RWA (Real-World Assets), which is seen as the next growth engine of DeFi, is heating up.
Recently, after the crypto lending protocol Maple Finance announced that it would launch a U.S. Treasury bond pool, its token $MPL rose by more than 20%. In the past three months, RWA concept tokens such as $CREDI, $SMT and $FACTR have all risen by more than 10 times.
In addition, last week Binance announced that it would become a node operator for the Layer 1 blockchain Polymesh, which also attracted the market's attention to RWA. Polymesh is not an ordinary Layer 1, but an institutional-grade blockchain tailored for regulated assets such as security tokens. After the announcement, Polymesh token POLYX rose by more than 10%.
A current trend that cannot be ignored is that in addition to Binance, large traditional financial institutions such as Goldman Sachs, Hamilton Lane, and Siemens, as well as leading DeFi protocols such as MakerDAO and Aave, are all competing on the RWA track.
According to the crypto data platform Rootdata, there are nearly 50 projects in the RWA sector, with many innovative projects in the fields of lending and real estate. Among them, investors in projects such as Goldfinch, Centrifuge, and Maple Finance include well-known institutions such as a16z, Coinbase Ventures, and Distributed Capital.
Why is RWA popular again?
RWA, the tokenization of real assets, is not a new concept. Since the birth of blockchain, discussions on the tokenization of real-world assets such as real estate, commodities, private equity and credit, bonds, and art have been common. Many conceptual projects have also appeared, but none of them have caused much splash.
In 2020, MakerDAO officially included RWA as a strategic focus and released guidelines and plans for the introduction of RWA. The concept gradually attracted more attention. In addition to issuing the stablecoin DAI, MakerDAO adopted a proposal to use RWA as collateral in the form of tokenized real estate, invoices, and accounts receivable to expand the issuance of DAI. It is reported that approximately 70% of MakerDAO’s revenue in December 2022 comes from RWA. Aave followed MakerDAO and announced the launch of the RWA market at the end of 2021, which also allows mortgage lending of real assets. However, despite the layout of the head agreement, RWA has been tepid.
Recently, Binance has entered the market, and the intensive layout of traditional financial institutions represented by Goldman Sachs, Hamilton Lane, Siemens, etc. and some on-chain U.S. debt agreements have brought RWA back into the spotlight.
Earlier this year, Goldman Sachs announced that its digital asset platform GS DAP was officially launched, and the platform has helped the European Investment Bank (EIB) issue a two-year digital bond of 100 million euros. Soon after, Hamilton Lane, a private equity firm with a management scale of over 100 billion, tokenized part of its 2.1 billion US dollar flagship equity fund on the Polygon network and sold it to investors; electrical engineering giant Siemens also issued a 60 million euro digital bond on the blockchain for the first time.
In addition to becoming a node operator for the Layer 1 blockchain Polymesh as mentioned above, Binance also released a 34-page in-depth research report on RWA in March this year.
In addition to the actions of large institutions, we also found that many projects supporting on-chain US debt, represented by Ondo Finance and TProtocol, have been active. Last week, Ondo Finance announced the launch of OMMF, a US dollar stablecoin based on money market funds (MMF), TProtocol launched a liquidity mining plan, and Maple Finance announced that it would launch a US Treasury bond pool.
Some crypto-friendly government agencies are also testing the waters with RWA, such as the Monetary Authority of Singapore (MAS), which announced a pilot project called Project Guardian that tokenizes bonds and deposits for various purposes. Among these DeFi protocols, JPMorgan Chase and DBS Bank are pilot partners.
Since RWA is not a new concept, why is RWA being valued again at this point in time? What are the driving factors?
Binance RWA research report mentioned that in the short term, the most direct reason is that DeFi's continued low yield cannot meet the growing income needs of crypto users. During the DeFi Summer period, the high yields of the bull market can meet the income needs of crypto investors. However, after experiencing major market fluctuations and a sustained bull market, DeFi's TVL has dropped by more than 70% from its high point in December 2021, and DeFi's yield has fallen to the bottom. DeFi protocols or crypto investors need a new channel for income growth.
From this perspective, it is not difficult to understand why on-chain U.S. debt is the hottest trend in the RWA track recently. As the Federal Reserve continues to raise interest rates, the yield on investing in U.S. bonds is much higher than that of DeFi protocols. The general yield of established DeFi protocols such as Curve, Aave and Compound has dropped from the highest of over 10% to 0.1~2%, while the yield of U.S. bonds has increased from 0.3 to 5%. The latter does not have as many protocol security risks as the former.
In addition, in the long run, the story of RWA opening up traditional finance and crypto-finance does bring a lot of room for imagination.
The real assets of traditional finance such as real estate and non-financial corporate debt markets are huge trillion-scale markets. If DeFi is compatible with them, it can provide users with greater liquidity, capital efficiency, and investment opportunities.
At the same time, traditional finance also has many pain points such as high entry barriers, many intermediaries, and many restrictions. For example, the investment capital of private equity funds is generally more than 500,000 US dollars, and real estate investment also requires considerable capital support. Ordinary investors can hardly enter the market. In addition, they also face the high fees of intermediaries, regulatory restrictions on entry, and the risk of assets in third-party systems. The design of DeFi can also solve some of the pain points of traditional finance and has the potential to attract more investors to enter DeFi.
RWA is expected to be a $16 trillion market by 2030, according to a recent report from the Boston Consulting Group.
What are the representative use cases of RWA?
The story of RWA aiming to bridge traditional finance and crypto-finance is not difficult to understand, but it is not easy to truly bridge the gap and inject a large number of large-scale new assets into Web3.
“We are still far from the final goal.” Jason Chen, a member research institute of ThreeDAO, believes that the development of the RWA track currently has two stages. The first is the earliest process of using blockchain to confirm and authenticate real assets such as real estate and collectibles. For example, many consortium chains were used to chain stamps at that time. The second is the emergence of stable coins and DeFi derivatives after the rise of DeFi, which combined legal currencies and other real assets. Assets are brought to the chain. We are currently exploring the second phase.
According to the classification of Binance Research Report, there are currently three main markets in the RWA market: the DeFi market based on equity, the DeFi market based on physical assets, and the DeFi market based on fixed income.
Among them, the DeFi market based on fixed income is currently the most important market for RWA, and this market mainly includes DeFi protocols that provide private credit and public bonds. Other real estate, art and other physical assets as well as projects based on private equity or stock tokenization are relatively rare or have limited activity.
private credit
In terms of private credit, one type is private credit agreements that require asset guarantees such as Centrifuge, Goldfinch, and Credix, and the other type is private credit agreements that do not require guarantees such as MAPLE, Clearpool, Truefi, and Ribbon Lend. Currently, the seven largest RWA private credit agreements have a historical loan amount of over 4 billion US dollars, active loans of nearly 500 million US dollars, and an average annual interest rate of over 12%.
Among them, Centrifuge was established as one of the first DeFi protocols to get involved in RWA. It is also the technology provider behind head protocols such as MakerDAO and Ave. Its investors include Fenbushi Capital, Coinbase Ventures and IOSG Ventures. In December 2022, Centrifuge also announced the establishment of a US$220 million fund in cooperation with DeFi Fintech, MakerDAO and BlockTower Credit.
Centrifuge aims to help central enterprises obtain financing with lower thresholds, while allowing investors to obtain income from real assets. Centrifuge basically simulates the corporate credit process in traditional finance, but uses DeFi+NFT to eliminate the participation of some intermediaries and the cumbersome processes off the chain.
The financing process on Centrifuge can be roughly summarized as follows: the borrower packages and uploads its real assets off the chain, generates a legally effective NFT for mortgage, and obtains interest-bearing ERC 20 tokens. Investors can use DAI to purchase these Interest-bearing ERC 20 tokens; the sponsor obtains financing and redeems it upon maturity, and investors receive income. The capital pool generated by interest-bearing ERC 20 tokens is also divided into two types: junior and senior. Investors in the junior capital pool have high returns but higher risks, while senior capital pools have relatively lower returns and risks.
Although Goldfinch, founded by former Coinbase employees, entered the market later than Centrifuge, it has received large amounts of financing from well-known institutions with its innovative model. Its cumulative financing has reached US$37 million, with a16z leading two consecutive rounds of investment, and Coinbase Ventures Well-known investment institutions such as , Alliance DAO, BlockTower Capital, and angel investors such as Balaji Srinivasan also participated in the investment.
Goldfinch primarily provides loans to debt funds and fintech companies, providing borrowers with USDC lines of credit and supporting their conversion into fiat currency to borrowers. Goldfinch's model is very similar to a traditional financial bank, but it has a decentralized pool of auditors, lenders and credit analysts. Goldfinch auditors auditing borrowers must own the pledged governance token GFI. The yield that Goldfinch can provide is very high. Due to the low mortgage threshold, Goldfinch borrowers can pay an interest rate of 10-12%, and it currently has no bad debts.
Compared to asset-backed private credit protocols, protocols such as Maple and TrueFi have provided high active lending in bull markets due to their unsecured credit models. The difference between Maple and Goldfinch, which uses users as the audit, is that Maple will appoint professional credit reviewers to strictly audit the borrower's credit. However, in the unsecured model, following the storms of Three Arrows Capital, FTX, etc., Maple incurred $52 million in bad debts, and was controversial because it required KYC for borrowing and was not centralized enough. Recently, Maple has also expanded its real asset-backed lending model to reduce risks.
public bonds
Compared to private credit protocols, on-chain bonds are also reaping dividends due to the Federal Reserve’s continued interest rate hikes. As mentioned earlier, in addition to traditional financial institutions that are deploying U.S. debt on the chain, there are also Flux Finance (developed by the Ondo Finance team) and TProtocol, Backed Finance, PV 01, Kuma Protocol, Arca Labs, Stream Protocol, Cytus Finance, BondBlox, etc. Pay less attention to protocols in this area.
Among them, Ondo Finance, founded by Nathan Allman, a former member of the Goldman Sachs digital asset team, and Pinku Surana, a former vice president of the Goldman Sachs technology team, has received US$34 million in investment from well-known institutions such as Pantera Capital, Coinbase Ventures, Tiger Global, and Wintermute.
Ondo Finance can provide investors with four types of bonds, U.S. money market funds (OMMF), U.S. Treasury bonds (OUSG), short-term bonds (OSTB), and high-yield bonds (OHYG). Users can trade fund tokens after participating in the KYC/AML process and use these fund tokens in licensed DeFi protocols. Among them, OUSG has the largest scale of use. OUSG holders who have passed KYC can deposit their tokens into Flux Finance, a decentralized lending protocol developed by Ondo Finance, to lend their tokens for USDC leverage; non-KYC USDC holders can apply to KYC leverage seekers offer loans for yields as low as 50 basis points.
Tioga Capital investor Tzedonn mentioned in the latest report that the existing market value of bond tokens is $168 million, and Ondo (OUSG) has a 61% market share, of which 28% is deposited in Flux Finance. At present, the total supply of Flux Finance has exceeded 40 million US dollars, and the market value of OUSG has exceeded 100 million US dollars.
Real estate and other real asset markets and equity markets
Compared to private credit and public bonds, projects based on physical assets such as real estate and art, as well as private equity or stock tokenization, are relatively few or active. On the one hand, these assets can only be provided by registered and reviewed exchanges and are subject to strict supervision. On the other hand, they usually require off-chain physical ownership of the underlying asset class, which is more complicated to operate. However, many protocols in this field are still exploring the introduction of more valuable real assets for Web3.
Among them, tokenization based on real estate has a growing development trend, and representative projects include Propy, ReaIT, Atlan, LABS Group, ELYSIA, Tangible, etc. The liquidity and transaction cost issues of real estate assets can be solved by tokenizing real estate. For example, properties that originally need to be bought and sold in units can be sold in pieces, allowing ordinary investors to participate in investment in the form of partial ownership.
In addition to real estate, tokenizing carbon credit certificates and trading them on the blockchain is also an emerging market with potential, with representative projects such as Toucan, Flowcarbon, and Regen Network emerging.
Is the RWA narrative too optimistic?
Behind the reheating of RWA, it is also facing a lot of doubts. Many crypto people point out that many current RWA projects are just DeFi derivatives wrapped in a new shell of the RWA concept, and the resistance to truly opening up traditional finance and crypto finance is too great.
First of all, regulation. Many crypto professionals have pointed out that tokenization requires global trading flows, while real assets are restricted by region. The core of RWA lies in the credit mechanism. The key to promoting global circulation lies in the establishment of internationally applicable laws, and the relevant laws should also have the ability to be enforced. However, at present, RWA still faces great resistance in compliance.
Twitter user 0x Chok, who has worked on chaining assets such as stamps, also agrees with the above point of view. He said that at the beginning, only alliance chains could be used to chain assets such as stamps. “On the surface, it is blockchain+, but in essence it is still centralized endorsement. , cannot be used globally, and it will be difficult to truly achieve liquidity.”
At the same time, the reality is that some asset protection mechanisms also face challenges. Currently, many private loans such as MAPLE and TrueFi have experienced bad debts, but since the collateral is not liquid ERC-20 tokens, liquidating these assets to recover the lender's capital will be much more troublesome than loans using cryptographic collateral.
In addition, there is also a view that RWA’s attractiveness to crypto users may decline after DeFi picks up. Once the macro economy and DeFi pick up, RWA’s attractiveness to crypto users may be far from enough, and it will be difficult to escape the fate of being a flash in the pan.
Despite the challenges, infrastructure such as blockchain is emerging specifically for RWA. Due to regulatory restrictions and other restrictions, permissionless public chains such as Ethereum may be difficult to meet the needs of RWA asset transactions, so vertical application chains specially established for RWA emerged as the times require. For example, there is Polymesh, an institutional-level blockchain tailored for regulated assets such as security tokens, and Binance has recently announced that it will become one of its nodes. In addition, RWA vertical application chains such as MANTRA Chain, Realio Network, Provenance, and Intain are also worthy of attention.
At present, the RWA track is still in its early stages and still needs to wait for the gradual improvement of supervision and infrastructure. However, the RWA narrative still has huge growth potential. While being linked to real assets, it may also be able to introduce more traditional users into the world of DeFi and Web3, truly reshaping the landscape of the encryption market.
Author: flowie
