How to tokenize real-world assets on Bitcoin — TradingView News

Key takeaways

Why use Bitcoin for RWA tokenization?

Tokenizing real-world assets (RWAs) on a blockchain delivers several benefits, ranging from leveled-up liquidity to improved transparency. While a fleet of blockchain platforms can offer tokenization features, Bitcoin stands out as a top choice thanks to its unparalleled security, industry recognition and robust infrastructure. 

• Bitcoin’s proof-of-work (PoW) consensus mechanism has shown exceptional resilience against hacks and attacks over its history. This security is a cornerstone of keeping assets shielded from tampering and fraud. This is critical in providing peace of mind for investors and asset holders. 
• As the most widely recognized and adopted cryptocurrency, Bitcoin (BTC) offers a large active user base. Using Bitcoin for tokenization attracts the widest possible audience and user base, which in turn delivers liquidity and marketability of assets. 
• The decentralization and immutability of blockchains like Bitcoin reduce the risk of centralized control, alteration or fraudulent behaviors. It guarantees the accessibility and authenticity of tokenized assets to maintain trust and integrity of ownership.

Various ways to tokenize RWAs on Bitcoin

While Bitcoin itself is not natively designed for tokenization like Ethereum or other smart contract platforms, there are several approaches to achieve this. 

1. Ordinals and inscriptions

The original design of Bitcoin did not allow for non-fungible tokens (NFTs) to be minted onto the network. It was simply technology that facilitated the transaction of Bitcoin and satoshis. In January 2023, the Bitcoin blockchain protocol was upgraded to introduce ordinals. This added functionality makes it possible to create and tokenize assets similar to NFTs on the network. 

With Bitcoin ordinals, users can now encrypt data, including text, images, videos and more, directly onto individual satoshis. This transforms generic interchangeable BTC into unique digital items. They become non-fungible to enable the creation of digital assets on the blockchain. The data inscription process embeds date indelibility on the blockchain to ensure its permanence and verifiability. 

This allows the data from real-world assets, like real estate, to be added to the blockchain to create digital Bitcoin ordinal tokens.

How to tokenize assets on Bitcoin blockchain using ordinals and inscriptions

The innovative approach of ordinals and inscriptions has transformed the ability to add real-world data to NFTs on the Bitcoin network. The concept can be complex to understand at first, but if you are confident in using Bitcoin wallets and platforms already, then it can be surprisingly straightforward. 

Here are the steps to tokenize assets on Bitcoin:

• Choose a Bitcoin wallet that supports Taproot functions required for ordinals. Wallets like MetaMask or Ledger can support ordinals when linked with Generative or Xverse, respectively. 

• Purchase Bitcoin through a trusted and reputable exchange like Coinbase or Binance. Then, transfer the Bitcoin to your wallet. 
• Create an ordinal inscription using Bitcoin Core or third-party tools like UniSat, Gamma, Ordinalsbot or Ordswap to inscribe your required data on satoshis. Input the data or information you’d like to inscribe the token. The platform will then generate a transaction for you to submit. Once confirmed, you can check the latest inscription on https://ordinals.com/ and view the token in your Bitcoin wallet. 

2. Bitcoin-based token standards

Bitcoin-based token standards like Counterparty and Omni Layer allow you to create and transfer asset-backed tokens directly on the Bitcoin blockchain. These solutions offer a way to tokenize real-world assets in a decentralized and secure manner.

This article will use Counterparty as an illustration to explain how to issue custom tokens on Bitcoin:

• Set up a Counterparty-compatible wallet.
• Use the Counterparty platform to create your token, defining its name, supply and divisibility.
• Issue the token and distribute it to users via Counterparty transactions.
• List and trade tokens on Counterparty-enabled exchanges.

While Bitcoin-based token standards like Counterparty and Omni Layer enable asset tokenization, they come with limitations. They lack the advanced functionality of Ethereum-based tokens, rely on Bitcoin’s slower and costlier network, and require technical expertise to set up and manage. 

Additionally, the ecosystem for these tokens is smaller, with fewer supporting wallets and exchanges. Scalability is also a concern, as Bitcoin’s blockchain isn’t optimized for high-throughput token transactions, leading to potential inefficiencies.

3. Smart contracts on Bitcoin

Bitcoin’s scripting capabilities, including OP_RETURN and Taproot, enable the creation of smart contracts that can be used to tokenize RWAs. These smart contracts allow for programmable and secure token transfers.

OP_RETURN:

OP_RETURN allows you to store small amounts of data in Bitcoin transactions, which can be used to represent asset ownership or other metadata. This provides a lightweight way to tokenize an asset while leveraging Bitcoin’s security.

• Embed asset metadata — e.g., ownership details — in an OP_RETURN output.
• Use this metadata to represent your asset in a verifiable way.
• Track ownership by referencing Bitcoin transactions containing the OP_RETURN data.

Taproot:

Taproot enhances Bitcoin’s scripting capabilities, enabling more complex smart contracts. It can be used to create tokens with sophisticated ownership rules, allowing you to tokenize assets in a customizable manner.

• Use Taproot’s advanced scripting capabilities to create a smart contract that represents the RWA.
• Define the ownership rules and other conditions within the Taproot script.
• Lock Bitcoin in the Taproot contract to issue tokens.
• Transfer ownership by updating the contract’s conditions.

Smart contracts on Bitcoin, using OP_RETURN or Taproot, offer tokenization but face challenges. OP_RETURN allows only minimal data storage, limiting metadata embedding, while Taproot, though more advanced, is complex to implement. 

Bitcoin’s scripting language lacks programmability, restricting smart contract capabilities. Transaction costs can rise, and the ecosystem for Taproot-based solutions still needs to mature. Security risks and limited interoperability with other blockchains further hinder their adoption for complex tokenization needs.

Use cases for real-world asset tokenization

Real-world asset tokenization using Bitcoin opens up new opportunities across several sectors. It’s not just a technical novelty; it’s a potential shift in how ownership and value transfer are managed. 

• Real estate tokenization: Tokenization ignites a revolution for property investment. With the ability to digitally inscribe property ownership and divide it into digital tokens, investors can own fractions of high-value properties. The idea not only simplifies transactions and liquidity of property but also builds a more accessible real estate market. Property owners, too, can tap into a global pool of buyers rather than current geographical restrictions. 
• Art and collectibles: These have become the leading use of NFTs and are a game-changer for the industry. Digital representation of artwork or rare items on the blockchain delivers an immutable and transparent record of ownership. This addresses a historical issue of authenticity and fraud in these markets.
• Commodity tokenization: It includes tokenizing agricultural products and even gold, transforming how you can trade and invest in essential resources. Representing commodities as digital tokens enables fractional ownership and more efficient trading. Smaller investors can now enter these markets once reserved for behemoth institutions. It could even lead to more efficient pricing and a stable commodity market. 
• Intellectual property: Intellectual property tokenization for patents and copyrights can enable more straightforward licensing and royalty distribution. The blockchain’s inherent transparency means licensing agreements and IP usage can be tracked and rewarded automatically. IP could even be traded on global markets as an asset to open up new monetization methods for creators. 

Challenges of tokenizing real-world assets

The tokenization of real-world assets on the Bitcoin blockchain is promising, but there are hurdles to overcome. Regulatory uncertainty and lack of clear frameworks are the overriding issues. 

It is still unclear how real-world assets will be governed and represented digitally. It is a concept in its infancy, with a patchwork of regulations to negotiate for issuers and investors. 

For example, combining real estate law and requirements with digital assets is a job that’s likely to take years. It could even be a case that a certain type of tokenized asset is legal in one country while being outlawed in another. 

Scalability is a constant issue vexing the blockchain industry. For the Bitcoin network, the benefits of security and robustness are continually dragged down by its ability to deal with high volumes of data and transactions. The large data payloads and throughput required for widespread tokenization may lead to a more bloated blockchain. This could severely limit the practicality of using Bitcoin for RWA tokenization compared to more advanced options. 

Tokenizing real-world assets on Bitcoin offers a fascinating new way for the world to interact with digital finance. There are significant potential benefits, particularly regarding liquidity, transparency and fractional ownership of assets. Still, challenges remain to widespread adoption, with stumbling blocks being regulation and scalability.