RWA is booming!
The concept of Real World Assets (RWA) has been a hot topic in recent months, with major institutions laying out strategies in this space, signaling it’s time to enter the market with a long-term positive outlook. For instance, earlier this year, Goldman Sachs’ digital asset platform went live, assisting the European Investment Bank in issuing a 100 million euro two-year digital bond; subsequently, electrical engineering giant Siemens also issued a 60 million euro digital bond on the blockchain for the first time; Binance released a 34-page in-depth research report on RWA in March this year; Citibank has been particularly bullish, noting in its report that almost anything of value can be tokenized, and the tokenization of financial and real-world assets could be the ‘killer app’ for blockchain breakthroughs, predicting that by 2030, there will be 4 to 5 trillion dollars in tokenized digital securities.
This indicates that the RWA track is set to become a key narrative focus this year. This article will explain and analyze the relevant content of the RWA track and inventory the ecological projects worth paying attention to, sharing potential speculative opportunities with you.
What is RWA?
RWA refers to the tokenization or NFT-ization of real-world assets, which can bring real-world assets such as real estate, bonds, and stocks onto the blockchain. Owning the token represents ownership of the item in the real world, allowing you to loan, rent, buy, and sell transactions on the blockchain. In fact, this concept has early successful cases of RWA in the crypto circle, with commonly used stablecoins like USDT and USDC being tokenizations of the real-world asset, the US dollar.
The Impact and Advantages of RWA+DeFi
The core impact of RWA on DeFi is bridging traditional finance and crypto finance: RWA brings off-chain financial assets onto the blockchain, and RWA tokens can redeem off-chain assets, creating a pathway between real assets and DeFi. This can sustain the crypto finance by increasing DeFi’s externality and improving the liquidity of various assets. Breaking the closed system injects more playability and possibilities into DeFi. Currently, DeFi is a relatively closed environment, with profits coming from the endogenous system, such as transaction fees, lending fees, staking rewards, and inflationary gains. RWA can diversify the underlying assets, which can be any possible item in real life, thus innovative play can emerge in crypto finance.
Expanding DeFi profits provides players with continuous motivation: As the yield of various DeFi protocols decreases and market uncertainty increases, DeFi investors increasingly need a diversified portfolio of real-world assets to obtain stable returns unrelated to cryptocurrencies. For example, US Treasury bonds have a 5% yield, high return and low risk, and were the preferred investment target for many investors after last year’s bear market.
Through RWA, investors can enter the traditional off-chain market for free investment choices and obtain a diverse combination of returns. The commercial value and potential of RWA tokenization in DeFi are recognized, attracting major institutions to layout, and capital to enter. Traditional financial institutions hold a large number of actual assets, such as real estate, stocks, bonds, etc., but the ownership and transactions of these assets usually need to be certified and regulated by intermediary institutions, requiring a lot of time and cost. The use of RWA can bring higher liquidity and value to enterprises by reducing the need for intermediary institutions, automating processes, and increasing liquidity, thereby increasing profits and competitiveness.
Analysis of RWA Projects
Currently, based on the nature of the assets and the method of tokenization, RWA can be divided into stablecoins, private credit, stocks and bonds, real estate, carbon credit certificates, metals, etc. Let’s take stock of a few very potential RWA projects:
1.Centrifuge Private Credit
Centrifuge was launched in 2017 and was the first project on MakerDAO to do RWA. It is an on-chain ecosystem for structured credit, focusing on securitizing and tokenizing previously illiquid debts. It aims to help central enterprises finance at a lower threshold while allowing investors to earn income from real assets.
Centrifuge essentially simulates the process of corporate credit in traditional finance, except that it uses DeFi+NFT to eliminate some intermediaries and cumbersome off-chain processes. The financing process on Centrifuge can be summarized as follows: the borrower packages and uploads its off-chain real assets, generates a legally effective NFT for collateral, and obtains interest-bearing ERC 20 tokens, which investors can purchase with DAI; the initiator redeems the financing after maturity, and investors earn returns. The funds generated by the interest-bearing ERC20 tokens are also divided into primary and senior pools, with primary pool investors having higher returns but also higher risks, while senior pools have relatively lower returns and risks.
Previously disclosed official website data shows that Centrifuge has financed over 385 million US dollars, and TVL has doubled compared to last year. Its tokenized assets have been integrated into the entire DeFi, including 220 million US dollars of risk-weighted assets on MakerDAO.
2.Ondo Finance Public Bonds
Ondo Finance is a DeFi protocol founded by former Goldman Sachs digital asset team member Nathan Allman and former Goldman Sachs technology team vice president Pinku Surana. It has currently received 34 million US dollars in investment from well-known institutions such as Pantera Capital, Coinbase Ventures, Tiger Global, Wintermute, etc.
It is understood that Ondo Finance has launched four tokenized funds through large high-liquidity ETFs managed by asset management giants BlackRock and Pacific Investment Management Company (PIMCO): US Money Market Fund (OMMF), US Treasury Bonds (OUSG), Short-Term Bonds (OSTB), High-Yield Bonds (OHYG), with an average yield of these four funds reaching about 6%. However, for compliance considerations, Ondo Finance will adopt a whitelist system, where investors need to pass KYC and AML screening before they can sign subscription documents, trade fund tokens with stablecoins or US dollars, and use these fund tokens in permitted DeFi protocols, while Ondo Finance will charge an annual management fee of 0.15%.
3.MakerDAO Bonds, Stablecoins
MakerDAO is an open-source decentralized autonomous organization created on the Ethereum blockchain in 2014, with anyone holding its token MKR able to participate in project governance. In addition, MakerDAO issued the stablecoin DAI and supports and stabilizes the value of DAI through mechanisms such as dynamic systems of collateralized debt positions.
MakerDAO issued the world’s first DeFi-based real asset loan, laying out the RWA track early. In 2020, MakerDAO formally included RWA as a strategic focus and released guidelines and plans for introducing RWA. In addition to issuing stablecoin DAI, MakerDAO passed proposals for RWA as collateral in the form of tokenized real estate, invoices, and accounts receivable to expand the issuance of DAI.
In 2022, MakerDAO also launched a 220 million US dollar fund with BlockTower Credit to provide funds for real-world assets. MakerDAO’s RWA business scale exceeds 680 million US dollars, of which 500 million US dollars of RWA collateral is US Treasury bonds, and Société Générale borrowed 7 million US dollars from MakerDAO, with its position supported by 40 million euros of AAA-rated bonds as OFH tokens. It is reported that about 70% of MakerDAO’s income in December 2022 came from RWA.
MakerDAO is definitely an early entrant in RWA, but the concept of RWA was lukewarm before, without any breakthroughs. It was not until the scale of DeFi rebounded in 2023 and other traditional giant institutions entered the field that RWA returned to the spotlight and received attention. And MakerDAO, which laid out the groundwork early, naturally has richer experience, including previous cooperation, support for the economic value of DAI, successful experience in issuing tokens, etc., so the market is generally very optimistic about MakerDAO.
4.RealT Real Estate
RealT is a company that tokenizes off-chain assets and is one of the pioneers in asset tokenization. It mainly tokenizes real estate in the United States. RealT can solve the liquidity and transaction cost problems of real estate assets by tokenizing real estate. For example, real estate that originally needed to be bought and sold by the set can be sold in fragments, allowing ordinary investors to participate in investment by holding partial ownership. For example, investors who traditionally find it difficult to directly invest in US real estate can directly invest in US real estate.
When investors purchase its tokenized token RealToken, they are equivalent to investing in a real estate asset and will receive proof documents that they own that part of the asset. Even if RealT goes bankrupt or disappears for some reason, RealToken still remains valid, and the interests of RealToken holders will not be damaged. Therefore, the value and effectiveness of RealToken itself are not affected by RealT.
Moreover, RealT will use IPFS technology to permanently save these documents that prove the effectiveness of RealToken assets. Once these documents are stored in IPFS, they will exist forever and cannot be tampered with, and no longer need to rely on third-party institutions to save these documents. In addition to these documents proving assets being uploaded to IPFS, data and information about house inspections, insurance, property taxes, etc., will also be uploaded to the IPFS system. These data and documents will provide real, objective, and verifiable information about the real estate they describe, record all transaction history of this real estate, and can easily verify its authenticity.
After the asset proof and data are securely stored, the data to be stored is the house price. RealT will introduce oracles so that real estate appraisal data can be obtained directly from the market without third-party institutions, in order to reflect the real estate price as objectively and truly as possible, achieving complete openness and transparency of real estate data, and the assessment of real estate value must also be completely open and transparent.
Currently, the total global real estate value is about 360 trillion US dollars. With such a colossal market, we are extremely excited about the innovation and activation of DeFi after RWA.
5.Galileo Protocol Open Source Infrastructure
Galileo Protocol is a platform for the tokenization and redemption of physical assets, an open-source infrastructure for executing smart contracts. It allows the creation of ‘pNFTs’ representing physical goods, issued across multiple chains and can interact with any blockchain.
Through the Galileo platform, users can diversify their crypto portfolios into physical assets, obtaining illiquid assets. Moreover, Galileo can guarantee that the related physical asset pNFTs are genuine, without fakes. Because pNFTs are QRC20 standard tokens, they can achieve interoperability on all major chains, providing storage, source tracking, and other information about these assets, thus avoiding counterfeiting and fraud. LEOX, as Galileo’s native token, will see users become four different stakeholder roles: The Owner, The Buyer, The Redeemer, and The Fractional Investor.
In Galileo, if you are a seller, you can generate an NFT to prove you are the owner of a physical asset. As a buyer, you can directly purchase the physical asset you want. After the purchase, the seller will send the NFT to the buyer, thus becoming the new formal owner of that physical asset. If you are a fractional investor, you may only purchase part of a physical asset. For example, a real estate asset of great value will be fragmented, allowing multiple fractional investors to invest in that real estate asset. And if you are in the role of the redeemer, you can directly redeem the asset and possess it.
Will RWA Accumulate and Break Through?
In 2023, the narrative of RWA welcomed a wave of attention, and some institutions have devoted themselves to building the RWA field. However, the field is still in the early stages of development, with a small scale; to a certain extent, it needs to rely on various DeFi protocols, especially oracles, which have always been an imperfect infrastructure; and finally, the compliance issue of RWA, builders in the RWA field are constantly struggling with regulations, determined to link Web3 with the real world.
Currently, there is no leading project in the RWA field, but driven by the huge market demand and the trend of linking on-chain and off-chain finance, it is necessary to pay attention to this field, and the time will come sooner or later. It is also believed that the projects mentioned in the article can stand out, drive the entire track to run, make DeFi more active and interesting, and provide investors with more investment opportunities.
