As regulations within the Web3 ecosystem become increasingly clear, the number of projects developed for the Tokenization of Real-World Assets is rising, and existing projects are accelerating their processes.
When we refer to Real-World Assets (“RWA”), we can think of all assets that we can physically access, buy and sell, and that can be subject to legal processes. Movable and immovable assets such as houses, cars, and ships can be examples of RWAs.
Now that we have identified what RWAs can encompass, let’s discuss the tokenization part. Tokenization can be briefly defined as the process of converting rights over an asset into a token or tokens by digitalizing them on the blockchain. It is, of course, possible to develop the definition of tokenization from a technical perspective; however, since the main topic of this article is RWA projects, I will assume that my readers are familiar with the technical processes of tokenization and continue with my writing.
When we consider both definitions together, we refer to the tokenization of real-world assets as the process of digitalizing real-world assets such as houses, cars, etc., on the blockchain and representing them by dividing them into a certain number of tokens. If you are not familiar with the Web3 ecosystem, it is also quite likely that you may ask this question: “Why RWA Tokenization?” So, let’s start by explaining this question.
Why RWA Tokenization?
Although tokenization is possible in many different areas, it has primarily begun to take shape in real estate, art, and luxury investment vehicles in practice. The number of active investors in fields such as artwork, classic cars, and real estate, where initial investments are particularly high, is quite limited. With the tokenization of these assets on the blockchain, they can be divided into many tokens, allowing the average investor to easily invest and also to easily obtain the profit from this investment as a crypto asset.
For example, let’s say you own a highly valuable office building. If we say the value of this office building is $1 billion, it is easy to say that you need high budgets to invest. However, if you decide to tokenize this office building and divide it into 500,000 (five hundred thousand) tokens, you can allow the average investor to invest in an office building with an amount as small as $2,000. Later on, many offices in the relevant building are rented out, and the building now generates rental income. Here, the token holders can benefit from this rental income in proportion to the number of tokens they hold. In short, you don’t need millions to start. RWAs offer you the opportunity to obtain a piece of real-world value at a more affordable entry point. Moreover, due to the transparency inherent in blockchain technology, it provides you with a clearer picture of what you are investing in.
So, let’s answer our question: Why RWAs? – Increased accessibility, transparency, liquidity, global reach, and efficiency.
Now that we have addressed RWA tokenization and why it is needed, we can move on to the main topic, which is how to tokenize RWAs in a way that minimizes potential issues. I say “minimizes potential issues” because the regulations in this area are still developing and encompass many aspects that we cannot be “certain” about. After all, we are talking about digitizing real-world assets and using blockchain technology to allow individuals to benefit from tokens representing real-world assets.
Preferred Structures in RWA Projects
Before moving on to the legal part, it is necessary to decide how the users who acquire the relevant token after RWA tokenization will be managed and benefited. This is where Decentralized Autonomous Organizations (“DAO”), Centralized Autonomous Organizations (“CAO”), or fully centralized organizations, which I am not very fond of, come into play. So, why do we need these organizations, and why am I not in favor of carrying out tokenization as a centralized organization?
After tokenizing RWAs, the users who acquire the relevant token form a “community.” However, remember that a real-world asset has been tokenized; while users, in theory, hold rights over this asset through the token they acquire on the blockchain, there must legally be a person or legal entity that owns this property. It must also be determined how the tokenized asset will be evaluated, sold, leased, and what actions will be taken in the event of legal disputes. This is where the management structure, in various forms such as DAOs, CAOs, and centralized governance organizations, which I mentioned earlier, needs to be established to manage the aforementioned community.
The governance structures I will discuss are complex structures related to blockchain technology, so I will not go into detail in this article. However, if you are not familiar with these governance structures, I recommend gaining some knowledge on this topic and then revisiting the following section.
DAOs, which we refer to as decentralized organizations with governance automated through smart contracts, are now widely used. In fact, several states in the United States have even created company types to legally establish DAOs. In DAOs, the community, consisting of token-holding users, generally has the right to participate in decision-making in the governance of the organization, usually in proportion to the tokens they hold, though this may vary. For example, in an RWA project, if the community exists as a DAO, the community has a say in situations such as the sale or leasing of the relevant real-world asset. Although this system is highly democratic and secure, decision-making processes can be quite lengthy, and there may be delays in taking action in the event of potential disputes.
Now, let’s move on to CAOs. CAOs are also automated structures with smart contracts, but they are not decentralized and are managed by a few administrators, though basic operations occur according to rules set in smart contracts without human intervention. While this sacrifices decentralization and transparency, it speeds up the actions to be taken. Considering the purpose and scope of RWA projects, this is one of the most logical structures I find, especially given that the primary goal of many RWA projects is to ensure that users benefit from the relevant real-world asset in the smoothest and best possible way. For this, the speed of action is crucial for us. Additionally, I believe CAOs are the most logical governance structure for creating a legal wrapper, which I will discuss in the second part of my article.
Finally, there is the fully centralized company structure for governance, which I do not see as very useful and believe could lead to many disputes. Here, there is no transparency, and all decisions must be made manually by one or more administrators. It is also quite difficult to place this structure within a legal wrapper. Even if it is currently possible, I think it could lead to major issues as regulations evolve in the future.
In the first part of my legal guide series for RWA projects, I discussed the choice of governance structure. In the next part, after choosing one of these governance structures, I will discuss how to carry out the RWA project legally, which country it would be more legally secure to offer the relevant tokens to users, and under what legal entity and in which country we should operate our community.
I believe that RWA projects will be actively used in many traditional sectors such as real estate and art over the next five years, and that the number of projects in this area will rapidly increase. Moving forward in compliance with existing regulations and being prepared for future regulations is very important in this gray area.
