What Is RWA and How It Differs From STO?

Key takeaways

Real World Assets, or RWA, means tokenizing physical assets, such as real estate, stocks, bonds, commodities, and artwork, through blockchain technology.

Introduced by MakerDao in 2020, RWA is considered a further development of STO. STO was introduced in 2017 to address the compliance issues of ICO projects.

Despite some overlap, STO and RWA distinguish themselves in their focus and scope.

The RWA sector will grow into a market worth US$16 trillion, according to a BCG report.

What is RWA?

Real World Assets, or RWA, refers to tokenization of physical assets, such as real estate, stocks, bonds, commodities, and artwork, using blockchain technology. Through tokenization, physical assets can increase circulation, tradability, and financing capability while enhancing transparency, liquidity, and value.

In the real world, there are non-fungible assets (distinct and irreplaceable) and fungible assets (interchangeable with assets of similar or identical quality and quantity). Typically, RWA tokenization projects correspond to the underlying physical assets in terms of fungibility. For example, shares of stocks or gold are often digitized as fungible tokens, while land may become non-fungible tokens (NFT) because of its unique attributes like area and location.

In theory, any physical asset with monetary value can be tokenized, and there are various methods to create RWA tokens. RWA can be simply understood as the tokenization of real-world assets, including real estate, cash (US dollars), metals (gold, silver, etc.), luxury goods, bonds, and insurance.

What's the difference between RWA and STO?

The concept of RWA was introduced in 2020 by MakerDAO, which later issued its stablecoin DAI. As of December 2022, MakerDAO generated about 70% of its revenue from RWAs; it also launched a US$220 million fund for RWAs through a partnership with BlockTower Credit. Aave followed closely, announcing the RWA Market in collaboration with Centrifuge, a crypto firm, in late 2021.

The launch of RWA was not accidental; before it, the crypto market focused more on Security Token Offerings, or STOs. During the ICO (Initial Coin Offering) boom in 2017, many projects raised funds through ICOs. However, a large number of ICO projects had issues with legal compliance and investor protection. To fix these concerns, the concept of STO was introduced. It provides a more compliant way to issue and trade digital assets that represent securities. The rise of STOs attracted the attention of regulatory authorities, which later developed rules and guidelines accordingly. Some countries and regions even established legal frameworks for STOs.

There is some overlap between STO and RWA, as both can tokenize assets like stocks or real estate. Their differences mainly reside in their focus and scope. STO is securities-oriented, with a focus on issuing and trading securities-compliant tokens on blockchain. On the other hand, RWA is a broader term that covers the tokenization of various physical assets, regardless of their monetary value. Additionally, STO emphasizes compliance in the securities sector and investor protection, while RWA prioritizes bringing real-world assets into blockchain to increase liquidity and avenues for value exchange.

Among RWAs, tokenized US Treasury bonds have recently garnered extensive attention. They surged to about US$1.5 billion from nearly US$0 the previous year. MakerDao also converted a remarkable portion of its stablecoin reserves into US Treasury bonds.This provides stablecoin enthusiasts with a low-risk investment avenue, helping to channel speculative capital into the crypto market. Moreover, non-US residents holding US dollars can enjoy profitable opportunities while coping with inflation. Essentially, launching US dollar stablecoins and tokenizing US Treasury bonds have transferred USD-denominated assets and their returns to blockchain, which will spur the development of applications in the traditional financial sector.

How large will the RWA market be in the future?

According to a BCG report, the RWA sector is expected to reach a market size of US$16 trillion by 2030 as illiquid assets ranging from real estate to carbon credits and natural resources mature enough for tokenization.

Citi Bank's report indicates that almost anything of value can be tokenized, and the tokenization of financial and real-world assets could be a "killer app" for blockchain breakthroughs. By 2030, up to US$5 trillion of funds could be in new forms of cryptocurrency, such as CBDC (Central Bank Digital Currency) and stablecoin, with about half likely based on blockchain's distributed ledger technology.

Furthermore, research conducted by BCG and ADDX suggests that tokenized illiquid assets worldwide could create a market of US$16 trillion (nearly 10% of the global GDP in 2030). This includes US$3 trillion in housing assets, US$4 trillion in listed/unlisted assets, US$1 trillion in debt and investment funds, US$3 trillion in alternative financial assets, and US$5 trillion in other assets.