(The views and comments mentioned in this article are the author’s personal opinions and do not constitute any investment advice.)

RWA, short for Real World Assets, refers to the process of transforming tangible assets from the real world into digital tokens in the blockchain and cryptocurrency space. These assets encompass real estate, gold, traditional financial instruments like stocks and bonds, and even modern ESG discussions such as carbon credits — all tokenized and brought into the world of blockchain. This topic isn’t limited to the realm of cryptocurrencies, as many traditional financial institutions like BlackRock, JPMorgan, Citi, Northern Trust, and other Wall Street giants are actively participating, believing that RWA will significantly reshape the operational landscape of traditional finance.

Overall industry market value in 2023

In continuation from the previous article discussion on the rapid resurgence of the cryptocurrency market, the DeFi sector is showing clear signs of recovery. Real World Assets (RWA) have particularly benefited, emerging as the fastest-growing track in the cryptocurrency space in 2023. According to data from DeFiLlama, the Total Value Locked (TVL) has surged to $5.472 billion, marking an astonishing growth rate of 730% compared to the beginning of the year when it was $0.75 billion. This places RWA as the 7th largest category within the DeFi landscape.

Additionally, according to data from Dune, the number of holders of Real World Assets (RWA) is rapidly increasing. Currently, considering RWA projects solely on the Ethereum blockchain, the token holders have approached nearly 60,000, more than doubling compared to the previous year.

RWA Technical Features

From the perspective of Web2, the traditional financial system has heavily relied on various intermediaries, including brokers, background checks, and regulatory bodies. While this offers a certain level of security, it comes at a considerable cost. Adopting DeFi in comparison to traditional financial markets can significantly reduce operational costs, offering the following benefits:

• Reduced Time and Barriers:

Financial products in RWA are not bound by market trading hours and don’t require large sums of capital to participate, drastically lowering entry barriers. Fragmentation of previously indivisible physical assets enables more people to join the financial market, enhancing liquidity and stimulating market activity.

• Improved Efficiency:

Traditional cross-border transactions may take several days to complete. Transactions on the blockchain can achieve real-time settlement, eliminating concerns about currency conversion and cross-border remittances. This results in reduced complexity and costs associated with transactions.

• Enhanced Transparency:

Traditionally, in the case of private equity funds, which may hold equities in multiple non-public companies, the specific investment portfolio might only be disclosed in periodic reports. This lack of real-time understanding of investments could be a challenge for investors. On the blockchain, all transaction and asset data can be tracked and queried, thereby increasing market transparency.

From a Web3 perspective, amid the backdrop of the Federal Reserve continuously raising interest rates and shrinking its balance sheet, the high-interest environment significantly impacts the valuation of risk markets. The balance sheet reduction notably extracts liquidity from the crypto market. It becomes evident that, after the DeFi Summer, the overall efficiency of DeFi protocols in generating returns gradually decreases.
During market prosperity, most blockchain users engage with DeFi for trading, lending, and staking, aiming to gain higher returns. Typically, a portion of these gains is reinvested in the market. However, in challenging market conditions, substantial capital outflows occur. Apart from putting certain projects at risk of liquidation and liquidity depletion, many DeFi projects offer yields that have gradually approached or fallen below those of traditional financial markets. This comes with the added risk of the cryptocurrency market, contributing to the decreasing allure of DeFi.
Therefore, the key to revitalizing the market lies in introducing new funds from external sources. A prime example would be tapping into the vast stock and bond markets, such as the recent buzz surrounding Bitcoin spot ETFs. With RWA, DeFi evolves beyond purely digital asset transactions and collateralization, incorporating real assets as valuable endorsements. This integration is poised to bring more significant liquidity to the crypto market and present diverse investment opportunities.

The Applications

Stablecoins

When discussing assets tied to real-world assets, one cannot overlook stablecoins. Currently, there are over 140 stablecoins globally, with a total market value of approximately $100 billion. The top five stablecoins are pegged to the US dollar, constituting 96% of the total stablecoin market value.
In the RWA landscape, one stablecoin worth noting is “Verified USD (USDV)”. Launched on November 14, 2023, by the Verified USD Foundation, USDV is pegged 1:1 to short-term US bond tokens (STBT).

Key Advantages:

• Stability: Each STBT is pegged 1:1 to the US dollar, ensuring stability compared to traditional USD stablecoins unaffected by risk pricing.
• High Security: USDV utilizes STBT introduced by the crypto financial services platform Matrixport. As there are no equity holders, the value of STBT remains protected in the event of Matrixport’s bankruptcy.
• Cross-Chain Capability: Employing LayerZero’s Omnichain Fungible Token (OFT) standard, USDV seamlessly transfers across different blockchain networks, CeFi, and DeFi platforms.

Tokenized Government Bonds

Currently, the majority of tokenized financial instruments are linked to US Treasuries. According to RWA data analysis platform RWA.xyz, since the beginning of 2023, the circulating value of United States Treasury Securities has surged from $100 million to an impressive $850 million by year-end.

$FOBXX:

Franklin Templeton, one of the world’s largest investment management firms, introduced the on-chain US Government Money Fund (FOBXX) on the Stellar blockchain in 2021. In 2023, they expanded its blockchain support to Polygon, marking their second blockchain integration. Currently, FOBXX’s assets under management exceed $330 million, representing around 40% of the total tokenized government bonds market value.
FOBXX stands out as the first US-registered mutual fund utilizing public blockchains for transaction processing and equity recording. The fund allocates at least 99.5% of its total assets to US government securities, cash, and repurchase agreements fully collateralized by US government securities or cash. Leveraging blockchain’s features, the fund enables real-time trading, allowing holders to monitor their positions in the fund through Franklin’s Benji Investments app, where each fund share corresponds to a BENJI token.

$OUSG：

In early 2023, Ondo Finance introduced $OUSG, an innovative project tokenizing US government bonds. As of today, $OUSG’s Total Value Locked (TVL) has reached $114 million, with an Annual Percentage Yield (APY) of 4.76%.
The OUSG fund product currently supports both Ethereum and Polygon blockchains, allowing users to deposit USDC assets. The minimum investment is set at 100,000 USDC, and the exchange rate is 1 OUSG = 104.50 USD. Beyond subscriptions, Ondo has developed the decentralized lending protocol Flux Finance, which launched on the Ethereum mainnet in February. Borrowers can use OUSG as collateral, while lenders provide stablecoins like USDC to earn returns.
Ondo Finance’s official platform not only features OUSG but also supports other products such as the US Money Market Fund (OMMF) and tokenized notes USD Yield (USDY), collateralized by short-term US government bonds and bank savings accounts. The APY for these offerings hovers around 5%.

Tokenized Private Credit

Blockchain loans, leveraging enhanced transparency and smart contracts, are seen as a game-changer compared to the slower and less transparent traditional private credit market. The blockchain’s ability to reduce risks and lower borrowing rates makes it highly appealing to investors. In contrast to the common 15% to 20% interest rates in traditional private finance, blockchain protocols charge borrowers an annual interest rate of less than 10%. This sharp contrast is driving increased interest and adoption in the blockchain lending space.

Source : RWA.xyz

In 2023, the active loan value in RWA lending agreements surged from $250 million at the beginning of the year to $590 million. While this falls short of the peak figures seen in 2022, it’s noteworthy that the Total Loan Value has now surpassed an impressive $4.5 billion.

Representative projects:

Centrifuge

Launched in 2017 with the aim of bringing real-world assets onto the blockchain, Centrifuge facilitates financing for borrowers without the need for banks or unnecessary intermediaries. It establishes an on-chain lending pool on Centrifuge, enabling borrowers to access instant liquidity in the crypto world through asset collateralization. Centrifuge has emerged as a leader in RWA private credit, boasting a TVL of $320 million and taking a leading position in Active Loans, surpassing $250 million.
The key framework involves bridging the off-chain asset side with on-chain fund-side channels, achieving cost reduction and increased efficiency through blockchain and smart contracts. Utilizing the Ethereum-based Tinlake protocol, Centrifuge transforms real-world assets into ERC-20 tokens via NFT collateralization. Additionally, it leverages the Centrifuge Chain for swift, low-cost transactions.

In terms of governance, $CFG serves as the native token for the Centrifuge Chain, incentivizing the execution of network protocols and ensuring the sustainable development of the ecosystem. With an initial total supply of 4 billion tokens (annual inflation rate of 3%), the majority of tokens are subject to long-term lockups, contributing to long-term stability. Notably, the project’s governance structure has transitioned from team-led initiatives to the Centrifuge DAO format. In November 2022, the community approved the DAO’s Founding Documents, initiating the introduction of groups such as Protocol and Engineering, Governance & Coordination, and Centrifuge Credit. These developments align with the overarching goal of establishing an on-chain credit system.

Consumer Brands NFTs

In the environment of a bear market with a significant reduction in Web3 funding, NFTs are no longer easily accessible channels relying solely on community speculation. Therefore, the play-to-earn (PFP) model may no longer be the future mainstream in the market. Recently, the emerging trend of combining Real World Assets (RWA) with NFTs presents a new avenue for development. Through the concept of integrating virtual and physical worlds, binding RWA with NFTs allows for the exchange between virtual and real-world items. This opens up a new sales model for brands. Leveraging blockchain technology, brands can gain numerous benefits, such as reducing customer management costs, avoiding the emergence of counterfeit products, and establishing more effective member reward systems.

There have been some similar conceptual cases in the past. For instance:

NFTiff Jewelry

A collaboration between the renowned jewelry and accessories company Tiffany & Co. and the blue-chip NFT project “Cryptopunks,” resulted in the release of physical goods. Launched in 2022 as a limited edition of 250, owners of “Cryptopunks” had the opportunity to acquire a pendant priced at 30 ETH. Additionally, buyers would receive the NFT of the rendered pendant design.

RTFKT x Rimowa

After the successful acquisition of the virtual sneaker brand ‘RTFKT Studios’ by the renowned sportswear brand Nike, its NFT sales have astonishingly surpassed $1 billion. This success is not merely a result of short-term speculation; Nike continues to operate in the physical goods realm as well. Towards the end of 2022, in collaboration with the luggage brand Rimowa, Nike released a limited edition of 888 ‘Original Cabin’ suitcases. Only holders who successfully minted the NFTs had the opportunity to exchange them for the physical version of the suitcase in an exclusive online event hosted by RIMOWA and RTFKT. Each RIMOWA x RTFKT NFT was priced at $3,000.

Climate and Regenerative Finance in the DeFi Space

In the current context where Environmental, Social, and Governance (ESG) issues are gaining increasing attention, all businesses are striving to maximize their presence in this market, with carbon credits being a central concept. Today, the concept of carbon credits is highly tokenized, and the operational methods of carbon credit markets vary across countries and regions, with many nations establishing their own carbon credit exchanges.
According to a research report by Research and Market, the global carbon credit market transaction volume reached $978.5 billion in 2022, and the market is expected to reach $2.68 trillion by 2028, anticipating nearly 2.5 times growth within five years. However, due to the nascent nature of the carbon market, many transactions occur privately over-the-counter (OTC), leading to issues of market opacity, compliance disputes, and inconsistent standards among different countries. Because of the decentralized and transparent nature of blockchain, many consider it an excellent tool for trading carbon credits.
At present, blockchain projects related to carbon credits include:

Toucan Protocol

Established in 2021 as a Swiss company, Toucan Protocol focuses on tokenizing carbon credits (RWA) to aid the development of the Voluntary Carbon Market (VCM). By bringing carbon credits onto the blockchain, the protocol enables the transfer and trading of corporate carbon credits on-chain. Once carbon credits are tokenized, they become TCO2 Carbon NFTs. Users can lock these NFTs in pledge to the carbon pool to receive corresponding carbon tokens, represented by $BCT or $NCT. Toucan Protocol currently offers carbon credit trading services on both the Celo and Polygon blockchains.

Senken

Founded in 2022, Senken is a German company that operates the world’s first and largest decentralized digital carbon market (Digital VCM). Users with relevant needs can easily search and compare carbon offset projects on the Senken website, selecting from 100 climate projects that have been verified and come from different countries, years, and types, collectively providing 40 million carbon credits. There is no need to pay intermediary fees; users can simply click to purchase and trade carbon credits.
Additionally, Senken and Toucan, the two projects mentioned above, have collaborated to introduce a new type of climate financial instrument: Carbon Futures Contracts. These contracts provide a way for investors to pre-fund climate action and can serve as a tool for risk management and capital planning for enterprises in generations increasingly focused on carbon emissions.

The Future of RWA

According to a report from Boston Consulting Group, the market size of tokenized assets is expected to reach $160 trillion by 2030, accounting for 10% of the global GDP at the end of the decade. This estimate includes both the tokenization of on-chain assets (more relevant to the blockchain industry) and the fragmentation of traditional assets (such as Exchange-Traded Funds (ETFs) and Real Estate Investment Trusts). It can even be considered that the real potential market is the entire global asset market, as anything that can be tokenized can be represented on-chain as RWAs.

The current focus of RWA is primarily on DeFi protocols, such as lending and token packaging, enabling RWAs with higher investment thresholds to integrate into DeFi, providing liquidity for their products. On the other hand, the future applications of NFTs also include integration into RWA products to provide physical goods or services integration. Taking NIKE as an example, the acquisition of the virtual sneaker brand ‘RTFKT Studios’ and collaboration with the luxury brand Rimowa can be used to exchange for actual products and other practical features.

This article believes that the rise of RWA also provides a new avenue for Web2 companies to enter the Web3 world, achieving a broader range of products through virtual-physical integration. However, it is currently at the intersection of fintech and traditional assets and is still in the very early stages. In addition, with increasing regulatory scrutiny, regional differences, and related governance uncertainties, it may take some time to have a clearer direction. Nevertheless, the developmental potential and future growth prospects are undoubtedly promising.

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