DBC Deep Dive: Real World Assets
This article is part of the #DBCDeepDives series about Digital Assets and Web3 in collaboration with Descryptor. Special thanks to Ryan King and Jeske Eenink from Dusk.
For this Deep Dive, we spoke with Ryan King, Head of Business Development at Dusk, and Jeske Eenink, Partners & Relations at Dusk, about different aspects of real-world assets (RWAs) and Dusk’s ambitions in this field. Dusk is tackling some of the most entrenched and important issues within the finance sector, including the lack of interoperability between systems both internal and external to institutions, and fragmented liquidity within the financial services industry.
Real-world assets (RWAs) are at the forefront of showcasing the transformative potential of blockchain technology, offering a groundbreaking approach to tokenization of (financial) assets. This process encompasses a wide array of valuables, spanning physical items like art and real estate, to stocks, commodities, and even personal data. By converting these tangible and intangible assets into digital tokens on the blockchain, RWAs pave the way for innovative ownership transfer methods, automation of costly processes by like voting, paying out dividends, shared revenue streams, and enhanced liquidity for assets that were once considered illiquid or non-tradable. The advent of tokenization is not just a technical leap; it represents a shift in how traditional asset classes and financial markets operate, heralding a new era of accessibility and efficiency.
RWAs (Real World Assets) are a hot topic. For example, recently HSBC announced that it is launching a tokenized gold product for retail investors in Hong Kong, named HSBC Gold Token, which will be available through HSBC Online Banking and the HSBC HK Mobile App, marking the first bank-issued RWA product for everyday investors. And BlackRock’s Ethereum-based tokenized fund BUIDL enjoyed strong demand in its first week, attracting $245 million USD in deposits.
Early days
Even though by the end of 2023 more than 100 billion USD in financial assets has been tokenized on public blockchains, it is still early days. 100 billion is an impressive number, but it is important to keep in mind that more than 95% of tokenized assets consist of fiat-collateralized stablecoins, such as USDT and USDC.
RWAs: Bridging the gap between traditional and decentralized finance
Part of the appeal of RWAs is the democratization of traditional, regulated assets such as bonds, stocks and loan distributions, and the ability to access the benefits that we have already seen in decentralized finance (DeFi). The initiative to migrate real-world assets onto the blockchain is straightforward in its ambition but complex in execution, requiring careful consideration of compliance issues. These assets are subject to stringent regulations, necessitating a framework within which compliance is seamlessly integrated, ensuring users cannot inadvertently breach regulatory requirements. By prioritizing privacy and compliance, and building out a suite of tools including privacy-friendly KYC, Dusk aims to onboard TradFi in a meaningful way.
Tokenization vs native issuance
This distinction between tokenization and native issuance is more than a mere technicality; it's a foundational choice that impacts the very nature of how assets will exist and operate on the blockchain. The crux of the matter lies in whether digital tokens should merely represent real-world assets as derivatives, which is what happens in tokenization, or if they should be issued natively on the blockchain, thus becoming digital assets in their own right. Dusk champions the latter approach, advocating for native issuance as a means to ensure that tokens are not mere representations but are the assets themselves.
According to Dusk, the current primary form of tokenization presents a dual ownership conundrum, raising questions about the true possession of voting and dividend rights. In contrast, native issuance is a more straightforward relationship between the token and its underlying value. The transition from tokenization to native issuance may not be linear or uniform across all assets. Initially, some assets might undergo tokenization due to the current technological and regulatory landscape, evolving into native issuances as the legal and technical frameworks mature.
Does native issuance introduce new risks?
Addressing the risks associated with native issuance, Dusk posits that tokenization, in fact, might carry more significant risks due to the potential disconnect between the token and the actual asset. In response, Dusk emphasizes regulatory compliance and the incorporation of existing financial regulations into its blockchain framework to mitigate these risks. The initial approach involves a more centralized and controlled environment to build confidence among investors and regulators, gradually moving towards a decentralized model as the ecosystem matures.
RWA Roadmap
As Dusk advances in its mission to revolutionize the integration of real-world assets (RWAs) into the blockchain, it confronts the critical task of fostering a robust network effect. A yet to be launched bridge from Ethereum to Dusk is poised as a strategic tool to import existing assets, yet the challenge lies in cultivating an ecosystem where DeFi and traditional finance (TradFi) mutually enrich one another. The strategy is two-pronged: firstly, to encourage DeFi users and developers to build on Dusk, supported by its 15M DUSK grants program; secondly, to appeal to TradFi entities intrigued by the burgeoning DeFi market and its clientele. By making Dusk an attractive platform for both sectors, it aims to create a self-sustaining cycle of growth and innovation.
10 trillion USD by 2030?
As we consider the horizon of 2030, the projection of tokenization potentially reaching up to $10 trillion underscores the massive economic shift that blockchain technology could instigate. The nuanced "bull" and "bear" cases - respectively 3.5 trillion USD and 10 trillion USD - presented by the report from Digital Asset Management Firm 21.co not only highlight the optimistic growth potential but also caution against the myriad challenges that lie ahead. The journey from current levels of tokenization to realizing such staggering figures will undoubtedly be marked by technological advancements, regulatory evolution, and shifts in market acceptance.
Dusk’s anticipation of bonds as the forerunners in the tokenization space due to their simplicity and market readiness illustrates a pragmatic approach towards achieving broader RWA tokenization. Yet, the ambition doesn't stop there; the prospect of tokenizing exchange-traded funds (ETFs) marks a bold step towards integrating more complex assets into the blockchain ecosystem. This evolution signifies not just a transformation in asset liquidity and accessibility but also a potential redefinition of asset ownership and management on a global scale.
However, this ambitious path is not devoid of hurdles. The legal and regulatory landscapes will need to evolve in tandem with technological innovations to support this transition. The collective efforts of innovators, regulators, and the financial community will determine the pace and success of this transition.