The decentralized finance (DeFi) landscape is changing. In addition to regulatory developments, there is an increasing focus on taking real-world assets (RWAs) like stocks, bonds, real estate, and commodities and bringing them on-chain. And it makes a lot of sense.
Bringing real-life assets on chain will make DeFi much more appealing to the average person, free up locked liquidity, and make the space significantly less risky, all while creating avenues for DeFi and traditional finance (TradFi) to intersect.
The realization of this has led to an increasing number of projects built around this concept, making tokenization the next big revolution in crypto. And seeing that, one can't help but speculate about its future. What challenges, opportunities, and subtrends will emerge as real-life assets make their way on-chain?
Claude Eguinta is the CEO of Mimo Capital, an institution that has contributed to the creation of DeFi protocols to provide multiple kinds of tokenized RWAs and has allowed users to leverage their assets on-chain. He provides some interesting insights on this matter.
Trends that will define the future of tokenized RWAs
Real estate
One facet of RWAs worth taking into account is real state. After all, tokenization is rarely discussed without its potential in real estate being mentioned. But according to Claude, the intersection of these two will not be as straightforward as these discussions often make it out to be.
Real estate dealings are very complex and sensitive, meaning investors require a good deal of protection compared to other asset classes. It is safe to say that the first few years will lack robust investor protection mechanisms to the level required by real estate dealings. This is because regulators will still be feeling their way around the concept of tokenization.
As a result, there will be a hesitance among investors to directly invest in tokenized real estate assets. Investors will have concerns about the security and legal safeguards surrounding token ownership in real estate.
Therefore, the space might initially see a disproportionately low amount of direct exposure to real estate compared to less complex and sensitive asset classes like stocks and bonds.
More risk or less?
Another feature of the tokenized assets landscape will be a gradual evolution from safe to riskier assets. The space is still young. So naturally, its early days will be defined by a demand for safe assets, like government bonds and blue-chip stocks, as investors look for stability and steady returns.
But as more participants join in, this may be a problem. Claude says the market will likely become saturated with these safe investment opportunities. This situation could result in commoditization. The increased competition will also mean issuers can only compete on fees and commissions, leading to tighter profit margins.
Fortunately, this will change as the market evolves. The initial period of focus on safe assets will have created a window for users to become more educated and accustomed to tokenization.
And when that happens, there will be a general willingness from investors to take on greater risk, leading to an upsurge in demand for riskier assets like startup ventures and stocks in emerging markets.
This demand introduces a great deal of variety for issuers to pursue. So, even with an increased number of issuers, the commoditization that defined the early market will be eliminated, resulting in healthier profit margins.
Bridging DeFi and TradFi
Claude also predicts that the future will see increased synergy between DeFi and TradFi. This feature is missing today but will manifest strongly as tokenized RWAs become accepted and recognized as valid representations of value. And of course, that will be to the benefit of both crypto natives and traditional finance institutions.
For example, TradFi institutions may accept tokenized RWAs as collateral for loans, allowing crypto-native users to borrow within TradeFi. This means users can unlock liquidity for use in the real world without having to liquidate their crypto holdings.
Additionally, tokenization will streamline processes like internal settlements within large companies. Blockchain technology will prove a more efficient and transparent mechanism for handling asset ownership and conducting transfers.
Regulation
Regulating an emerging industry will always be a challenge. So according to Claude, regulation won't come immediately. While the previously mentioned developments unfold, regulators will adopt a "wait and see" approach.
Tokenization will see its fair share of experimentation in the first few years. So, regulators may hold back a bit and use this time as an opportunity to study and understand its potential risks and impacts.
As regulators evolve with the market, this should allow them to strike a balance between protecting investors and promoting innovation when they inevitably formulate comprehensive regulatory frameworks.
A future of promise and challenges
The future of tokenization holds a great deal of promise. But to get there, the space will first have to overcome hurdles around risk, regulation, and investor protection. This is a process that, as it unfolds, will unlock new opportunities for crypto-native investors and issuers as well as traditional investors and financial institutions, potentially reshaping the relationship between crypto and TradFi.
