RWA (real assets) have been used in MakerDAO since 2020 in the form of tokenized government securities and corporate bonds as collateral for the DAI stablecoin. At the end of 2022, analytical reports from organizations such as Binance Labs, Coinbase, PwC and others highlighted RWA as one of the key long-term trends in the blockchain field.
According to DeFiLlama, as of September 2023, there were at least 25 protocols in the RWA ecosystem, making it rank eighth in terms of the volume of funds locked in smart contracts. The number of token holders for these projects on the Ethereum blockchain has doubled over the past year.
Currently, the total volume of lending against tokenized assets has reached $4.4 billion, with a trend towards expanding the range of tokenized assets, including precious metals and carbon credits.
What is RWA?
RWA stands for Real World Assets, which are transformed into digital tokens. The creation of such assets involves issuing tokens that represent both physical and intangible assets, with their value and characteristics often based on off-chain data.
Tokenization facilitates the integration of traditional assets into the decentralized finance (DeFi) ecosystem, making them more accessible and improving trading conditions through automated market making systems and other blockchain technologies.
Thus, RWA acts as a bridge between traditional finance (TradFi) and DeFi, capable of transforming the cryptocurrency market by attracting new capital, increasing liquidity, and enhancing profitability.
Types of RWA Assets
RWA encompasses a broad spectrum of assets transformed into tokens on the blockchain, including:
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Centralized Stablecoins:
Popular currencies like USDT (Tether) and USDC (Circle) are essentially RWA. They are backed by real assets such as fiat money or government bonds, which the issuing companies lock on their accounts, releasing the corresponding stablecoins.
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Private Lending:
MakerDAO, known as the issuer of the DAI stablecoin, is an active participant in this area. In 2022, they provided a loan of $100 million in tokens to the American bank Huntingdon Valley Bank, using off-balance-sheet loans as collateral. Similar initiatives are undertaken by the issuer of the USDC stablecoin, which developed the open-source Perimeter protocol. This protocol is designed to establish and support tokenized lending platforms.
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Government Bonds:
Companies in this sector issue stablecoins backed by government bonds of various countries. For example, Ondo Finance offers the USDY stablecoin, guaranteed by short-term U.S. Treasury bonds. Also part of this sector is the Mountain Protocol initiative, which has created the USDM stablecoin on the Ethereum basis, backed by Treasury bonds yielding an annual passive income of 5%.
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Tokenized Securities:
Bitfinex, a cryptocurrency exchange, paved the way in this field, launching its Bitfinex Securities branch in September 2021, targeting the RWA market. By October 2023, they had issued the first tokenized bond with a three-year maturity and a 10% yield.
The sector has also attracted institutional investors' attention. For example, HSBC, one of the largest banks in the UK, plans to launch a service for storing tokenized securities in 2024. In October 2023, JPMorgan introduced the Tokenized Collateral Network (TCN), a service for converting shares into tokenized assets, developed in collaboration with financial giants like BlackRock and Barclays.
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Real Estate:
In January 2023, the financial conglomerate Société Générale obtained a loan of $7 million in DAI from MakerDAO, with mortgage bonds regulated by French law worth $40 million serving as collateral.
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Carbon Credit Certificates:
In 2022, the market for carbon credits, often referred to as “green” certificates, surged in popularity. The KlimaDAO project, with investment from billionaire Mark Cuban, offered such credits to cryptocurrency users. Theoretically, the rising price of these certificates should motivate polluting companies to reduce emissions. However, this sector is still in its infancy and faces issues related to fraud.
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Art and Collectibles:
This industry segment is represented through the NFT market, where in 2021, many organizations and investors began tokenizing famous artists' works, transferring their value to the blockchain. For instance, the Swiss crypto bank Sygnum launched an NFT collection based on Pablo Picasso's “Girl with a Beret,” dividing it into 4000 tokens. Tron's founder, Justin Sun, acquired works by Picasso and Andy Warhol for $22 million with the intention of tokenizing them through the JUST NFT Fund.
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Precious Metals:
In the RWA segment, there are companies that issue stablecoins backed by physical precious metals. Examples of such tokens include products from Paxos and XAUT.
How the DeFi Trend Works
The tokenization of traditional assets such as stocks, debt obligations, or real estate occurs in three main phases, as identified by analysts.
- Offline Preparation
This phase begins with the establishment of ownership rights and the valuation of the asset. It involves conducting a professional assessment to determine the condition and value of the property, registering it according to the legislation of the relevant jurisdiction, and ensuring that the tokenization initiator owns the RWA.
For example, to tokenize a building, a businessman establishes a legal entity, which then acquires, say, a hotel. Following the valuation of the property, the company issues a certain number of shares, each representing a stake in the hotel's ownership.
- Digital Integration
Once the asset is formalized offline, its details are transferred to the blockchain. This is done using smart contracts and tokens, depending on the asset's characteristics. At this stage, developers create a smart contract that includes information about the real asset, forming the basis for the RWA. The data transfer process is often entrusted to external parties.
For instance, the hotel owner approaches a tokenization service with documents confirming ownership and valuation of the property, along with details of the shares. The service developers then create a smart contract and issue the corresponding number of tokens, each representing a share in the ownership.
- RWA Management and Support
At this stage, it is crucial to maintain updated information about the tokenized asset, ensure its liquidity, and support the necessary technical infrastructure for RWA operations. Typically, these tasks are handled by the tokenization platform, which updates smart contracts and manages the tokens.
This requires the platform to maintain constant communication with the issuer, verify legal information, and provide current valuations of the real asset. RWA maintenance involves working with price oracles and external consultants, helping to offset the costs of blockchain infrastructure.
The Future of the Real Asset Market
The market for tokenized real assets (RWA) has significant potential, given that the total value of global assets is measured in hundreds of trillions of dollars of untapped liquidity. For instance, the global real estate market was valued at over $326 trillion in 2020, and a small portion of it is expected to transition to the blockchain.
As of the end of November 2023, data from Rwa.xyz shows that RWA protocols have locked in funds amounting to $4.5 billion, with issued loans reaching $571 million.
Despite the current success, analysts anticipate that the main development of the market is still ahead, and its growth prospects appear significant. Predictions from organizations like Coinbase suggest a “tokenization boom” occurring in the next one to two years. Forecasts by Citigroup and the Boston Consulting Group estimate the potential growth of the RWA market to be between $5 trillion and $16 trillion by 2030.
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