Real world assets explained: from physical property to digital tokens

Real world assets encompass any tangible or traditional financial assets existing outside native blockchain environments. This includes real estate, commodities like gold and oil, government and corporate bonds, private credit, invoices, art, intellectual property, and more. When these assets are "tokenized," digital tokens on a blockchain represent ownership claims on the underlying assets. This process aims to improve liquidity, reduce transaction costs, enable fractional ownership, and provide transparent ownership records.

What qualifies as a real world asset

The "real world asset" category is defined by what it excludes rather than what it includes.

Crypto-native assets like Bitcoin, Ether, and governance tokens exist entirely onchain. Their value derives from network effects, utility within protocols, and speculative demand. No physical asset or traditional financial instrument underlies them.

Real world assets are everything else that might be represented onchain: things that existed before blockchain and would continue existing if blockchain disappeared.

Physical assets include real estate (commercial, residential, land), commodities (precious metals, energy, agricultural products), art, collectibles, and equipment. These have tangible presence in the physical world.

Financial assets include government bonds, corporate debt, private credit, trade receivables, insurance policies, and equity in private companies. These represent contractual claims rather than physical objects but still exist within traditional legal and financial frameworks.

Intangible assets like intellectual property, carbon credits, and royalty streams also qualify. These lack physical form but represent valuable rights under existing legal systems.

The mechanics of asset tokenization

Bringing real world assets onchain involves several distinct steps.

Asset preparation comes first. The underlying asset must have clear ownership documentation. For real estate, this means recorded deeds. For bonds, registered ownership. For commodities, warehouse receipts or custody agreements. Any existing claims or encumbrances must be resolved or disclosed.

Legal structuring creates the connection between tokens and asset rights. This typically involves a special purpose vehicle (SPV) that holds the asset. The SPV issues tokens representing claims on itself. Token holders become beneficial owners of whatever the SPV holds. Regulatory compliance requirements vary dramatically by asset type and jurisdiction.

Token issuance creates the onchain representation. Smart contracts define token characteristics: total supply, transfer restrictions, distribution rules, and any automated functions like dividend payments. Tokens are minted and distributed to initial investors.

Custody and servicing maintains the underlying asset. Physical assets need secure storage. Financial assets need proper administration. Real estate needs property management. Whatever income the asset generates must be collected and distributed. Corporate actions, maturities, and other events must be handled.

Secondary market infrastructure enables token trading after issuance. This might involve listing on decentralized exchanges, integration with DeFi protocols, or purpose-built marketplaces for specific asset types.

Economic implications of asset tokenization

Tokenization potentially transforms asset markets through several mechanisms.

Liquidity improvement. Illiquid assets trap capital. Private real estate stakes can take months to sell. Private credit positions often have no secondary market at all. Tokenization creates standardized units that can trade on blockchain-based markets with instant settlement. More buyers can participate, potentially narrowing bid-ask spreads and reducing the illiquidity discount that these assets typically carry.

Access expansion. Traditional alternative investments have high minimums. Private equity funds typically require $250,000 or more. Commercial real estate partnerships often start at $50,000. Tokenization enables fractional ownership where investors might participate with $100 or less. This dramatically expands the potential investor base.

Operational streamlining. Traditional asset servicing involves layers of intermediaries: transfer agents, paying agents, custodians, registrars. Each adds cost and delay. Smart contracts can automate many of these functions, reducing operational overhead and time to settlement.

Transparency enhancement. Public blockchains provide audit trails for ownership and transactions. Cap tables update in real time rather than quarterly. Investors can verify holdings rather than trusting periodic statements.

Barriers and limitations

Tokenization faces significant obstacles that temper optimistic projections.

Regulatory uncertainty. Securities laws in most jurisdictions apply to tokenized assets. Compliance requirements vary dramatically. The US, EU, Singapore, and Switzerland have developed different frameworks. Cross-border offerings face especially complex requirements. Many potential issuers wait for clearer rules rather than risk enforcement action.

Legal enforceability. Tokens are only valuable if they represent enforceable claims. Courts must recognize token holders' rights. Bankruptcy treatment for tokenized assets remains largely untested. Smart contract code and legal documentation must align precisely, but the lawyers who draft documents and the developers who write code rarely understand each other's domains well.

Oracle dependencies. Onchain systems need offchain information: asset valuations, interest payments, corporate actions. Oracles that provide this data introduce trust requirements and potential failure points. If an oracle reports incorrect values, smart contracts will execute based on wrong information.

Custody challenges. Physical assets must be held securely offchain. Custodian failure, fraud, or negligence affects token value regardless of blockchain security. The chain of custody from physical asset to digital token involves multiple potential failure points.

Where tokenization makes most sense

The strongest use cases for tokenization share common characteristics.

Assets with high transaction costs benefit most from blockchain efficiency. Private securities that currently require extensive legal work for each transfer become dramatically simpler when tokenized.

Assets with high minimum investments benefit most from fractionalization. Commercial real estate, fine art, and infrastructure investments that previously required institutional capital become accessible to retail investors.

Assets that would benefit from transparent ownership records find natural fit with blockchain's audit trail capabilities. Cap table management for private companies, fractional ownership of collectibles, and any situation where ownership disputes might arise all benefit from immutable ownership records.

Assets that already have strong custody solutions translate more easily. Government bonds held by qualified custodians present simpler custody challenges than physical art or real estate.

Related Concepts

• What is RWA: RWA fundamentals for beginners
• RWA tokenization: The complete tokenization process
• Stablecoin yield: How stablecoins use real world assets
• Protocol revenue: Evaluating RWA protocol economics