Is RWA Revolution A Gimmick or Real Opportunity?

Introduction

DeFi protocols have made rapid progress from 2020 to 2021. The Total Value Locked (TVL) in DeFi has skyrocketed from hundreds of millions of dollars to trillions of dollars. This period has been referred to as “DeFi Summer.” As we entered 2022, the growth rate has slowed down. During this process, a significant amount of funds flowed into the DeFi space, leading to a multitude of innovative DeFi applications. The market has been enthusiastic about participating in token airdrops and DeFi mining activities, creating rapid wealth opportunities for early participants. The TVL in DeFi surged from $1.1 billion on June 1, 2020, to its peak of $184.75 billion on December 1, 2021, representing a growth rate of 250 times. However, following a series of market fluctuations and panic, the DeFi market experienced a downturn. As of October 24, 2023, the TVL in DeFi has dropped by 80% from its peak and currently stabilizes at around $40 billion.

Source: https://defillama.com/

As the cryptocurrency market cooled down, regulatory issues and problems with some centralized exchanges have caused continuous volatility in the market. In addition, with the US dollar entering a tightening cycle, the previously attractive Annual Percentage Rates (APR) are no longer what they used to be. In this context, the market has started seeking low-risk investment opportunities to weather the cryptocurrency winter. This period coincides with changes in the macroeconomic environment and the rise in US Treasury yields, making Real World Asset Tokenization an incredibly important value-capture channel in the current cryptocurrency market.

RWAT is currently the hottest topic in the Web3 and cryptocurrency markets, believed to be the engine driving the next bull round. According to DeFillama data, there are over 20 projects in the RWA track with a total TVL (Total Value Locked) exceeding $6 billion, ranking 6th in the DeFi market TVL leaderboard.

Source: https://defillama.com/categories

Overview of RWA

RWA, short for “Real World Assets,” refers to real physical assets that can be tokenized, converted into digital assets, and traded on the blockchain. Bringing real-world assets into the DeFi space requires tokenization, which means converting tangible assets with real value, such as gold and real estate, into digital tokens to represent their value on the blockchain and use them in DeFi protocols. In other words, RWA represents the value of real-world assets that have been tokenized and are used on the blockchain.

Unlike traditional asset securitization, which bridges the traditional capital market and real assets, RWA tokenization builds a bridge between real assets and crypto finance. Its purpose is to bring real-world assets into DeFi, leveraging the global advantages of DeFi to provide real assets with more liquidity. RWA covers a wide range of underlying asset types, including tangible assets such as gold and real estate, intangible assets such as government bonds or carbon credits, as well as cash (USD), precious metals (gold, silver, etc.), insurance, consumer goods, promissory notes, royalty fees, and more.

Currently, USDT, the stablecoin that ranks third in cryptocurrency market capitalization, can be seen as the most successful RWA token because it maps the US dollar onto the blockchain through tokenization.

Since the birth of blockchain technology, market participants have been exploring how to bring RWA onto the chain. Traditional financial institutions such as Goldman Sachs, Hamilton Lane, Siemens, and KKR are actively working to tokenize their real-world assets.

Citibank, in its research report “Money, Tokens, and Games” predicts that by 2030, up to $50 trillion in funds could be transferred to new forms of digital currency, such as CBDCs and stablecoins, with about half of it potentially based on blockchain distributed ledger technology. The tokenization of real-world assets (RWA) has the potential to become the driving force that propels the blockchain industry into the trillion-dollar range.

Why has RWA Gained Popularity?

Between 2017-2018, entrepreneurs in the cryptocurrency market were enthusiastic about mapping art, real estate, or securities onto the blockchain. At that time, the concept of DeFi had not yet been introduced to the cryptocurrency market, and the concept of Security Token Offering (STO) was also not mature. The industry was relatively empty, with more focus on equity assets such as company stocks or equity assets, and less involvement in bond assets.

Previously, the main sources of income for cryptocurrencies and DeFi were trading, leverage, and the issuance of new tokens. However, after the DeFi Summer, the issuance of various governance tokens resulted in a period of market prosperity. DeFi earnings became significant, with APR generally exceeding 20%. Meanwhile, the interest rates of US government bonds were close to zero, which caused a lack of interest in asset categories other than cryptocurrencies in the market.

DeFi asset yields decline while US Treasury yields skyrocket

As the crypto sector slips into a bear market and the U.S. embarks on a cycle of raising interest rates, a peculiar inversion in asset yields has emerged. For example, the APYs in Curve pools and in lending-focused platforms like Compound are now languishing below 1% (this refers to earnings without extra subsidies). By contrast, the yield on U.S. Treasury bonds has soared to 5.5%, significantly outperforming the returns from Ethereum’s LSD. In this bearish DeFi climate, both in terms of yield and stability, the sector is failing to meet the demands of some institutional players. This shift has prompted a considerable movement of capital away from DeFi, with a growing preference for parking funds in the more traditional realm of U.S. Treasury bonds.

Source: https://dune.com/lido/lido-morning-coffee-dashboard

BTC Spot ETF Expected to be Approved

If the spot ETF for Bitcoin is approved, it will bring long-term benefits to the RWA track. This will help major financial companies such as BlackRock drive the tokenization of real assets. After experiencing a bear market, the blockchain industry is in desperate need of new narratives to ignite market sentiment and explore the direction of the next crypto market. Currently, the approval of the BTC spot ETF seems imminent, so some opinions believe that RWA+ETF has the potential to trigger the next bull round of the crypto market, making RWA seen as the next important development narrative in the DeFi field.

Major players in various fields accelerate their deployment in the RWA track

Goldman Sachs has launched GS Dap to tokenize traditional assets, while Siemens has leveraged RWAs to issue bonds worth $60 million. Citibank, in its report “Money, Tokens, and Games” highlighted that RWAs could be the game-changer propelling the blockchain industry towards a multi-trillion dollar scale. This is because nearly any asset with a value can be tokenized. Optimistically, they forecast that by 2030, the RWA market could reach $4 trillion.

Data from rwa.xyz shows that as of October 24, there have been 1,771 credit agreements under RWA protocols, amounting to over $4 billion in total loans.

Source: https://app.rwa.xyz/

What RWA Projects are Currently Available?

MakerDAO

MakerDAO is a decentralized collateralized lending platform built on the Ethereum blockchain. It was established in 2014 and operates by locking cryptocurrencies like ETH in smart contracts to enable overcollateralized loans. Through this process, the stablecoin DAI is minted and pegged to the US dollar.

This year, MakerDAO has increased the DAI Savings Rate (DSR) multiple times, currently setting it at 8%. This rate is significantly higher than US bond yields. As a result of this high savings rate, MakerDAO has seen a substantial increase in its deposit size.

According to data from Dune, as of October 24th, 59% of MakerDAO’s total assets consist of Real-World Assets (RWA), and over 65% of the income is derived from RWA.

Source: https://dune.com/steakhouse/makerdao

Source: https://dune.com/steakhouse/makerdao

MakerDAO (MKR)’s on-chain US debt and its stablecoin DAI are common use cases for Real-World Assets (RWA).

Maple Finance

Maple Finance was founded in 2020 and officially launched in May 2021. Maple Finance is an institutional capital network that introduced a licensed KYC loan guarantee program in 2021, providing infrastructure for credit experts to engage in on-chain lending activities and connecting institutional borrowers with lenders. Unlike the standard DeFi collateral model that relies on the ability to reduce collateralized assets in case of insufficient payment, Maple Finance allows users to provide low-collateral loans to reputable companies based on their reputation.

As shown in the chart below, Maple Finance launched a cash management pool for US Treasury bonds in May, and the protocol’s revenue gradually increased.

Source: https://dune.com/maple-finance/maple-finance

Ondo Finance

Founded in 2021, Ondo Finance is a company focused on blockchain services. Its primary mission is to create and manage institutional-grade financial products, such as U.S. Treasury bonds and money market funds, and build DeFi protocols on these financial products. Ondo aims to develop protocols that are decentralized and composable, offering tailor-made services to meet the varied needs of organizations, DAOs (Decentralized Autonomous Organizations), and high-net-worth individuals. The platform’s vision is to bridge the gap between traditional finance and decentralized finance by introducing Real World Assets (RWAs) into the DeFi space.

Data from Dune Analytics shows that as of October 24, Ondo Finance held $176 million in short-term U.S. government bond funds.

Source: https://dune.com/steakhouse/ondo-finance

Conclusion

RWAs took on the crucial role of revitalizing market confidence when the DeFi market struggled. It’s a compelling narrative, bringing the value of various real-world assets into the DeFi ecosystem and breaking down barriers between traditional finance and the crypto world. Its rise also symbolizes innovation in the crypto space. However, it’s important not to overlook the multiple risks involved, such as regulatory challenges, the traditional financial system’s cumbersome settlement processes, and inherent security issues within DeFi. Overall, RWAs still represent a trend in the future of finance. With improved regulation, the changing market environment will likely attract more global financial giants into this emerging field.