Introduction: In the midst of a crypto winter and a rise in US interest rates, a new wave of DeFi innovation may be on the horizon. However, native DeFi protocol yields have significantly decreased, with stable yields even lower than US bond yields. As a result, many DeFi projects are shifting their focus to real-world assets outside of the crypto realm. Notable traditional financial institutions and leading DeFi protocols have actively engaged in the RWA (Real World Asset) space. It has sparked discussions on the market, with some suggesting that RWA could trigger the next bull market. Entrepreneurs have also redirected their attention towards RWA-related areas in hopes of leveraging this growing narrative to accelerate business growth.
01. What is RWA in crypto?
Real world asset (RWA) tokenization refers to the process of representing ownership or rights to a real-world asset using digital tokens on a blockchain or distributed ledger. This allows for digital ownership, transfer, and storage of assets without the need for central intermediaries. The value of these assets is mapped onto the blockchain for trading. RWA can encompass tangible or intangible assets.
This may seem ordinary, consider the following numbers: the global real estate market valued at $360 trillion, fixed income bonds amount to $127 trillion, and the total market capitalization of the cryptocurrency market is only $1.18 trillion. If real-world assets can successfully be tokenized, the market potential is limitless.
0.2 Why is RWA gaining attention?
At its core, the consistently low returns of DeFi are not meeting the increasing income demands of cryptocurrency users. During the DeFi Summer period, the booming market provided high yields that satisfied the income needs of crypto investors. However, due to market volatility and a prolonged bull market, DeFi’s Total Value Locked (TVL) has dropped by over 70% since its peak in December 2021, resulting in significantly decreased yields. Both DeFi protocols and crypto investors are now seeking alternative income growth opportunities.
With the Federal Reserve raising interest rates, investing in US bonds now offers much higher yields compared to DeFi protocols. Well-established DeFi protocols like Curve, Aave, and Compound have seen their average yields drop from over 10% to 0.1–2%, while the yield of US bonds has increased from 0.3% to 5%. Moreover, investing in US bonds carries fewer protocol security risks compared to DeFi.
Additionally, RWA’s potential to bridge TradFi and DeFi has sparked great interest in the long term. Traditional financial assets like real estate and non-financial corporate debt markets are massive trillion-dollar markets. If DeFi can integrate with these assets, it can provide users with increased liquidity, capital efficiency, and investment opportunities.
Furthermore, traditional finance has its own challenges, including high entry barriers, numerous intermediaries, and various restrictions. RWA’s design can address some of these pain points in traditional finance, attracting more investors to participate in DeFi.
Clearly, RWA expands the market size of DeFi and helps traditional financial institutions explore new business models. Leading DeFi protocols are actively positioning themselves with RWA, and TradFi institutions also show great interest in RWA. RWA breaks down the barriers between TradFi and DeFi, enticing more traditional funds to enter the DeFi market through tokenization. It diversifies the range of assets available in DeFi and promotes interoperability between TradFi and DeFi. Additionally, RWA reduces the cost of financial transactions, eliminates complex intermediaries and fees, and overcomes geographical limitations, enabling assets to circulate globally and establishing a faster and simpler transaction system.
03. Applications
There are several common applications in DeFi:
- Stablecoins: Top stablecoins such as USDT, USDC, and BUSD are examples of RWA. Companies like Tether, Circle, and Paxos maintain audited reserves of US dollars to mint stablecoin tokens for use in blockchain and DeFi protocols.
- Synthetic assets: Synthetic assets also fall under RWA. For example, through synthetic assets, stocks and commodities can be traded on-chain in the form of derivative products. Synthetix is currently the leading platform in the development of synthetic assets, with over $3 billion worth of assets locked in its protocol during the peak of the bull market in 2021.
- Lending protocols: RWA has seen significant development in lending protocols. Borrowers can use RWA as collateral, and DeFi platforms can provide collateralized lending services. There are also credit lending services that rely solely on brand reputation without collateralizing assets. The use of RWA in DeFi lending protocols plays a crucial role in the sustainable development and revenue scale of these protocols.
04. Opportunities and Risks
Despite the many benefits of RWA, only compliant RWA can sustain large-scale development. The current biggest criticism of USDT is its apparent centralization, as the underlying assets remain opaque. How to put real assets on the chain, how to ensure the authenticity and legality of assets while on-chain, and how to prevent money laundering and other illegal activities are the challenges that RWA development needs to address, which will also involve various legal, regulatory, and technological requirements. It should be noted that currently, the overall market size of real estate projects in RWA is very small, with insufficient liquidity and poor transparency in mechanisms. It requires the involvement of large centralized entities to endorse and regulate, and the overall acceptance of utility tokens issued by related agreements in the crypto market is low. This is mainly due to the strict regulation of physical assets, and project parties also need to perform complex operations on asset ownership.
In summary, the RWA track is still in its early stages and still needs to wait for gradual improvement in regulation and infrastructure. However, the narrative of RWA still has tremendous growth potential and may also attract more traditional users into the DeFi and Web3 world, truly reshaping the landscape of the crypto market.
General Disclosure: This material is not intended to be relied upon as forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, cryptocurrencies or to adopt any investment strategy.
