The ongoing rise of Real World Assets (RWAs) in the blockchain space showcases a natural convergence point between traditional finance (TradFi) and decentralized finance (DeFi).
However, for RWAs to truly achieve mainstream adoption and expand access channels for this new investment category, the industry must overcome a key obstacle: how to verify and certify these assets in a scalable, transparent, and accurate manner.
Experts predict that by 2030, the market size for tokenized RWAs will reach an astonishing $10 trillion (estimated by asset management firm 21.co) to $16 trillion (predicted by Boston Consulting Group and ADDX), and is expected to develop into a massive industry in the coming years.
Nevertheless, as the tokenized RWA market continues to expand, establishing a robust verification mechanism to ensure on-chain and off-chain integrity is crucial for enhancing investor confidence and promoting the comprehensive development of the entire ecosystem.
Compared to digitally native assets, the verification of RWAs faces a series of unique challenges stemming from their inherent complexity. RWAs include physical or legally represented assets such as real estate, commodities, or artworks, all of which require differentiated verification methods.
Current systems for verifying RWAs are often overly decentralized and heavily reliant on multiple layers of intermediaries, which not only leads to inefficiencies but also poses risks of fraud and opacity.
One of the core challenges facing the field is the lack of standardization; without a unified RWA verification protocol, various verification practices have emerged in the market, potentially leading to disputes among market participants.
Additionally, the issue of trust is equally prominent, as traditional verification methods that rely on centralized entities are susceptible to human manipulation or errors, thereby undermining investor confidence.
Can you be 100% sure that third parties providing custodial management services will not hire irresponsible employees, who could lead to asset loss or damage?
Moreover, scalability remains a significant challenge, as verifying assets across different jurisdictions, meeting diverse legal framework requirements, and ensuring seamless scalability of tokenized platforms all present considerable hurdles.
In traditional finance, private and behind-the-scenes trading around derivatives and other financial instruments has historically injected risk into the market, as witnessed before the 2008 financial crisis.
Therefore, without a robust and reliable verification system, the tokenized RWA market may fall into the same traps of opacity and distrust that occasionally plague traditional finance, potentially hindering investor participation in this highly promising emerging field.
To address the current challenges, the industry must embrace innovative solutions and fully leverage the unique advantages of blockchain technology and other emerging technologies. The core characteristics of blockchain—immutability, decentralization, and transparency—provide a solid foundation for building a more reliable and scalable verification system.
For example, integrating digital identity with smart contracts can automate and ensure the continuity of asset verification, significantly reducing reliance on centralized intermediaries and thereby lowering potential risks.
Additionally, decentralized oracles and third-party auditing firms play a crucial role in connecting off-chain data with on-chain activities. Decentralized oracle networks ensure data integrity by aggregating information from multiple trusted sources. Meanwhile, third-party auditors or verifiers provide an additional layer of trust by confirming that off-chain data accurately reflects its on-chain representation.
It is worth mentioning that applying artificial intelligence and machine learning technologies to asset certification can significantly enhance the accuracy and efficiency of the Real World Asset (RWA) verification process. Combined with Internet of Things (IoT) devices, AI can provide real-time monitoring and physical asset verification, offering critical additional assurance to investors and market participants, thereby boosting market confidence.
The path forward for building scalable RWA verification requires establishing a standardized framework to unify market practices and ensure regulatory compliance. Developing universal RWA verification standards and protocols can not only reduce risks but also enhance cross-border interoperability, providing investors with a smoother and safer experience.
However, achieving this goal is not an easy task. It requires close collaboration among industry alliances, regulatory bodies, and other stakeholders to jointly create and implement a standardized framework that clarifies acceptable practices for asset verification.
Although this vision is ambitious, a data-driven balanced approach that considers the needs of all stakeholders can facilitate the formation of fair and reasonable standards.
Regulatory considerations are also crucial, as effectively navigating complex legal frameworks is vital for the success of RWA verification systems. Ensuring compliance with local and international regulations while maintaining a decentralized framework is a challenge, but it is necessary.
One possible solution is to establish self-regulatory organizations that provide oversight and guidance for market participants, striking a balance between regulatory oversight and industry development.
Institutional participants, such as established financial institutions and large investors, play a key role in shaping these standards. Experts point out that by leveraging their reputation and expertise, institutions can help develop innovative hybrid models that enhance verification processes while ensuring scalability and transparency.
Through collaboration between traditional finance and DeFi participants, the industry can move towards building robust, interoperable, and compliant solutions that uphold the integrity of both on-chain and off-chain activities.
By leveraging blockchain, decentralized oracles, and AI-supported standardized frameworks, the RWA market is expected to overcome current challenges and realize its grand potential, ushering in a new era of financial innovation and inclusive finance.
Tomer is the Chief Marketing Officer of Kima Network and the Investment Director of ChainGPT Labs. He is also an angel investor in over 60 projects and serves as a strategic advisor for more than a dozen projects.
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This article is for general reference only and does not constitute legal or investment advice, nor should it be considered as such. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Original article: “The Real World Asset (RWA) Market Must Overcome a Major Hurdle Before Soaring”
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