Interpreting Binance RWA Research Report
The RWA sector is a bit "making a fortune silently" in this atypical bull market.
When everyone's emotions are easily driven by Meme, if you take a closer look at the data, you will find that the income performance of the tokens in the RWA track so far this year is probably better than the tokens in most other tracks.
When U.S. debt becomes the largest RWA, the trend of the track being affected by macroeconomics will become more obvious.
Recently, Binance Research released a report titled “RWA: A Safe Haven for On-Chain Yields? 》A long report, which conducts a detailed analysis of the RWA track's structure, projects and revenue performance.
DeepChao TechFlow has interpreted and refined the report. The key contents are as follows.
Key takeaways
Total on-chain RWA reaches $12 billion, not including the $175 billion stablecoin market.
Major categories in the RWA space include tokenized U.S. Treasuries, private credit, commodities, stocks, real real estate and other non-U.S. bonds. Emerging categories include air rights, carbon credits and fine art.
Institutional and traditional finance (“TradFi”) are increasingly participating in RWA, with BlackRock’s BUIDL tokenized Treasury product being the leader in the category (market cap >$500 million); Franklin Templeton’s FBOXX being second Large tokenized treasury bond product.
6 projects focused on in the report: Ondo (structured financing), Open Eden (tokenized treasury bonds), Pagge (tokenization, structured credit, aggregation), Parcl (synthetic real estate), Toucan (tokenization carbon credits) and Jiritsu (zero-knowledge tokenization).
Technical risks that cannot be ignored: centralization, third-party dependence (especially for asset custody), the robustness of the oracle, and the complexity of the system design are not worth the benefits.
From a macroeconomic perspective, we are about to begin a historic interest rate cutting cycle in the United States, which will likely have an impact on many RWA protocols, especially those focused on tokenizing U.S. Treasuries.
Data Fundamentals of RWA
Aggregated RWA definition: Tokenized on-chain versions of tangible and intangible non-blockchain assets, such as currencies, real estate, bonds, commodities, etc. Broader asset classes, including stablecoins, government debt (mainly dominated by U.S. government bonds, i.e. Treasuries), stocks and commodities.
The total amount of RWA on the chain reached an all-time high, reaching more than 12 billion U.S. dollars (excluding the stablecoin market of more than 175 billion U.S. dollars)
Key Category 1: Tokenized Treasury Bonds
2024 has experienced explosive growth, from $769 million at the beginning of the year to $2.2 billion in September.
Growth may be affected by U.S. interest rates at 23-year highs, with the federal funds target rate having held steady at 5.25-5.5% since July 2023. This makes U.S. government-backed Treasury yields an investment vehicle for many investors.
Government endorsement - U.S. Treasuries are widely considered to be one of the safest yield assets on the market and are often referred to as "risk-free."
The Fed will kick off its rate cut cycle later this month at the September FOMC meeting, so it will be important to watch how RWA yields evolve when they start to fall.
Key Category 2: On-Chain Private Credit
Definition: Debt financing provided by non-bank financial institutions, typically small and medium-sized companies.
The IMF estimates that this market will exceed US$2.1 trillion in 2023, while the on-chain market will account for only about 0.4%, or approximately US$9 billion.
On-chain private credit is growing extremely fast, with active loans growing by approximately 56% in the past year.
Much of the growth comes from Figure, a program that offers lines of credit backed by home equity.
Other major players in the on-chain private credit market include Mongolge, Maple and Goldfinch.
Despite the recent growth, total active loans are still down about 57% from a year ago. This coincides with the Federal Reserve's aggressive interest rate hikes, with many borrowers affected by increased interest payments (particularly on private credit loans with floating rate agreements), resulting in a corresponding decrease in active lending.
Key Category 3: Commodities (Gold)
The two leading coins, Paxos Gold ($PAXG) and Tether Gold ($XAUT), hold about 98% market share of the roughly $970 million market.
But gold ETFs are extremely successful, with a market value of over $110 billion. Investors remain reluctant to move their gold holdings further on-chain.
Key Category 4: Bonds and Stocks
The market is relatively small, with a market capitalization of about $80 million.
Popular tokenized stocks include Coinbase, NVIDIA, and the S&P 500 tracker (all issued by Backed).
Key Category 5: Property, clean air rights, etc.
While it hasn’t reached mass adoption yet, the category is still here to stay.
Alongside this comes the Renewable Finance ReFi concept, which attempts to combine financial incentives with eco-friendly and sustainable outcomes, such as the tokenization of carbon emissions.
Key components of RWA
Smart contract:
- Leverage token standards such as ERC 20, ERC 721 or ERC 1155 to create digital representations of off-chain assets.
- The key feature is the automatic revenue accumulation mechanism that distributes off-chain earnings on-chain. This is achieved through rebase tokens (such as stETH) or non-rebase tokens (such as wstETH).
Oracle:
- Key trend: RWA-specific oracles. Legal compliance, accurate valuations, and regulatory oversight are all issues that generalized oracles may not fully solve.
- For example, in private credit a lender might issue RWA mortgages on-chain. Without high-quality oracles to communicate how funds are being used, borrowers may not comply with their loan agreements, take risks, and may even default.
Original report, compiled and compiled by Shenchao TechFlow
Projects currently working on dedicated oracles: Chronicle Protocol, Chainlink, DIA and Tellor
Identity/Compliance
- Emerging technologies for identity verification such as soul-bound tokens (“SBT”), while zero-knowledge SBT (“zkSBT”) offers a promising way to verify identity while protecting sensitive user information.
Asset custody
- Managed by a combination of on-chain and off-chain solutions:
- On-chain: Secure multi-signature wallet or multi-party computation (“MPC”) wallet is used to manage digital assets. Off-chain: Traditional custodians who hold physical assets are integrated by law to ensure proper ownership and transfer mechanisms.
The entry of traditional financial institutions
BlackRock (asset management scale of US$10.5 trillion)
The USD Institutional Digital Liquidity Fund (“BUIDL”) is the market leader with over $510 million.
It was only launched in late March and quickly became the largest product in its field.
Securitize is BlackRock’s key partner in BUIDL and serves as transfer agent, tokenization platform and placement agent.
Meanwhile, BlackRock is the largest issuer of spot Bitcoin and spot Ethereum ETFs.
Franklin Templeton ($1.5 trillion in assets under management)
Their on-chain U.S. Government Currency Fund (“FOBXX”) is currently the second-largest tokenized Treasury product, with a market value of over $440 million.
BlackRock’s BUIDL runs on Ethereum, but FOBXX is active on Stellar, Polygon and Arbitrum
Blockchain integrated investment platform Benji adds more features to FOBXX. Allows users to browse tokenized securities while also investing in FOBXX.
WisdomTree Investments (asset management scale: US$110 billion)
Originally a global ETF giant and asset management company, it went a step further and launched multiple "digital funds." The total AUM of all these RWA products is over $23 million.
Project analysis
The key projects analyzed in the report are Ondo (structured financing), Open Eden (tokenized treasury bonds), Pagge (tokenization, structured credit, aggregation), Parcl (synthetic real estate), Toucan (tokenized carbon credit) ) and Jiritsu (zero-knowledge tokenization).
The business model and technical implementation of each project are described in detail in the report, and due to space limitations, they will not be elaborated here.
The comprehensive comparison and characteristics of each project are as follows:
Original report, compiled and compiled by Shenchao TechFlow
Overall results and outlook
RWA can bring benefits, but whether the technical risks VS benefits are worth it is a matter of opinion. Technical risks are as follows:
Centralization: A higher degree of centralization in smart contracts or overall architecture, which is inevitable given regulatory requirements
Three-party dependence: heavy reliance on off-chain intermediaries, especially asset custody
Some new technology trends:
Emergence of RWA-specific Oracle protocols. Established players like Chainlink are also increasingly focusing on tokenized assets.
Zero-knowledge technology is emerging as a potential solution for balancing regulatory compliance with user privacy and autonomy.
RWA needs its own chain?
Benefits: Easier to launch new protocols on these chains without having to set up their own KYC framework and jump through regulatory hurdles, thus facilitating the growth of more RWA protocols; traditional institutions or Web2 companies looking to adopt certain blockchain features can secure their All users are KYC/meet necessary regulatory requirements.
Disadvantages: Facing the "cold start" problem; it is difficult to use liquidity to guide new chains and ensure sufficient economic security; higher entry barriers, users may need to set up new wallets, learn new workflows, and become familiar with new products
Outlook for upcoming interest rate cuts
The market expects that the Federal Reserve will start its interest rate cut cycle at its next meeting on September 18. What does this mean for the RWA project that thrives in a high interest rate environment?
While yields on some RWA products may decline, they will continue to offer unique benefits such as diversification, transparency and accessibility, which may continue to position them as attractive options in a low interest rate environment.
Legal environment concerns
Many protocols still maintain significant centralization, and various technologies, including ZK, have significant room for improvement.
Decentralize authority while still maintaining regulatory compliance; this may also require some changes to traditional compliance systems to recognize new forms of verification.
Most RWA protocols still have some way to go before financial products are truly reserved for professional investors but also have permissionless access.
This article is reproduced in cooperation with: Shenchao
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