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Tokenization of real assets: the future of decentralized credit
The tokenization of Real World Assets (RWAs) such as real estate, fiat currencies and bonds is becoming a must. These digitized assets, thanks to blockchain, can be used as collateral on decentralized finance (DeFi) lending markets. Take bitcoin (BTC) or ether (ETH): considered solid collateral in the crypto ecosystem, their management is automated via smart contracts, with no need to go to court to settle disputes. But these innovations do entail risks, as we'll see below.
For physical assets such as real estate or government bonds, oracles - a service that enables a blockchain to access data external to the network, such as asset prices or real-world events, to trigger smart contracts - are needed to provide real-time data on prices and cash flows. With this evolution, individuals and institutions can access loans by pledging a variety of tokenized assets, freeing up liquidity and multiplying borrowing options on a global scale.
Example: Tokenizing a building
Imagine a company owning an office building worth $10 million. Rather than selling the entire building to a single buyer, the company decides to tokenize it on a blockchain, such as Ethereum.
Here's how it works: the building is divided into one million tokens, each token representing a fraction of the property. These tokens are then sold to different investors on a decentralized platform. This means that investors of all sizes can buy a share in the building, even if they only have $10 to invest. Once in possession of these tokens, investors can use them as collateral on the DeFi markets to borrow stablecoins or other assets, in the same way as if they were pledging a share or bond.
Income generated by the building's rents would be distributed automatically to token holders via smart contracts, guaranteeing total transparency and avoiding the need for a centralized intermediary. Should the building be sold, investors would also receive a share of the profits.
This model makes real estate, traditionally illiquid and difficult to fractionalize, accessible to a wider variety of investors, while enabling these assets to be used as collateral for loans on DeFi platforms.
On the other hand, certain risks still persist. Typically, in October 2022, the BNB Chain platform suffered an attack exploiting a flaw in a smart contract, causing a loss of $570 million. This underlines the persistent risk of vulnerabilities in smart contracts. Or, just one month later, in November 2022, the Mango Markets lending platform was exploited by manipulating the price of oracles to siphon off over $100 million. This shows how poorly secured oracles can be exploited to manipulate DeFi markets.
Continuous lending markets
DeFi platforms create 24/7 open markets for lending, borrowing and exchanging assets. Thanks to these protocols, users can lend cryptos such as bitcoin, ether orUSDC and earn interest. The future? Adding tokenized assets such as government bonds or real estate to these pools.
Unlike traditional finance, where risky practices such as rehypothecation can create systemic risks, DeFi's smart contracts guarantee total transparency and clear collateral management - as long as the smart contracts are correctly coded. One example: bitcoin holders are increasingly using wBTC (wrapped Bitcoin) to borrow stablecoins on platforms like Aave without having to sell their BTC, while retaining exposure to its upside potential. In this model, loans are secured by digital assets, and if the value of the collateral falls, the borrower must add to it or risk liquidation, ensuring a more transparent and secure lending environment. According to data provider DefiLlama, over $87 billion is locked up in decentralized finance protocols.
DefiLlama
Become your own bank
The most revolutionary change brought about by DeFi? The possibility for everyone to become, to a certain extent, their own bank. Historically, during banking crises - whether the one in 2008 or, more recently, the one in 2023 linked to rising interest rates - savers sought to withdraw their money outside the banking system. Today, DeFi offers a modern alternative. Thanks to multiparty computation (MPC) portfolios, everyone can store and manage their assets in complete security, with blockchain verification guaranteeing direct control of their funds. It becomes possible to store stablecoins, invest in digital assets and access decentralized lending and borrowing services, all without the need for traditional banks. With tools like SMAs (separately managed accounts), users can secure their assets in digital vaults, safe from banking risks, while retaining full control over their wealth.
On the other hand, once again, great care must be taken when embarking on this type of initiative. If users lose their private wallet keys, they irreversibly lose access to their funds. Unlike a traditional bank, there is no mechanism for recovering lost assets.
Digital wallets, although secured by technologies such as multi-signature or multi-party computation (MPC), remain vulnerable to hacks or sophisticated attacks. For example, in August 2022, Solana wallets were compromised, resulting in the loss of several million dollars for users.
In conclusion, thanks to the tokenization of real assets, property such as real estate becomes collateral via smart contracts, and loan markets run non-stop, without intermediaries. Digital wallets make it possible to become your own bank. But beware, behind these innovations also lie risks: data manipulation, security breaches and crypto volatility. So, yes, the promises are enormous, but it's best to stay on your guard and take maximum precautions.
