What Is RWA in Crypto? Real-World Asset Tokenization Explained

By now, you’ve probably seen the term RWA, but what is RWA in crypto? RWA stands for real-world assets and provides a way to tokenize financial assets or tangible assets on the blockchain. Some examples include BlackRock’s BUIDL fund, which uses the Ethereum blockchain to tokenize US treasuries or even real estate owned by thousands of token holders.

One promise of RWAs is to make fractional ownership easier to access, with transfers, yields, and rights documented on the blockchain. However, RWAs can take several forms, ranging from a fixed number of tokens circulating to a single NFT representing ownership of a home or car. RWAs make traditionally illiquid assets tradable, digitize asset management, and allow anyone to participate in markets usually reserved for high-net-worth investors.

Let’s learn how RWAs work and what the future holds for this new wave of digital assets.

What Are Real-World Assets (RWAs)?

Real-world assets, or RWAs, are tokenized representations of financial or physical assets on the blockchain. While standards are still evolving, one of the first examples of converting real-world assets to digital assets was a $650,000 home in Florida. The winning bidder was awarded an NFT (non-fungible token) representing ownership of the home.

NFTs are unique tokens, making them well-suited to full ownership of physical or digital assets. However, newer implementations of RWAs use larger amounts of tokens, allowing fractional ownership of assets of any value. Imagine the value of a $10 million building split into 10 billion tokens, each of which can earn a yield.

RWAs open new opportunities for people around the world to participate in financial markets that may not be available through traditional means—even intellectual property. Although many see tokenized real-world assets as the future for financial markets, this corner of the blockchain is still evolving.

Why do People Invest in RWAs?

Transparency and global reach are two key reasons why people invest in RWAs. Assets managed on a blockchain offer the ability to see where and when tokens are transferred as well as view positions in real time. Ultimately, RWAs also offer a much broader audience, spanning the entire world.

Several big names in traditional finance have placed their bets on tokenized assets, including BlackRock and Franklin Templeton, giving the fledgling RWA sector more than $5.65 billion in total locked value (TVL). BlackRock’s USD Institutional Digital Liquidity Fund (BUIDL) reached over $500 million in its first four months. However, BUIDL focuses on qualified investors, whereas funds like Blockchain Capital (BCAP) and Arca US Treasuries Fund (RCOIN) are open to retail investors.

Most Prominent RWA Assets on the Market

Gold and Treasury-backed tokens dominate the RWA market. As the market matures, the number and types of assets are expected to grow. Leaders in the space include MakerDAO, Tether Gold, and Ondo. MakerDAO alone boasts more than $1.1 billion in total value locked, although RWAs are limited to 25% of the protocol’s total collateral. Single-asset RWAs like Tether Gold boast as much as $620 million in TVL.

MakerDAO (MKR)

MakerDAO uses RWAs as part of the collateral for the DAI stablecoin, a token pegged to the value of the US dollar through over-collateralization. Maker added RWA to its portfolio, boosting the investment by $1 billion in 2024. Although the MKR token has seen a recent slump alongside the broader market, those who invested investors prior to Maker’s addition of treasuries in 2023 saw significant gains.

Up to 25% of the collateral held by MakerDao can be held in RWAs, with asset types divided into four categories.

Tether Gold (XAUt)

Due to its scarcity, gold has been used as money throughout history. Tether Gold now offers its XAUt backed by physical gold. Holdings can be redeemed for real gold and delivered to any Swiss location. Although Tether holds a significant amount of treasuries and Bitcoin, a detailed whitepaper explains the utility of gold-backed tokens compared to Bitcoin and traditional currencies.

Real gold comes with certain challenges, including storage, transport, and divisibility. Tokenized gold, however, allows you to take your gold’s value with you anywhere in the world, secured by your crypto wallet. You can also trade your XAUt tokens at any time on crypto exchanges that support the token.

Ondo Finance (ONDO)

Ondo combines tokenized assets with decentralized finance tools to put your RWA tokens to work. The ecosystem is governed by Know Your Customer (KYC) regulations. New buyers must complete identity verification. Purchases are also limited to accredited investors and qualified purchasers. Ondo’s yield-bearing USDY token currently pays 5.35% APY, and its OUSG token backed by US treasury bonds pays a 5.18% APY yield. US residents are restricted from the USDY token.

BlackRock BUIDL (BUIDL)

Similar to Ondo, BlackRock’s BlackRock USD Institutional Digital Liquidity (BUIDL) token uses US treasuries to back the token and utilizes ONDO as a provider. Investors can view all fund transactions on the Ethereum blockchain using Etherscan or a similar blockchain explorer. At press time, BUIDL’s market capitalization topped $500 billion.

Paxos Gold (PAXG)

The PAXG token mirrors the goals of Tether Gold, giving investors another way to invest in tokenized real-world assets. The Paxos token offers lower management fees than Gold ETFs and physical delivery options from secure vaults in London. Each token equals one troy ounce of gold.

Why Is Real-World Asset Tokenization Useful?

RWAs offer utility in several ways, including increased liquidity for financial assets and physical assets. For example, Tether Gold (XAUt) is one of the leading RWA tokens and allows people anywhere in the world to buy a gold-backed token on nearly 20 crypto exchanges.

These tokens can then be used in other ways, such as collateral for trades or lending markets. XAUt’s popularity has grown alongside its market cap, now approaching $700 million.

Investing in assets like physical gold can be cumbersome and inefficient. Spot prices may not reflect real acquisition costs, and secure storage becomes a concern or often an additional expense. The same market inefficiencies exist when selling. Tokens like XAUt offer an easy and transparent way to invest in physical assets without slippage challenges or storage issues.

As the RWA market evolves, more commodities may become tradable as tokens. Many RWAs are available to investors worldwide. XAUt launched on centralized exchanges but is also available through decentralized exchanges (DEXs) like Uniswap. As the market grows, the most popular RWA tokens will be tradable on DEXs or can be used as collateral in decentralized finance (DeFi) applications like lending markets. The token maintains its peg to physical gold because investors can redeem XAUt for physical gold.

RWAs can also tokenize real estate or other assets that have value but aren’t easy to trade. Tokens like XAUt make real-world assets divisible, allowing easy sales and transfers and the ability to trade 24/7.

Challenges of Real-World Asset Tokenization

RWAs still face some challenges in several areas, ranging from standards to regulation. Certain types of assets may still be gated communities, whereas others trade freely worldwide. BlackRock’s BUIDL, for example, isn’t available on exchanges and limits access to qualified investors.

Standards for Valuations

RWAs are still searching for a reliable way to match token values to real-world markets. Tether’s XAUt maintains a close peg to gold by offering redemptions in physical gold. However, real estate RWAs, for example, can’t be redeemed in the same way. Market capitalization for tokens representing real estate or similar assets could decouple from the real-world value.

Governance & Centralization

The current structure of RWAs places governance in the hands of off-chain custodians. While this aids regulatory compliance, it also prevents true decentralization. As a result, some RWA tokens don’t offer much functional advantage over traditional financial assets managed by firms and documented on paper and in databases.

Regulation

Due to their focus on assets that appreciate or bear yields, many RWAs will face regulatory hurdles with government agencies like the Securities and Exchange Commission (SEC). Arguably, many would be securities as defined by the Securities Act of 1933, and few would pass the Howey Test, which is the current method of determining whether an asset is a security. By contrast, a fair-launch, decentralized digital asset like Bitcoin is not a security subject to SEC regulation.

Thin Liquidity and Limited Markets

Tether’s XAUt isn’t available on Coinbase or Binance, two of the largest crypto exchanges. Trading markets are limited to smaller exchanges, and liquidity remains thin. The highest 24-hour trading volume among the exchanges that offer Tether Gold is $1.5 million, with most exchanges seeing less than $10,000 in daily volume. XAUt is one of the largest RWA tokens, but the liquidity remains thin.

Scams and Hacks

As RWAs launch, expect copycat tokens with the same ticker symbol. We found several listings for the BUIDL ticker on Uniswap, many of which were labeled as BlackRock’s token. However, only one of these tokens had the correct contract address, and there were no pools for the correct token contract. Investors could easily purchase a scam token instead of the RWA token.

Scams aside, RWAs face similar challenges to those seen with any smart contract or token. Code is written by humans and could have bugs or vulnerabilities. Hacks and glitches represent a risk in both traditional finance and digital assets. However, an RWA token or contract with vulnerabilities could cause a domino effect if the token is deployed across multiple protocols, possibly toppling other assets as we saw in 2022 with the Luna-led crypto crash.

RWA and DeFi

Tokenized real-world assets promise to bring the liquidity of traditional financial markets to the blockchain. For the most part, cryptocurrencies are contained ecosystems. While cross-chain tools exist, there isn’t yet a standard way to access the value of traditional financial assets on the blockchain. In the next section, we’ll discuss oracles, which may provide the key to accurate asset values for RWAs on the blockchain.

Once standards emerge, tokenized real-world assets may change the scope of decentralized finance (DeFi) forever. For example, in the current DeFi landscape, you might use ETH as collateral to borrow USDC, which you can then deploy in other areas while still holding your ETH. Tokenized RWAs open the possibility of borrowing against tokenized securities or real estate, potentially bringing massive amounts of liquidity to lending and swap protocols.

RWAs and Oracles

Although blockchains offer powerful features such as ledgers and smart-contract platforms, they’re only aware of data that exists onchain. This creates some limitations for RWAs, particularly in the area of decentralization.

For example, the Paxos PAXG token represents one troy ounce of gold. Paxos creates or destroys tokens as needed to maintain a 1:1 ratio. This creates centralization. However, without a way to bring the price of gold to the blockchain, there is no other way to have a token track the value of gold.

Oracles may provide the key to more decentralized RWA tokens. Chainlink is one of the companies leading the market by providing trusted data from the outside world for use in blockchain applications. Chainlink’s Cross-Chain Interoperability Protocol (CCIP) aims to connect all on-chain markets using an open standard to provide cross-chain liquidity and value data.

Conclusion

So, what is RWA in crypto? RWA stands for real-world assets, with real-world assets in crypto referring to tokenized versions of assets like bonds or gold. However, the market may evolve to provide tokenized versions of other assets, such as commodities, real estate, and much more.

RWAs allow greater accessibility and divisibility. They also promise to bring massive amounts of liquidity on-chain that had been isolated to traditional markets. Oracle providers like Chainlink will bring off-chain data to RWA protocols as standards emerge, allowing token values to align with real-world market values.

FAQs

What does RWA mean in crypto?

RWA stands for Real World Assets. RWA in crypto refers to tokenized versions of physical assets or financial assets, such as gold or treasuries.

Which RWA token is best?

Tether Gold offers one of the best examples of a successful RWA token. Currently, the XAUt enjoys a market capitalization of more than $600 million.

What are the pros of RWA?

RWAs offer a way to bring the value of real-world assets onto the blockchain and provide a way to access the value of less liquid assets and make real-world assets divisible. This allows people worldwide to buy asset-backed tokens for gold or other assets.

What are the cons of RWA?

Some RWA tokens are only available to accredited investors or may not be available in specific regions. This reflects some of the regulatory challenges RWAs face in countries like the US, where they may be labeled as securities in some cases.

Are real-world assets in crypto a good investment?

Real-world assets in crypto can be good investments if you’re bullish on the underlying asset. For example, if you plan to invest in gold, for example, an RWA token like Paxos or Tether Gold offers an easier way to do so compared to buying physical gold.