RWA tokenization can be a new hope for the cryptocurrency industry
Author: Shih Chun Chen, CFA, Founder of InVar Finance Marlboro Zhang, Researcher from 3WW3
Since the beginning of the bear market, the term real-world assets (RWAs) has become increasingly common. RWAs range from tokenization of physical assets to traditional financial instruments (TradFi) and even ESG-related assets. When intertwined with blockchain technology, traditional real-world assets can improve efficiency, increase transparency, optimize liquidity management and many other benefits, ultimately achieving inclusive society. By incorporating RWAs into the cryptocurrency space, the development of centralized finance will be more diversified.
By combining tokenization with the cryptocurrency ecosystem, RWA leverages the advantages of blockchain to iterate traditional financial instruments (TradFi) to achieve innovation, including credit loans, income-based financing, corporate lending, mortgages and other assets. Compared to the market crash of DeFi or NFT in 2022, the market demand for RWA tokenized products has become stronger.
Although tokenization is not a new concept, the development path of RWA tokenization has been steadily growing, providing a channel for people to use cryptocurrencies in familiar scenarios. One of the most successful RWA tokenization cases is stablecoins, which currently have a market size of $127 billion. The innovation of stablecoins brings stability, which is beneficial to combat the volatility of cryptocurrencies, and also maintains the efficiency of managing capital, but manages capital in the new form of digital dollars.
In addition to stablecoins, the tokenization of real estate and traditional financial instruments (TradFi) is also a huge market. This huge market has attracted many participants, such as start-ups, governments, and financial institutions, who are exploring the tokenization market of real estate and traditional financial instruments (TradFi). Tokenization can give real estate or traditional financial instruments (TradFi) greater flexibility in transaction size, transaction time limit, and transaction process. In addition, the native characteristics of blockchain such as programmability, immutability, and composability will give RWA tokenization a new paradigm.
By reviewing the history of RWA tokenization, we can find that when ICO became chaotic, it was the time for security token issuance (STO) to enter the market; and when DeFi and Layer1 became more accessible to the public, token-as-medium could provide partial ownership and returns to more investors. In addition, when DeFi is trapped in a niche market due to weak scalability and high entry costs, we can obtain traditional financial returns from tokenized short-term Treasury bills or RWA mortgages. Therefore, RWA is still in its early stages of development, but its value to cryptocurrency has long been apparent.
Explore cutting-edge RWA applications
RWA tokenization is not limited to bringing hard assets and traditional financial businesses onto the chain, there is more to explore. For example, MakerDAO is increasing the application of RWA, which not only diversifies cash flow, but also helps financial institutions take advantage of the high capital efficiency on the chain to release liquidity. This is a breakthrough milestone in promoting new scenarios for RWA tokenization.
Another representative example is the derivative DEX ProsperEx, which is also a use case in the early development of the RWA field. The DEX itself retains the inherent form of the derivative DEX, that is, it includes major derivative trading modes such as on-chain perpetual contracts and on-chain options. At the same time, it introduces RWA assets such as stocks and bonds as trading targets, and can be further used for derivative transactions.
ProsperEx will provide unique opportunities and market efficiency for derivatives traders. It is completely built on the chain, based on the two mainstream trading methods of peer-to-pool and peer-to-peer (order book), and the adoption of zero-knowledge proof technology. It can provide services to all traders in a non-permissioned and private manner, which is its advantage. At the same time, it also has the characteristics of expanding more trading functions. For example, in addition to trading FT assets, it will also support the trading of a wider range of asset types such as NFT. ProsperEx is expected to provide an early reference for the development of DEX in the RWA field.
RWA tokenization creates a way for DeFi and traditional finance to communicate and interact to meet different use cases. The market capitalization of RWA is much larger than the cryptocurrency market. This is because the tokenization of RWA is a powerful catalyst to redirect liquidity to cryptocurrency and can counter the weaknesses of the decentralized economy. Using RWA as collateral is a popular concept of tokenization. Asset originators can use tokenized RWA to borrow capital in DeFi. Not only that, users can also transfer ownership or related rights of the underlying assets through tokenization. In this application, on-chain value and the potential for releasing liquidity are the full manifestation of the potential of RWA tokenization.
As we have seen in the cryptocurrency market, RWA has unlimited potential and can become an essential tool to unlock value and enhance the sustainability of the ecosystem. InVar Finance has taken the first step to develop a trust-minimized tokenization model, exploring solutions to maximize the flexibility of tokenized RWA and bridge Web2. By building a tokenization model based on ERC-3525, the InVar Finance trust-minimized tokenization model breaks through the limitations of ERC-721 and 1155 solutions, while also adding additional investment flexibility to users.
ERC-1155 v.s. ERC-3525
Imagine that everyone in the world can invest $100 in real estate, have the discretion to manage RWA NFTs and be able to trade freely on DEXs like ProsperEx without worrying about security issues. And this is the huge advantage of RWA NFTs compared to traditional investments. Large data capacity and high visualization make NFT the best medium for identity on the RWA chain. Therefore, DeFi and NFT infrastructure are extremely important for the expansion of new applications of RWA NFT.
D3X, a new decentralized NFT exchange, aims to provide ultimate liquidity for NFTs through a full set of trading infrastructure. Improving liquidity is an essential task for NFTs anyway. Therefore, by supporting NFT projects to enter the customized liquidity pool of the integrated platform, including NFT AMM, incentive allocation, NFT release, etc., D3X provides RWA NFT with a channel for instant trading of RWA, and also enables new users to obtain relevant rights and interests while maintaining RWA risk exposure, including token rewards provided by D3X.
RWA: Overcoming challenges and moving forward
Although RWA tokenization has unlimited potential, it still needs to overcome a series of difficulties at this stage.
A major issue with RWA tokenization is the execution and coordination of on-chain and off-chain processes. Unlike DeFi lending protocols, where liquidation is fully automated and managed by code, liquidation of RWA collateral must (at least partially) be handled off-chain, typically through the legal system. This in turn creates complexity for debtors and can bring legal disputes to protocols where RWA is collateral.
In addition, the valuation and liquidity of RWA tokens may be affected by market dynamics and investor sentiment, which are not always directly related to the intrinsic value or performance of assets. This will bring volatility and uncertainty that is different from, or even greater than, traditional assets.
In addition, the legal and regulatory framework governing RWA tokenization may not be able to seamlessly integrate with the digital realm. The market will also need to address issues related to jurisdiction, property rights, and enforceability to protect tokenized assets and ensure the legitimacy of tokenized assets.
Marlboro, a researcher at 3WW3 (Web3 Research Institute of Asia, Africa and Latin America), believes that the world is currently in a stage of lack of investment targets. As the confrontation between China and the United States intensifies, many ordinary investors hope to invest in emerging market countries. However, due to high entry barriers, lack of effective channels and foreign exchange controls, this vision is often difficult to achieve.
Currently, the stock and real estate markets in emerging countries such as Vietnam, Indonesia, and India are increasingly favored by investors. This is because the faster economic growth and huge market potential in these regions provide rich returns for many multinational capital investors. However, due to the lack of direct investment channels, ordinary investors cannot directly benefit.
Blockchain can tokenize RWA and bring it to the global investment market, thereby enriching the investment targets of the cryptocurrency world and allowing more non-crypto native users to participate in the cryptocurrency trading market, thereby bringing more new users and funds to Web3 and slowing down the overall bull-bear volatility brought about by Bitcoin's four-year cycle.
In short, the scope of RWA has been expanded unprecedentedly. RWA tokenization is inherently superior to traditional financial instruments because it can improve liquidity, cost-effectiveness, transparency and many other aspects. Although the development path of RWA tokenization is bumpy and complicated, there are still many practitioners who work tirelessly to achieve the goal of RWA tokenization for the benefit of society.
Backed by values other than cryptocurrencies, RWA allows for the introduction of new types of collateral in DeFi. Users can easily obtain on-chain investments in traditional financial instruments such as real estate or short-term treasury bills through cryptocurrencies, and obtain returns generated outside the blockchain, or mixed returns. However, the differences between cryptocurrencies and real currencies bring certain challenges. If these challenges can be overcome, the prosperity of RWA will eventually come.
Overall, RWA tokenization can be a new hope for the cryptocurrency industry due to its native diversity and solid value foundation. In addition to technology, by educating the market with real and reliable evidence that can prove the significance of RWA tokenization, regulation, technology, tools and consumer behavior also need to be synchronized and keep up with the pace of RWA tokenization.
