Role of Governance in the Growth of Tokenized Real-World Assets

The cumulative value of tokenized illiquid assets, encompassing real estate and natural resources, may achieve $16.1 trillion by 2030, stated the Boston Consulting Group (BCG) in their 2022 report. According to them, it is a “highly conservative forecast.” The report highlights a tokenization potential of $68 trillion by 2030 in the best-case scenario.

What is Real-World Assets Tokenization?

Tokenizing real-world assets (RWAs) into digital tokens on a blockchain enhances liquidity, transparency, and accessibility, making it easier for a broader audience to invest in assets like real estate and art. This process democratizes traditional financial markets by allowing fractional ownership and 24/7 trading. Tokenization reduces costs and removes barriers typical in financial markets, though it faces regulatory and security challenges. 

Despite these hurdles, tokenization represents a promising innovation, potentially revolutionizing how we invest in and interact with physical assets, especially within the decentralized finance (DeFi) ecosystem. While tokenization of real-world assets improves the ease of storing and trading value, governing these tokens remains a risk. Up to the point of losing everything. 

Benefits of Real-World Asset Tokenization

Real-world asset tokenization is experiencing rapid growth within DeFi, emerging as one of the fastest-growing asset categories. From $1.44 billion to $2.5 billion as of September 30, 2023, the total value locked in RWAs nearly doubled over the course of the year. This surge in tokenized real-world assets is largely driven by shifts in the broader macroeconomic landscape. 

Historically, on-chain yield opportunities relied heavily on new token issuance, while traditional yields remained stagnant. However, with rising interest rates and a downturn in the crypto asset market, traditional yield-generating instruments like U.S. Treasuries and private credit have become more appealing. Consequently, there is reduced demand for crypto native yield instruments in DeFi, leading to a greater interest among crypto users in products capturing off-chain yield through on-chain channels.

The Current State of Tokenized Real-World Asset Governance

In order for RWA real-world assets to operate on-chain, their ownership and representation need to be recorded on the blockchain as well. Although the specific procedures may differ, the basic process typically includes defining the terms beforehand and then creating tokenized versions of the asset on-chain. The overall tokenization process is illustrated in the figure below.

In detail, this process includes: 

1. selecting assets, 
2. determining token formats, 
3. developing smart contracts, 
4. integrating oracle solutions, 
5. ensuring regulatory compliance, 
6. building network effects, 
7. connecting to off-chain data, 
8. enabling cross-chain interoperability, 
9. ensuring security, 
10. and fostering market liquidity. 

One of the examples is the ERC-3643, the token standard for real-world asset tokenization. Utilizing the ERC-734 and ERC-735 standards, this contract securely stores keys and claims pertinent to individual identity, offering comprehensive functionality for their management.

There is an emerging tokenization landscape that connects conventional financial tools with blockchain technology and facilitates the digitization of tangible assets like real estate, securities, and commodities.

Navigating the Risks of Real-World Assets Tokens

Despite the lively and growing RWA ecosystem, challenges remain. Those entail regulatory clarity, permission issues, network effects, oracle complexities, and the need for reliable off-chain data. All of these issues are related to questions of governance. Since there is no way to connect tokens to off-chain assets purely on a technical level, we need some form of governance mechanism to do that. And this governance mechanism must adhere to legal and regulatory frameworks. Good governance is a necessary condition for tokenized RWAs to work.   

RWA Governance with Q

This is where the Q Protocol comes in. With frameworks for all the necessary elements that you need for governance – rule setting, enforcement and dispute resolution – it is predestined to become the home for ambitious RWA projects. Many of the known risk factors, for example, related to the administration of private keys or the validation of off-chain data, can be addressed using Q’s toolbox. Moreover, the ability to easily install expert panels can bring professionalism to technical decisions and alleviate decision fatigue among token holders. 

Finally, Q’s ability to integrate legal contracts with on-chain enforcement increases legal certainty and mitigates regulatory risks. By providing a comprehensive framework rather than individual tools, the Q Protocol makes it easy for RWA tokenization providers to onboard. From a simple on-chain deployment of existing products all the way to highly customized solutions, the Q Protocol can support NFTs for real-world assets at every stage of development.  

Below is an example of the project that has tokenized RWAs on the Q blockchain.

VNX Gold (VNXAU) offers tokenized ownership of pure gold stored in secure European vaults, providing investors with the stability of gold and the flexibility of crypto assets. It is accessible on various protocols, including the Q blockchain.

While seeking a platform that balances speed, affordability, security, and decentralization, VNX also chose Q blockchain for its low transaction fees, robust security, and clear governance rules, minimizing forking risks. Looking ahead, Q’s governance infrastructure offers additional functionality, like dispute resolution, enhancing the value proposition for token issuers like VNX.

“Our collaboration with Q Blockchain has been instrumental in achieving our objectives of bridging real assets with the crypto world. The deployment of VNX stablecoins on the Q blockchain has significantly enhanced accessibility and liquidity, paving the way for innovative financial solutions.” 

– Alexander Tkachenko, CEO at VNX.

Merging the best of two worlds

Today, many of the current tokenization approaches prove to be far from compelling. The risks of added complexity and non-transparent centralized actors often outweigh the potential benefits, such as gaining access to millions of retail investors who could purchase a piece of a stock or gold bar, virtually represented by a token. It is for a reason that the process itself resembles a conventional centralized service (see the figure below). 

So how could RWA platforms benefit from Q’s governance-as-a-service (GaaS) features to manage real-world assets like gold or securities? The potential of Q governance is that it transcends the binary principle of “code is law,” offering a nuanced approach to managing assets. While the Q Blockchain offers a solid basis to safeguard transactions, its governance architecture accommodates non-binary decisions that cannot simply be encoded in smart contracts. 

With over 90% of global decisions falling into the non-deterministic realm, Q’s governance framework addresses the limitations of managing and distributing RWAs tokens. 

Coming back to the examples given above, this principle can be applied to elements like attestations of off-chain data, the on-chain integration of legal contracts and a mechanism to resolve disputes – both on-chain and off-chain – in case they occur. Furthermore, the Q Protocol itself can be considered best-in-class in terms of regulatory clarity and certainty, making it a sound infrastructure for institutional players to build on. 

Conclusion

In a nutshell, real-world assets represent a groundbreaking fusion of traditional financial instruments with blockchain technology, offering a myriad of benefits and a gigantic market. However, despite their immense potential, real-world assets tokens face several challenges that hinder their widespread adoption and utilization. One of the primary concerns is the centralization inherent in many current RWA platforms, which introduces vulnerabilities to hacking, manipulation, and other malicious activities. 

Moreover, given the complexity of connecting the off-chain and on-chain worlds, sophisticated governance structures are necessary. RWA tokens that lack transparency and accountability pose risks to the integrity and stability of the respective projects. These limitations underscore the need for alternative governance solutions that can effectively manage RWAs while addressing the shortcomings of traditional and decentralized approaches.

Fortunately, the Q Protocol offers a compelling alternative governance framework tailored to the specific needs of managing NFT for real-world assets. With its innovative two-layer node system and clear governance rules laid out in its Constitution, Q blockchain provides a robust and secure infrastructure for tokenizing and managing real-world assets.