment from the customer when the invoice becomes due. In this way, the business owner receives immediate cash flow, while the buyer receives a discounted return on their investment.
Selling invoices as assets can be a useful financing tool for small businesses that need immediate cash flow to fund their operations or growth plans. By using a real-world asset marketplace that leverages NFTs, these businesses can access a wider pool of potential buyers.
Other examples could be an artist who creates a unique painting, while a real estate developer might be an asset originator who builds a commercial property. Asset Originators essentially hold the legal ownership of the asset and have the right to transfer ownership or sell it to others.
On the other hand, buyers in a real-world asset marketplace are individuals or organizations who purchase the ownership rights of the asset from the asset originator. The buyer receives an NFT that represents the ownership of the asset and can hold, trade, or sell it to others. In some cases, buyers may also be interested in holding onto the asset for its intrinsic value or for its potential to appreciate in value over time.
Asset originators and buyers play critical roles in real-world asset marketplaces. Asset originators create the assets and provide ownership rights, while buyers purchase these rights and trade them on the marketplace. Together, they enable a way of investing in and trading high-value assets that were previously difficult to access or trade.
How Does Polytrade’s RWA Marketplace Work?
The RWA marketplace is a platform wherein asset originators, investors, insurers, traders, and market makers can come together and can buy, sell, trade, fractionalize and bundle tokenized assets together.
This means that investors will soon be able to create a portfolio of pieces or fractions of a Walmart invoice, carbon credits issued by a Dutch company, and loans from LATAM. The asset originator will auto-settle all tokens at maturity while Polytrade ensures that the assets are held with the originator and gates the marketplace to only allow quality assets. The platform adopts an asset-agnostic approach, allowing users to connect a diverse range of assets with the DeFi realm. This approach benefits both asset originators and investors, offering advantages that cater to different risk-reward profiles.
When an asset originator comes to Polytrade, their assets are converted into non-fungible tokens (NFTs) that are incorporated with appropriate legal documentation. These NFTs are tokenized representations of specific assets, such as invoices, loans, carbon credit, real estate, or structured debt. These NFTs are critical in decreasing the barriers to entry for asset origination and investment, expanding asset financing and liquidity, and building bridges between the real world and DeFi.
Why Have We Concentrated on Solving for Tokenization of RWAs?
According to CoinMetrics, one of the primary growth areas in 2023 will be the tokenization of RWAs. In real-world asset tokenization, physical and traditional financial assets are mirrored as digital tokens on a blockchain. This enables a more safe and more efficient investing environment for people who do not or cannot keep physical assets.
The RWA market currently has a gross value locked (including the amount borrowed) of $193 million. Tokenization of RWAs and their usage in DeFi offers several advantages over the status quo, many of which stem from the qualities that make public blockchains and DeFi attractive.
Are There Other Use Cases for Tokenizing RWAs Apart From Invoice Factoring?
The Asset NFT contract can be used in a variety of real-world applications, including:
Invoice Factoring
Companies can use the Asset NFT contract to sell their invoices to a third party, known as a factor, in exchange for immediate cash. The factor then collects the payment from the company’s customer when the invoice is due. The Asset NFT contract can be used to mint an NFT for each invoice, with the initial metadata containing details such as the invoice amount, due date, and fees.
Supply Chain Financing
The Asset NFT contract can be used to facilitate financing for businesses in the supply chain, such as manufacturers and distributors. For example, a manufacturer can use the Asset NFT contract to mint an NFT for an outstanding purchase order, with the initial metadata containing details such as the purchase order amount, due date, and fees. The NFT can then be sold to a third party, such as a bank or financial institution, in exchange for immediate cash.
Trade Finance
The Asset NFT contract can be used to facilitate trade finance, which involves providing financing to businesses involved in international trade. For example, a business exporting goods to another country can use the Asset NFT contract to mint an NFT for the outstanding export invoice, with the initial metadata containing details such as the invoice amount, due date, and fees. The NFT can then be sold to a third party, such as a bank or financial institution, in exchange for immediate cash.
Real Estate Financing
The Asset NFT contract can be used to facilitate financing for real estate projects, such as the development of a new housing complex or the renovation of a commercial building. For example, a developer can use the Asset NFT contract to mint an NFT for the outstanding construction loan, with the initial metadata containing details such as the loan amount, due date, and fees. The NFT can then be sold to a third party, such as a bank or financial institution, in exchange for immediate cash.
For example, consider a scenario where an investor is considering entering the real estate market with an eye on investing in a $1M property. The investor understands that the property is in a prime place and that its value will only rise in the future years. But the entry ticket is extremely high, so either he has great liquidity to invest, or collateral to obtain a loan from a bank to invest in the property. These two factors, besides being a barrier, may pose difficulties for this investor.
Since asset tokenization can allow the property to be divided into as many portions as needed, the $1M property is now represented by 10,000 tokens at $100 each. This entry ticket is more appropriate for the investor since he does not need to go into debt to earn the funds to invest in what he considers to be a lucrative investment. With this small entry ticket, he now has access to invest and decides to acquire 100 tokens to get profitability according to how the $1M investment performs.
How Do We Fractionalize and Tokenise RWAs?
Real-world assets are fractionalized and tokenized through blockchain. This involves creating digital tokens that represent a fractional ownership stake in a particular asset. Here are the steps involved in the fractionalization and tokenization process:
Asset Identification and Valuation
An asset originator, who owns the real-world asset, identifies an asset to be tokenized and determines its value.
Legal Documentation
The originator creates legal documentation that specifies the terms and conditions of the fractional ownership offering and token issuance, such as the percentage of ownership represented by each token and the rights and responsibilities of token holders.
Token Issuance
The originator then creates digital tokens that represent fractional ownership of the asset. These tokens are created on a blockchain network and issued to investors through a smart contract.
Trading and Liquidity
Once the tokens are issued, they can be traded on a secondary market. This allows investors to buy and sell fractional ownership stakes in the asset without having to go through traditional intermediaries, increasing liquidity.
Governance and Administration
Token holders participate in the governance and administration of the asset, such as voting on decisions related to the asset or receiving dividends from rental income or profits from the sale of the asset.
DualLayerToken (DLT)
In the world of blockchain and cryptocurrencies, token standards play a crucial role in defining how digital assets should be created, managed, and exchanged. DualLayerToken (DLT) is a unique and versatile token standard that combines the best features of existing standards while adding a unique layered structure. We at Polytrade always strive for innovation and excellence and to deal with real-world assets, where there can be various types of assets with multiple attributes or components we opted for DLT.
DLT’s versatility fosters innovation by allowing the leeway to explore new and creative applications across industries and use cases. The combination of mainId and subId offers a more flexible approach to managing assets, making it easier to adapt to different scenarios and requirements.
Here’s how DLT has helped us:
Simplified Asset Management: The mainId and subId structure of DLT allows for a more organized and efficient management of assets, making it easier to handle complex scenarios involving diverse asset types with multiple attributes.
Optimized Gas Costs: By allowing efficient management of diverse asset types within a single contract, DLT helps reduce gas costs associated with smart contract interactions. This is especially beneficial in a world where gas prices can be volatile and high.
Inherent Scalability: The dual-layer structure of DLT ensures scalability, as it’s designed to handle various asset types and their attributes without sacrificing efficiency. This is particularly crucial when dealing with real-world assets that can have multiple components and require flexible management.
Enhanced Interoperability: As a standard, DLT promotes a more cohesive ecosystem by facilitating interaction and integration with other blockchain projects, wallets, and marketplaces. This interoperability is essential for the growth and adoption of blockchain technology across various industries.
How is Polytrade’s RWA Marketplace Different from Others?
Compared to traditional marketplaces for real-world assets like OpenSea, NFTX, Meridio, and others, the RWA Marketplace offers several advantages for investors.
- Provides more accessible investment opportunities, as fractional ownership allows for smaller minimum investment requirements and wider access to a range of investors.
- Offers greater liquidity, allowing investors to buy, sell, or trade assets more efficiently, compared to traditional illiquid markets.
- Adds greater transparency, immutability, and security, compared to traditional investment methods, reducing the risk of fraudulent activities.
- Eliminates intermediaries, reducing transaction costs and making investment more cost-effective.
- Presents more diversified investment opportunities, allowing investors to create custom portfolios of different asset types, compared to traditional high-capital investments.
Safety Protocols
In a marketplace like ours, where various assets are traded or exchanged, it is essential to have mechanisms in place to ensure the security and protection of those assets.
One way to achieve this is by implementing custodial arrangements and first-loss pool provisions.
When we say that “assets on the marketplace are custodied with the asset originator,” it means that the responsibility for holding and safeguarding the assets lies with the entity or organization that initially created or originated those assets. This could be a financial institution, an investment company, or any other entity that acts as the issuer or creator of the assets.
Custody involves the safekeeping and administration of assets on behalf of their owners. By entrusting the asset originator with custody, participants in the marketplace can have confidence that their assets are being held securely and managed according to industry best practices and regulatory requirements. Custodial arrangements involve stringent security measures, such as secure storage facilities, robust access controls, and comprehensive auditing processes.
In addition to custody, the concept of a “first loss pool” comes into play to provide an extra layer of protection for the assets. A first loss pool is a designated reserve or fund established by the asset originator to absorb any initial losses that may occur within the marketplace. These losses could arise from events such as defaults, insolvencies, or other unforeseen circumstances that affect the value or performance of the assets.
The purpose of the first loss pool is to mitigate risks for investors or participants in the marketplace. If any losses occur, the first loss pool will be utilized to cover them, reducing the impact on individual asset holders. By having this protective mechanism in place, we aim to instill confidence and minimize the potential negative effects that adverse events could have on the overall marketplace ecosystem.
The size and structure of the first loss pool can vary. It is typically funded by the asset originator, who may allocate a portion of their own capital or engage in risk-sharing arrangements with other parties to ensure an adequate level of protection.
ERC-1155
For the RWA Marketplace, an upgraded standard from ERC-1155 is utilized, which incorporates a sub-entry to track ownership, thereby facilitating the fractionalization of assets.
ERC-1155 is a token standard on the Ethereum blockchain that enables the creation of both fungible (identical and interchangeable) and non-fungible (unique and distinct) tokens within a single smart contract. By building upon this standard, the RWA Marketplace enhances its capabilities by introducing a sub-entry that focuses on tracking ownership.
With the inclusion of this sub-entry, the RWA Marketplace can handle fractionalized assets. The fractionalization process involves the creation of these fractional shares, which represent proportional ownership in the underlying asset. For example, a high-value property can be divided into 100 fractional shares, and each share represents a 1% ownership stake. These shares can then be traded or transferred on the RWA Marketplace, allowing investors to buy, sell, or hold fractional portions of the asset.
The upgraded standard within the RWA Marketplace enables efficient tracking and management of these fractional shares. Each fractional share is associated with a unique identifier and metadata, allowing for granular ownership tracking. This means that ownership of a specific fraction of an asset can be recorded on the blockchain, providing an immutable and transparent record of ownership rights.
The ownership tracking functionality provided by the upgraded standard ensures that ownership rights can be easily verified and transferred between participants. It provides a clear and auditable history of ownership, enabling a seamless and secure transfer of fractional shares during transactions. This transparency and traceability promote trust and confidence in the marketplace, as participants can validate the ownership status of the assets they are interested in.
The ownership tracking mechanism within the RWA Marketplace also enables additional features such as dividend distribution, voting rights, or access to asset-related information and updates. These functionalities can be implemented based on the ownership records stored within the blockchain, enhancing the overall utility and value proposition of the marketplace.
Additional Read: Polytrade ID: On-chain Identity for Organizations
Problems We Are Solving
While real-world asset marketplaces have the potential to offer several advantages over traditional investment methods, there are also some current problems and challenges associated like:
Lack of Standardization
The market for real-world assets is highly fragmented, with different asset types and structures making it difficult to create standardized investment opportunities. This can lead to a lack of transparency and difficulty in comparing different investment options.
Polytrade’s RWA Marketplace provides a standardized platform for investment, making it easier for investors to compare different assets and make informed investment decisions. We are creating standardized investment opportunities through the use of uniform asset tokenization and offering transparency in pricing and fees.
Volatility
Real-world assets, like any investment, are subject to market forces that can cause their value to fluctuate. However, the illiquid nature of many real-world assets can make it difficult to quickly respond to changes in market conditions, potentially leading to losses for investors. The RWA marketplace offers diversification to mitigate potential losses from market fluctuations. Investors have the option to buy and sell assets at predetermined prices.
Tokenization Risks
The tokenization of real-world assets can introduce new risks related to the technology and infrastructure supporting these marketplaces. For example, smart contract bugs or hacks can lead to the loss of assets, and the use of non-standard token standards can limit interoperability between different marketplaces.
We have adopted secure tokenization technologies and standards, and regularly audit our smart contracts to ensure they are secure. We offer insurance and other risk mitigation products to protect investors in the event of a smart contract vulnerability.
Limited Asset Pool
Despite the potential benefits of real-world asset marketplaces, the asset pool available for investment is still relatively limited, with many marketplaces focusing on specific asset classes or geographies. This can limit the diversification opportunities for investors and lead to concentration risk.
We are all set to increase the number of assets available for investment by expanding their coverage of asset classes and geographies. We have plans to onboard additional originators, expand into new markets, and adopt technologies that make the investment in smaller asset classes economically viable.
Future Asset Classes
For now, invoices can be bought, sold, and traded on the marketplace but we will soon going to be expanding the range of asset classes available on our RWA marketplace. In addition to invoice financing, we will soon be adding car loans, real estate, and structured credit to the list of assets available for investment on our platform.
Car loans are a popular asset class in the lending industry, and we believe that they will be a valuable addition to our marketplace. By tokenizing car loans, investors will be able to invest in the underlying loans and earn a return on their investment based on the interest payments made by the borrowers.
Real estate is another asset class that we are excited to add to our marketplace. Real estate has traditionally been a popular investment option, but it can be difficult for individual investors to access high-quality real estate opportunities. By fractionalizing real estate assets, we will be able to offer investors the opportunity to invest in real estate properties with smaller amounts of capital, while also providing greater liquidity and transparency.
Structured credit is a complex asset class that has historically only been accessible to institutional investors. By tokenizing structured credit, we will be able to provide individual investors with access to this asset class, while also providing greater transparency and liquidity.
Stay tuned for more updates as we continue to expand our platform!