Tokenization of Real World Assets (RWA): A Comprehensive Review
Real-world assets (RWAs) refer to tangible assets that have undergone tokenization, transitioning to the blockchain for a streamlined and expedited trading experience.
The pioneering move in bridging tangible assets with the blockchain universe came with the association of NFTs to diverse items. This introduced the ability to acquire rights to both tangible and intangible assets, be it artworks, musical compositions, or written works, all via cryptocurrency tokens.
The RWA arena has since burgeoned, and today, assets backing tokens aren't confined to just property or luxury items. They span actual financial assets, such as short-term U.S. treasury bonds, credit commitments, collectibles, and more.
We'll dive deep into the RWA landscape, evaluating its profound influence on the cryptocurrency market, and highlighting projects that are garnering significant user attention.
RWA Stats
The analytical platform DeFiLlama lists 25 protocols under the Real World Assets (RWA) category, with a combined TVL of around $2.4 billion. According to a report by the Federal Reserve from September 8, this figure is closely matched, estimated at $2.15 billion.
Major RWA protocols and their TVL. Source: defillama.com
The size of the RWA sector as reported by the Federal Reserve. Source: www.federalreserve.gov
Cryptocurrency resources CoinGecko and CoinMarketCap offer varying perspectives on the RWA sector. According to CoinGecko, the market capitalization of the tokenized asset sector stands at just $480 million. Meanwhile, CoinMarketCap values this segment at over $6.5 billion, factoring in cryptocurrency projects such as Chainlink, Maker, Synthetix, Centrifuge, Reserve Rights, and others.
Cryptocurrency projects within the RWA sector as per CoinGecko. Source: coingecko.com
Cryptocurrency projects within the RWA sector as per CoinMarketCap. Source: coinmarketcap.com
It's worth noting that many RWA projects have yet to be added to these analytical platforms, suggesting the actual industry statistics might be significantly higher.
Working Mechanism of Asset Tokenization
The main goal of RWAs is to bridge the gap between the conventional financial system and the DeFi sector. This melding of the blockchain world and real-world assets offers benefits to both realms.
The process of tokenizing assets and transitioning them onto the blockchain consists of three sequential phases:
- Off-chain Formalization: This initial phase involves confirming asset ownership, appraising its relative and absolute value, and legally establishing the asset.
- Information Bridging: In this phase, data about the tangible asset is transitioned into the blockchain environment. A specific smart contract is formulated for this purpose, encapsulating detailed information about the asset. It can manifest as a standard ERC-20 token, an NFT ERC-721, or other standards such as ERC-3643, ERC-2222, and ERC-4626 tailored for various asset types.
- Introduction and Protocol Management: At this juncture, the assets become tradeable and operational. Specific DeFi protocols underpin their support and management.
For RWAs to function seamlessly, it's crucial to engage specialists from the spheres of finance, jurisprudence, tokenization, and business analytics. This ensures the formulation of accurate and validated documentation for each financial asset.
Main RWA Categories
Almost any asset can be tokenized and brought onto the blockchain, including:
- Real estate properties;
- Precious metals like gold, silver, and platinum;
- Artifacts and works of art;
- Tangible assets such as cars, boats, and airplanes;
- Shares of companies and corporations;
- Corporate and sovereign bonds;
- Carbon offset credits;
- Currencies from Central Banks and other financial tools.
Stablecoins, such as USDC, DAI, and PAX, to some extent, are also considered tokenized assets, being backed by a combination of bonds and cash reserves.
Benefits and Drawbacks of the RWA Sector
RWAs present numerous advantages, notably:
- Enhancing the trustworthiness and practical application of blockchain technology in the tangible world, expanding the cryptocurrency user base;
- Bridging the gap between centralized and decentralized finance realms;
- Boosting the liquidity of the DeFi sector while infusing fresh liquidity;
- Curtailing operational expenses via the application of smart contracts, thus sidelining numerous intermediaries and third-party service providers;
- Amplifying the domain of intellectual property trading;
- Facilitating supply chain management and introducing lending mechanisms on the blockchain.
However, the sector also comes with its set of challenges:
- RWA's vulnerability to conventional risks, such as breaches in smart contracts or cyberattacks on the protocols;
- Technical limitations linked to the immutable nature of once-deployed smart contracts;
- Encountering regulatory and legislative hurdles in various jurisdictions. Thorough governance of tokenized assets proves challenging, invoking potential oversight pressures and legal quandaries. This is intertwined with the slow-paced evolution of overarching crypto-focused regulations;
- The likely emergence of undersecured assets leading to RWA depreciation;
- A steep entry threshold for specific protocols. For example, initiatives mainly catering to institutional or large-scale retail investors might stipulate a base RWA acquisition threshold of $100,000 or more.
Leading RWA Initiatives
StUSDT, a decentralized stablecoin operational on the Ethereum and Tron networks, boasts a backing of $1.7 billion in fiat currency. This project has been established to foster improved collaboration between RWA initiatives and their potential investors.
How stUSDT works within the RWA landscape. Source: stusdt.io
Ondo Finance offers a trading platform for U.S. government securities and money market assets. The platform introduces its own stablecoin, USDY, secured by treasury bonds, and features various tokens associated with tangible assets, tokenizing through exchange-traded funds.
Assets available on Ondo Finance. Source: ondo.finance
In the realm of real estate, RWA provides more than just property trading avenues. It facilitates earnings from property rentals and segmenting properties into diverse units, enhancing accessibility and lowering the initial investment bar. Notable ventures in this area include RealT, Tangible, and Lofty. Additionally, similar projects have been introduced on WhiteBIT Launchpad.
User interface snapshot of the RWA marketplace on Tangible. Source: www.tangible.store
RWA's potential isn't limited to asset trading. It can be employed for lending purposes or as collateral to secure loans. Pioneers in the RWA lending space include Centrifuge, Goldfinch, and Maple.
Working mechanism of the Maple lending protocol. Source: maple.finance
The Future Prospects of RWAs
The RWA sector symbolizes the tangible embodiment of blockchain technology, eradicating a majority of bureaucratic hindrances. It standardizes and democratizes asset trading, regardless of a user's geographical locale. It's foreseeable that many cryptocurrency firms will pivot their attention to RWA in upcoming times, especially those currently navigating liquidity challenges or facing financing hiccups during bearish market phases.
