NFTs are now being utilized to represent digital ownership of digital arts, music, or collectibles. We are also seeing numerous NFT projects being launched targeting RWA (Real World Assets) like properties and lands.
Just in case you are new to the Web3 world, non-fungible tokens (NFTs) are basically digital assets powered by blockchain technology. Unlike cryptocurrencies such as Bitcoin which you might have heard about, NFTs are unique and indivisible.
What makes NFT a promising technology is its ability to store data that can securely proves its authenticity and origin. This new innovation of tokenizing and trading value digitally will redefine how we perceive ownership of assets.
Such a momentous innovation can certainly disrupt and revolutionize industries but adoption of RWA thus far has been slow and hindered by challenges. We will discuss some of these problems in this post.
Solving Real World Problems with RWA
Each NFT is a one-of-a-kind digital certificate of ownership. When tied to a RWA, it proves who owns what, without needing middlemen like brokers or title companies. This process makes transactions faster, more secure, and often cheaper.
RWA include physical items like real estate, luxury goods, and commodities. Tokenizing these assets using NFT allows ownership to be represented digitally, unlocking liquidity and enabling fractional ownership. For instance, a property could be tokenized as an NFT, allowing multiple investors to own portions of it securely on a blockchain.
For example, the NFT-RWA technology can certainly be applied to a current real world problem. Most families around the world now are smaller in size compared to previous generations ago. As a result, many large properties that used to house big families are difficult to sell in the current market due to high prices and a much smaller pool of potential buyers.
This is where the NFT technology can prove to be advantageous in solving the problem. For example, a $1 million property can be split into 1,000 NFT shares. This lowers the barrier to entry for investors or buyers, allowing more people to own parts of valuable assets.
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Can RWA (Real World Assets) Take Off?
Problems with Digitally Tokenizing RWA
Digitizing our ownership of Real World Assets sounds wonderful in theory as a secure and efficient blockchain can certainly offer a host of benefits.
However, implementing NFT in RWA actually faces much hurdles such as regulatory ambiguity and legal recognition of digital ownership. There also remain some technical challenges in linking physical assets with their digital counterparts.
Proving ownership of RWA is not fool-proof yet, even though the blockchain is believed to be tamper-proof. For instance, there have been several cases of fake NFTs of popular pieces of art that were created without the consent of the original artist. This brings up the copyright issue, which is an age old problem.
Even if we can trust the blockchain to be secure, there still remains a vulnerability with the smart contract. We have already witnessed several hacking cases of smart contracts which had resulted in losses of millions of dollars. Therefore, if the smart contract that governs a real world asset is known to have been hacked, then it would introduce uncertainties about the legit owner of the asset.
Last but not least, we also have to question whether or not there is actually a real market for digitizing ownership of real world assets. In order for the system to be feasible, we will need to integrate some form of verifiable digital identity system. Considering that many citizens are concerned about the loss of privacy and freedom that comes with digital systems, how would freedom loving citizens willingly accept a digital identity that would make it even more easy for governments to track and monitor their assets and activities?
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Conclusion
While tokenizing real-world assets with NFTs holds great promise, it’s clear that the road ahead is still full of challenges.
Lack of widespread market demand, regulatory gaps, security concerns as well as difficulties of linking physical assets to digital tokens all create barriers to consumer adoption. Questions around custody, compliance, and enforcement also need clearer answers.
Therefore, for the RWA space to truly scale, collaboration between blockchain innovators, regulators, and traditional institutions is essential.
Nonetheless, NFT-based tokenization remains a powerful idea with real potential. In time, we should see the NFT industry expand beyond our initial expectations.