Tokenizing Real-World Assets (RWA) Part 1: A Deep Dive into ERC-3643

Today, the tokenization of real-world assets (RWA) is one of the leading trends in the industry. This direction is already actively growing and has even higher potential for further progress.

In this article, we will discuss what tokenization is and what its benefits are, as well as take a closer look at the ERC-3643 standard, which was developed specifically for this purpose, and look at the benefits and potential use cases of this standard.

What is tokenization?

Tokenization is the process of converting rights to real-world assets into digital tokens that are placed on the blockchain. One can tokenize securities, real estate, brilliants, commodities, cars, business shares, collectibles, art, copyrights, collectible wines, paintings, etc.  In general, almost any real-world property or asset from the real world can be tokenized.

Currently, the total market for digital assets is estimated at ~ $1 trillion, while the total volume of real assets that can be tokenized is estimated at more than $800 trillion.

In reality, the records that we own something are stored in various ledgers, and/or our rights are backed up by supporting documents.

Blockchain networks are isolated systems that are not directly connected to the outside/real world, thus we need to represent rights to assets as tokens on the blockchain network. It is important to note that any deal with an object is a transfer of a right, so we are talking about rights.

Moving rights to real-world assets into a blockchain-enabled digital space has many advantages, which we will explore in a moment.

What are the advantages of tokenization?

Blockchain networks have several key advantages, the most important being the support of smart contracts, which allow automated deals, and immutable decentralized storage. The advantages of asset tokenization are exactly the use of these tools.

Reduced transaction costs: Executing token transactions using smart contracts automates and optimizes the entire process. In this case, the transaction is automated and executed strictly according to the code in the smart contract, eliminating the need for third parties/intermediaries and the related costs, which can be quite high. Tokenization minimizes administrative complexity and reduces transaction costs.

Increased speed of deals: Because all calculations and records take place on the blockchain, it can serve as a single  source of valid information, eliminating the need for multiple reconciliations. This means that as soon as a transaction goes through the network, the transaction is complete and the data is updated - which is quite fast. For example, a securities transaction today typically takes about 72 hours. This is due to the settlement schedule, whereas a transaction in tokenized  securities can take only a few seconds or minutes.

24/7 availability: Unlike the current infrastructure of banking, finance and other instruments, blockchain networks like Ethereum are available 24/7. This means that in the case of tokenized assets, we can transact at any time, regardless of whether it is a weekday or a weekend. Because the network is always live and we can send a transaction at any time and the network will process it. On the other hand, with the current infrastructure, if you want to make  a deal that requires a third party (e.g. a stock exchange trade or a bank letter of credit) you cannot do it on a Saturday at 11.00 PM.

Security: By executing a deal with a tokenized asset via smart contracts, you are guaranteed that the transaction will be executed strictly in accordance with the terms and conditions contained in the smart contract code. As a result, you can be sure that the transaction is secure. The code never lies. For example, the contract verifies that the seller owns the asset, transfers funds in the specified amount from the buyer to the seller, and transfers the asset from the seller to the buyer. And storing this data on the blockchain guarantees its immutability.

Increased liquidity: Tokenization allows the rights to assets to be represented in the form of fractional interests, opening up opportunities for those who have been excluded from certain asset classes. For example, when considering expensive paintings, other works of art or luxury real estate, only large investors can invest in these asset classes, which limits the liquidity of these assets.

But along with some of these benefits come issues that need to be solved. For example, there is a need to regulate deals in a public blockchain network with tokenized assets, as is already the case in today’s traditional infrastructure.

The legality of such transactions must be controlled,  regulatory compliance must be verified, and participants must be identified. Solutions to these issues offer huge potential for the growth of tokenization around the world and open up opportunities for institutional players. This is why the ERC-3643 standard, discussed below, was created to implement RWA tokenization.

ERC-3643 advantages

Regulatory compliance: You can set almost any conditions that transactions must meet. This is implemented in a very flexible and convenient way - you can connect ready-made modules or develop them from scratch. Most importantly, compliance with these rules is guaranteed by the code itself and everything is executed according to it, without the need for an additional layer. For example, we can strictly control that token transfers can only proceed between   verified users (passed KYC), control the volume per investor, control the volume for investors depending on the country etc.

ERC-20 compatible: This standard is widely used in EVM networks, which means ERC-3643 has very broad compatibility abilities. For example, this opens up the possibility to trade such tokens on most decentralized exchanges and to use them in multiple DeFi protocols, adding usability, efficiency and liquidity to tokenized assets via ERC-3643.

Control: Even though tokens are directly owned by investors, control of those  tokens is still retained by issuers and authorized persons. This is a very important point to maintain control over most assets that require it by law. Such options include freezing accounts, freezing tokens, stopping the transfer of tokens etc.

Token loss protection: The ERC-3643 standard provides the ability to recover tokens if a user loses access to their account. Authorized persons can restore access to tokens, just like in a traditional system, which is very important for the users themselves and allows them to protect their rights!

Deal efficiency: All transactions are strictly coded in smart contracts, eliminating the need for a third party, reducing transaction costs and speeding up transactions.