The global market for real world asset (RWA) tokenization is expected to exceed $16 trillion by the year 2030, which highlights the rapidly growing importance of this process in modern finance. It has gained so much popularity because of the ease that it provides in converting physical assets, like real estate, art, and commodities, into digital tokens on a blockchain. This innovation has offered us to trade real world assets with much increased liquidity, fractional ownership, and broader access to all the assets which were previously reserved only for the rich people and institutional investors.
Real world asset tokenization development is also closely tied to the concept of on-chain and off-chain tokenization. On-chain tokenization is the one which involves the creation of a direct link between the asset and its digital token on a blockchain network making sure that there is transparency, security, and immutability in records. Off-chain tokenization, on the other hand, does the linking of the digital token to the real world asset via a trusted custodian or legal framework, which gives us an option for much greater flexibility in managing the underlying asset.
Comparing On-Chain and Off-Chain Tokenization for RWAs
Feature | On-chain Tokenization | Off-chain Tokenization |
Asset Recording | Asset and ownership recorded directly on the blockchain | Asset is managed off-chain, with tokens representing ownership on the blockchain |
Transparency | High transparency; every transaction is visible and immutable on the blockchain | Lower transparency; relies on third-party intermediaries to manage asset ownership |
Intermediaries | No intermediaries needed; fully decentralized | Relies on intermediaries (custodians or legal entities) for asset management |
Security | High security; blockchain technology ensures asset integrity | Relies on third-party security; potential for human error or fraud |
Liquidity | High liquidity due to fractional ownership and decentralized trading | Liquidity may be limited by custodians and intermediaries, making transactions slower |
Speed of Transactions | Fast, as transactions are processed directly on the blockchain | Slower due to reliance on intermediaries for asset management |
Regulatory Compliance | Easier to comply with decentralized financial systems, but may face challenges in traditional markets | Easier to comply with traditional regulatory frameworks, but depends on intermediary regulations |
Cost | Lower transaction costs, as no intermediaries are involved | Higher costs due to fees associated with intermediaries and custodians |
Best Use Case | Ideal for assets that can be fully digitized (e.g., cryptocurrencies, fractionalized real estate) | Best for physical, highly regulated assets (e.g., rare art, commodities, private equity) |
The 2 Types of Asset Tokenization
On-Chain Tokenization
On-chain tokenization means creating a simple, digital copy of a real world thing on a blockchain. This process makes sure that both the ownership of the thing and its history of transactions are completely stored on the blockchain. With on-chain tokenization, the details of the things traded are saved directly in the blockchain itself, which makes it very clear and safe.</span
The main features of on-chain tokenization are the clarity, the safety, the automation, and the ease of selling. The clarity comes because every single transaction can be seen and checked on the blockchain. The safety means that, once information is written down, it cannot be changed, which helps people trust that the history of the thing is correct. The automation happens through smart contracts, which are programs that can handle tasks like changing ownership without needing people to do it manually. On-chain tokenization also makes selling easier because it allows people to own small parts of a thing and trade them easily, which is not possible with the old ways of owning assets.
When a thing is tokenized on-chain, it is directly connected to a blockchain by creating a digital token. The blockchain keeps all the details about the thing, and ownership can be changed securely using smart contracts. This process makes it very safe and easy to understand. It also helps with leases and makes it simpler for people to manage and trade things.
Off-Chain Tokenization
Off-chain tokenization, on the other hand, means making a digital token that stands for a thing, but the thing itself is actually not stored on the blockchain. Instead, a trusted third-party, like a person or group, or a legal system makes sure there is a connection between the token and the real thing. This way gives much more freedom in handling our assets, especially those that are too hard or not possible to put on a blockchain, like physical art or real estate.
The main features of off-chain tokenization are the freedom, the caretaker, and the rule-following. The freedom is a big plus because off-chain tokenization works for things that can’t easily go on a blockchain. A caretaker, like a bank or legal group, makes sure the thing is real and owned by the right person. This adds another layer of trust and checking. Also, off-chain tokenization helps follow the rules better, which is important for some things that don’t fully work with blockchain systems.
In off-chain tokenization, the token stands for a real world thing but stays off the blockchain. The blockchain only keeps a record of what happens with the token, while a trusted group or person takes care of the real thing or its legal setup. This often needs extra legal and rule-following steps to make sure the thing and token are real and properly owned. This setup can also include leases, giving more ways to handle and use the assets.
Key Differences
There are a few important differences between on-chain and off-chain tokenization. On-chain tokenization gives a much higher level of transparency and security because all the data is fully stored on the blockchain, making it impossible to change and easy to access. In contrast, off-chain tokenization relies on third-party custodians to manage the assets, which could bring risks or make things more complicated.
Off-chain tokenization is usually more flexible because it can handle things that are hard to put on the blockchain, like physical artwork, real estate, or certain goods. It also allows for more traditional ways of managing assets, making it easier to follow the current legal rules. On the other hand, on-chain tokenization works in the decentralized blockchain system, which might not always fit with old legal systems but offers a simpler, digital-first way to manage assets. This also makes it easier to add leases, giving more ways to manage the assets.
On-Chain Tokenization Explained
On-chain tokenization as we know is how we turn real world assets (RWAs) into digital tokens on a blockchain network. In this method, both the ownership and the history of the transactions for the asset are being fully stored on the blockchain, which offers us the creation of a much clearer, unchangeable, and shared digital record. On-chain tokenization is absolutely changing the way that we have been managing assets by the features which give us a much safer, faster, and easier way to own, trade, and transfer the assets. It connects physical assets to the world of decentralized finance (DeFi), opening up new ways to trade and invest in assets. This method also makes it simpler to include leases, giving more options for managing assets.
Advantages of Using Blockchain for Asset Tokenization
The use of blockchain technology in on-chain tokenization gives several important benefits. First and most important, it makes sure there is transparency. Since the blockchain ledger is open to everyone, every transaction related to the tokenized asset is available and can be easily checked, which helps build trust. Security is another big benefit, as the blockchain’s cryptographic nature makes it hard to change or fake, making sure the asset’s ownership and transaction history stay safe. Immutability guarantees that once a transaction is recorded, it can’t be changed, providing a permanent and tamper-proof record of ownership.
Also, blockchain technology makes things work more efficiently. Smart contracts automatically handle many tasks like asset transfers, cutting the need for middlemen like banks or brokers, which helps lower transaction costs and saves time. Blockchain also helps with liquidity by allowing fractional ownership. Tokenization can split an asset into smaller, tradable parts, letting smaller investors join markets that were once only for big investors. This method also makes it easier to add leases, giving more ways to manage and trade assets.
Use Cases in the Market
On-chain tokenization has a growing number of uses in many industries. One of the most important use cases with this type is real estate, where tokenizing properties lets all types of investors to buy and sell parts of real estate. This makes it much easier for regular investors to access several property investments, which were once only available to wealthy people, and also opens up new opportunities for retail investors with less capital to invest.
Another big use is in art and collectibles. Tokenizing art lets artists and collectors sell parts of valuable pieces, making it more available to a larger group of people. It also gives more liquidity to assets that are usually hard to sell, like rare art.
Commodities like gold, oil, and farm products are also being tokenized. On-chain tokenization allows the creation of token versions of these physical goods, letting investors buy and trade them in smaller amounts, without needing to store or transport them physically.
Also, tokenization is changing the equity markets by allowing companies to issue token shares. This not only lowers the costs linked to traditional stock exchanges but also makes it easier to raise money and give liquidity to shareholders. Adding leases makes managing these assets easier and creates more opportunities for both investors and companies.
Off-Chain Tokenization Explained
Off-chain tokenization is the another type in which the process creates a digital version of the real world asset (RWA) that we choose on a blockchain, but the actual asset here is actually not directly recorded on the blockchain at all. Instead, the asset is being put away to be managed or held outside the blockchain, often by a third-party custodian or intermediary. In off-chain tokenization, the token represents the asset, and the ownership and transfer of these tokens are managed on a blockchain network. This method is usually used for physical assets that are hard or not possible to store directly on the blockchain, like real estate, rare art, or private equity. Adding leases helps to manage these assets better, giving more flexibility and chances for investors.
How Off-Chain Tokenization Differs from On-Chain Tokenization?
The main difference that separates off-chain from on-chain tokenization is the place where the real asset is being stored or recorded. In on-chain tokenization, both the asset and its transaction history are being fully recorded on the blockchain network itself. This method makes everything clear and open, as we can easily know each and every detail of the asset’s entire history that can only be seen and cannot be changed. On the other hand, off-chain tokenization keeps the assets that are being traded off the blockchain, and only the digital tokens that represent the asset are being recorded on-chain.
While on-chain tokenization is fully open to us and completely decentralized, off-chain tokenization actually depends on a trusted middleman, like a custodian, to make sure that the digital token stays connected to the real world asset. This often makes off-chain tokenization easier for traditional asset types, which might need rules or a custodian, but it also takes away some of the decentralization of the process. Adding leases to off-chain tokenization can offer more flexibility, helping to manage these assets better. This is a key aspect of real world asset tokenization development, which aims to bridge the gap between traditional assets and blockchain technology.
Intermediaries in Off-Chain Tokenization
Intermediaries play an important role in off-chain tokenization, acting as trusted guardians of the real world asset. These intermediaries are responsible for taking care of the physical asset or making sure its legal and regulatory rules are followed, ensuring that the tokenized version accurately shows the ownership of the asset.
For example, in real estate off-chain tokenization, a third-party custodian may hold the title deed or act as a legal representative to make sure the asset is properly managed and that ownership is transferred correctly. These intermediaries often act as a bridge between the decentralized blockchain network and the traditional financial or legal systems, making sure rules are followed and providing extra layers of security and oversight. Adding leases can make this process even more flexible and efficient.
The Challenges and Limitations of Off-Chain Tokenization
While off-chain tokenization gives a lot of flexibility, it also comes with its own problems and limits. One big problem is the need for intermediaries. Since the actual asset is not recorded on the blockchain, users have to trust the intermediary to keep the asset safe and make sure its ownership is correct. This creates counterparty risk, which does not exist in on-chain tokenization, where ownership is directly recorded and can be easily checked.
Another problem that comes with this is the lack of transparency. Unlike on-chain tokenization, where all the transactions are being made public and there is no possibility to get these changed or altered, off-chain tokenization needs trust in the intermediary to track and record asset transfers properly. This can raise certain doubts about the accuracy of the asset’s history and the ownership too.
Legal issues also cause problems for off-chain tokenization. While blockchain technology works in a decentralized way and often exists outside regular financial systems, off-chain tokenization needs to follow existing laws. These legal rules can change depending on the type of asset and where it is, which makes it harder for off-chain tokenization to grow in different places.
Also, liquidity can be a problem with off-chain tokenization. Since the asset is usually not broken down into smaller pieces like in on-chain tokenization, it might be harder to trade parts of the asset. The involvement of intermediaries can also slow down transactions, making the tokenization process less efficient. Adding leases could help make things easier and more flexible.
Which to Choose for Real World Asset Tokenization: On-Chain or Off-Chain?
Choose On-chain Tokenization for RWAs If:
– You want high transparency and visibility for all transactions.
– You aim for faster, peer-to-peer transactions without needing intermediaries.
– You are dealing with digitized or fractionalized assets like real estate, stocks, or cryptocurrencies.
– You prefer lower transaction costs and eliminating the need for third-party custodians.
Pros of On-chain Tokenization
– High transparency
– Faster transactions
– Lower costs
– Enhanced security
Cons of On-chain Tokenization
– Regulatory challenges
– Limited to digitized assets
– Complexity in physical asset representation.
– You are dealing with physical assets like art, precious metals, or commodities that require a custodian to hold the underlying asset.
– You need to comply with traditional regulatory frameworks and laws that govern ownership of physical goods.
– You prioritize security and control by working with trusted third parties.
Pros of Off-chain Tokenization
– Ideal for physical assets
– Easy Regulatory compliance
– Fractional ownership
Cons of Off-chain Tokenization
– Higher costs
– Slower transactions
– Lower transparency
Each method has its strengths, so the choice depends on the specific nature of your RWAs and your goals for tokenization.
Conclusion
On-chain and off-chain tokenization offer several distinct benefits and limitations. On-chain tokenization on one hand provides us with a trading experience composed of better transparency, security, and faster transactions, making it much more ideal for digitized assets and fractionalized ownership too. However, it may actually not be suitable for physical assets that would require custodians. On the other hand, off-chain tokenization excels in the handling of physical assets, giving the best possible regulatory compliance and control but which also comes at the cost of higher fees, slower transactions, and lower transparency.
The adoption of these technologies for asset tokenization depends on the type of assets and specific goals that you have. As the industry matures over time, combining both on-chain and off-chain approaches could offer us with a versatile solution.
At Shamla Tech, a real world asset tokenization development company, we offer RWA tokenization solutions that take out the best of both on-chain and off-chain technologies. Our several years of experience in RWA tokenization will make sure that your assets are being securely digitized, fractionalized, and seamlessly integrated into the blockchain system.
