Web3 Fundamentals: An Investor’s Guide To Evaluating Tokenized Assets

The allure of tokenizing RWA is the promise to revolutionize the way we think about value, access and liquidity. As leading organizations such as McKinsey & Co. mark the potential of the industry at nearly $4 trillion by 2030, it’s important that we ensure investors are well informed of the benefits of RWA and how best to evaluate the merits of each offering.

Tokenizing RWA is meant to be a solution that solves systemic problems, not a solution looking for a problem. The drawback with tokenizing anything and everything is that the market becomes saturated with tokenized assets that lack clarity of value – overshadowing the entire industry. The industry must be careful not to create an NFT APENFT or Metaverse 2.0, where the market slides to a halt as quickly as it shoots up.

It makes sense, then, to have a framework that declutters the plethora of offerings in a simple way and guides investors through a process of determination. Credbull, an on-chain private credit fund platform, has structured a framework for investors to evaluate RWA opportunities and labeled it the PETALS Framework, focusing on six key levers.

Capturing Performance And Efficiency

Generating better and more sustainable performance lies at the very heart of the problem tokenized RWA aims to solve.

It’s imperative that it only makes sense to bring an asset on-chain if it has intrinsic value and delivers incremental performance to investors from what they currently have access to in the traditional market. Performance can come in the form of better yield relative to the underlying risk, shorter lock-up periods or more attractive features such as the option for early redemption.

Blockchain infrastructure that underpins tokenization can also reduce the need for intermediaries, cut down on transaction times, and offer real time settlement.

Tokenizing an asset should result in a more efficient investor experience and backend operations. One of the main selling points of tokenization is its potential to streamline processing across the investment cycle, reducing friction and delivering lower fees to investors.

Making Informed Decisions Based On Transparency

Just because an asset is tokenized doesn’t mean it’s decentralized. Trust between issuers and investors is imperative for all emerging technology. Where traditional financial instruments have so often left investors in the dark, tokenized RWA can shine light. Tokenization, when done right, can offer unparalleled transparency, providing real-time insight into capital allocation, asset performance and risk exposure.

As an example, funds built on Centrifuge’s on-chain asset management platform offer investors full transparency of the on-chain and off-chain portfolio positions, transactions and operations data – all in real time. This level of transparency is compelling for investors, especially in an age where opaque financial systems have led to mistrust.

Another compelling reason to tokenize an asset is the potential to democratize access to it. Traditional investment vehicles often require high minimum investments, cutting smaller investors out of the game. Tokenization can break down these barriers, allowing a broader audience to invest with lower minimum amounts.

This criterion is especially important for asset classes that have historically been inaccessible to the average investor, such as private credit, real estate, fine art, or private equity. Tokenizing these assets within the applicable regulatory frameworks can open up new opportunities for investors who would otherwise be excluded.

Benefiting From Greater Access, Liquidity And Self-Custody

Liquidity is a critical factor for tokenized assets. RWA promises to unlock liquidity in traditionally illiquid markets, but this is only achievable if there is a robust infrastructure in place for early redemptions, secondary markets or leverage.

When evaluating whether an asset should be tokenized, it’s essential to consider whether there is—or can be—a liquid market for it. This involves assessing the asset’s counterparty risk, market demand, and the mechanisms available for facilitating liquidity (such as secondary markets or decentralized finance platforms).

All things considered, the most important differential aspect of any digital asset, compared to traditional counterparts, is the option to self-custody the asset. Self-custody refers to giving investors the ability to hold and manage their tokens without relying on third-party custodians. This is one of the defining features of blockchain-based systems, empowering investors with direct control over their assets.

However, self-custody isn’t suitable for every investor or asset. While some may value independence, others may prefer the security of third-party custody solutions. Tokenization should provide investors with the option for self-custody, but it should also offer alternatives for those who prefer managed custody services. By giving investors choice and control, tokenization can cater to a wider range of preferences and risk tolerances.

To conclude, not every asset is suited for tokenization, and tokenizing everything indiscriminately can lead to inefficiencies and investor confusion. To negate these unwanted outcomes, a clear evaluation framework is a helpful tool for investors. Given the power to make informed decisions, their confidence to engage with this exciting emerging market will ultimately ensure its longevity and success.

Source