In nineth episode of Coffee with COSIMO, Ciarán Hynes, Managing Partner at COSIMO Ventures, sat down with Adam Bouktila, Co-founder of Defactor, to delve into the burgeoning field of tokenizing real world assets (RWAs) through blockchain technology. The discussion sheds light on the current state, benefits, challenges, and future prospects of RWAs, providing valuable insights for newcomers and seasoned blockchain enthusiasts alike.
Understanding Real World Assets (RWA)
Tokenization of real world assets refers to the process of creating a digital representation of physical or intangible items on a blockchain. “When people talk about tokenizing real world assets, they mean creating a digital twin of something that exists in the physical world,” explained Bouktila. This concept can be applied to a wide array of assets including tangible items like gold, real estate, and art, as well as intangible assets like stocks and invoices.
Why Tokenize?
The benefits of tokenizing real world assets are multifaceted. For one, it can enhance transparency and efficiency by enabling end-to-end visibility and streamlined processes. Bouktila illustrated this with an example: “Consider gold. It’s hard to break a gold bar into smaller pieces and carry it around. Tokenizing gold makes it possible to own a fraction of it and transfer that ownership easily across borders.”
Tokenization also democratizes asset ownership, making high-value assets accessible to a broader audience. “Fractional ownership in a Van Gogh painting is a prime example,” said Bouktila. “It allows people who could never afford a whole painting to invest in art.”
The Tokenization Process
The tokenization process begins with identifying the asset to be digitized. This is followed by obtaining a proper valuation and custody arrangement, ensuring legal compliance, creating the digital token, and finally listing it on a blockchain for trading. While this might sound straightforward, Bouktila emphasized the complexity involved: “It’s crucial to ensure that the asset is correctly valued and legally structured to avoid issues later on.”
Addressing Challenges and Risks
Tokenizing real world assets comes with its own set of challenges. One major concern is custody. “For something like vintage cars, you need to consider storage, security, and maintenance,” Bouktila pointed out. Valuation is another significant challenge, especially for unique assets like art or collectibles. Regulatory compliance also varies greatly by jurisdiction, adding another layer of complexity.
DeFi’s Role in RWAs
Decentralized Finance (DeFi) is intrinsically linked with the tokenization of real world assets. DeFi enables financial transactions without intermediaries, using smart contracts to facilitate peer-to-peer lending and borrowing. Bouktila explained, “With DeFi, you can use tokenized assets as collateral for loans. For example, if you have tokenized gold, you can secure a loan against it through a smart contract, bypassing traditional financial institutions.”
Market Size and Future Prospects
The RWA market is still in its nascent stages but is growing steadily. According to Bouktila, the private credit market alone has outstanding loans worth approximately $8 billion. The total market cap of RWA projects is also around $8–9 billion. While these numbers are small compared to the broader financial markets, they indicate significant potential.
Bouktila sees tremendous opportunities for RWAs, especially in developing nations. “In regions with high mobile penetration and limited access to traditional financial services, tokenization can provide unprecedented access to global asset classes,” he noted.
The episode concluded on an optimistic note, emphasizing the transformative potential of RWAs. “We are still in the storytelling phase,” Bouktila acknowledged. “But as these models prove successful, the impact could be revolutionary, particularly in underdeveloped regions where access to high-value assets has been historically limited.”
The conversation between Hynes and Bouktila highlighted the exciting possibilities and challenges of integrating real world assets with blockchain technology. As the RWA market continues to evolve, it promises to democratize access to valuable assets, drive innovation in financial services, and unlock new economic opportunities globally.
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The Coffee with COSIMO series aims to demystify blockchain technology and foster greater understanding among a broader audience. We encourage you to explore upcoming topics and join future discussions.