What is a Real World Asset?
Real World Asset (RWA) tokenization is an emerging concept that traces back to the advent of blockchain technology. The journey began with Bitcoin's introduction in 2009, which unveiled a decentralized, secure, and transparent ledger system.
This groundbreaking technology laid the foundation for turning physical assets into digital tokens recorded on a blockchain. However, the real leap forward came with Ethereum in 2015, introducing smart contracts —self-executing agreements coded directly onto the blockchain.
With smart contracts, it became possible to digitally represent physical assets like real estate, art, and commodities, bridging the gap between the physical and digital worlds. The potential for this technology to impact global economies and social structures quickly became apparent.
Why Do RWAs Matter?
To understand the significance of RWA tokenization, picture a large pizza you want to share with friends. Instead of giving each friend the whole pizza, you slice it into pieces, with each slice representing part of the whole.
Tokenization works similarly with assets. When an asset is tokenized, it’s divided into smaller parts called “tokens,” each representing a share of the asset. These tokens can represent anything valuable, from real estate to intellectual property. Managed and traded using blockchain technology, these tokens ensure secure and transparent ownership records, making assets more accessible, liquid, and tradable globally.
The Impact of Tokenization
Consider the real estate market in cities like New York or London. A $10 million property could be divided into 10 million tokens at $1 each. This enables individuals to invest as little as $100, owning a slice of high-value real estate.
Tokenization brings liquidity to the real estate market, which is traditionally illiquid and difficult for smaller investors to access. According to Markets and Markets, the global real estate tokenization market is projected to reach $1.4 trillion by 2026, growing at a CAGR of 22.8%.
The same principle applies to commodities. An ounce of gold worth $2,000 can be tokenized into 2,000 shares at $1 each. This lowers the barrier to entry, allowing more investors to gain exposure to commodities without needing significant capital. Grand View Research forecasts the tokenized commodities market to reach $4.5 billion by 2025.
Tokenization also empowers creators to monetize their intellectual property. A patent valued at $1 million could be divided into 1 million tokens at $1 each. Investors can purchase these tokens and share in the revenue generated, rewarding creators while opening up investment opportunities to a broader audience. Juniper Research predicts the market for tokenized intellectual property rights will reach $320 million by 2025.
European Union Allowances as RWAs
EUAs are an ideal asset class to tokenize as an RWA. According to Chainlink Co-Founder Sergey Nazarov, Real World Assets have already surpassed DeFi in assets under management. Sergey believes RWAs will flip cryptocurrency for total value over the next 1-3 years. Chainlink is adopting RWA with companies including Fidelity and is specifically trying to adopt carbon as an RWA. Since private citizens and companies outside the EU can't purchase European Union Allowances (EUAs) directly, the best performing carbon instrument on the planet is destined to become an RWA for global investment purposes.
PARYS™ is conceived as a digital representation of real-world carbon assets, primarily EUAs with inclusion of other government issued carbon instruments as appropriate, operating on blockchain. To understand the real-world manifestation, we need to examine the PARYS™ components and how they interact with existing financial and environmental markets.
- Collateralization: PARYS™ tokens are fully backed by a reserve of EUAs, or equivalent, held in custody. These financial instruments represent real-world government issued carbon assets. This direct linkage to physical carbon allowances is crucial for establishing PARYS™'s value and stability.
- Price Discovery and Fungibility: PARYS™ leverages the ICEEUA index, a benchmark reflecting the market price of EUAs, for price discovery. This ensures that the value of PARYS™ tokens is closely aligned with the real-world carbon market dynamics. Additionally, the fungibility of EUAs, meaning they are interchangeable and tradable on multiple regulated secondary markets, enhances the liquidity and redeemability of PARYS™ tokens.
- Regulatory Compliance: PARYS™ aims to operate within established financial regulations. It plans to register as a digital asset under MiCA, comply with KYC/AML laws, and undergo regular audits to demonstrate proof of reserves. These measures aim to build trust and legitimacy, bridging the gap between the decentralized nature of blockchain and the requirements of traditional financial systems.
- Bridging Traditional and Decentralized Finance: PARYS™ represents a convergence of traditional carbon markets and decentralized finance (DeFi). It enables investors to gain exposure to carbon assets through a digital token, potentially expanding market participation and increasing liquidity. Moreover, its integration with major L1 and L2 blockchains allows for the development of new financial products and services, such as decentralized carbon exchanges and carbon-based lending platforms.
- Climate Positive Impact: By facilitating investment in carbon allowances, PARYS™ aims to contribute to global emissions reduction efforts. The protocol's Pigouvian Subsidy model, which rewards token holders, further incentivizes participation in climate change mitigation.
In essence, PARYS™ can be seen as a digital wrapper around a real-world asset—EUAs. It seeks to enhance the existing carbon markets by leveraging blockchain technology to improve transparency, accessibility, and liquidity, ultimately promoting climate action by channeling investment towards emissions reduction initiatives.
The PARYS™ Protocol real-world impact hinges on seamless interaction with existing carbon markets and regulatory frameworks. The success of PARYS™ will depend on its ability to navigate the complexities of these interconnected systems and fostering trust while demonstrating contribution to a more sustainable future.