Golden Finance reporter Jessy
This year, both the traditional capital world and native crypto companies have begun to pay attention to and enter the RWA sector. RWA is a bridge built between Defi and Tradfi (traditional finance), allowing real-world assets to be combined with Defi.
Putting real assets on the blockchain and tokenizing them is not new. Initially, people put real estate, collectibles and other real assets on the blockchain for ownership verification. Nowadays, with the development of Defi, real-world assets have more diverse ways to play by putting them on the blockchain and adding a series of on-chain financial operations.
Goldman Sachs announced the official launch of the digital asset platform GS DAP, which has helped the European Investment Bank issue a two-year digital bond of 100 million euros. Hamilton Lane, a private equity firm with a management scale of more than 100 billion, tokenized part of its 2.1 billion US dollar flagship equity fund on Polygon and sold it to investors; the electrical engineering modular blockchain issued a 60 million euro digital bond for the first time. Secondly, some government agencies have also begun to test the waters of RWA, including the Monetary Authority of Singapore (MAS) will cooperate with JPMorgan Chase and DBS Bank.
How can DeFi be developed after real assets are put on the blockchain? What problems need to be overcome? In particular, how to deal with various legal issues related to real-world assets?
The historical development and significance of RWA
The originator of RWA, the most influential crypto project today, should be the stablecoin backed by physical assets. This puts physical assets such as the US dollar and US Treasury bonds on the chain, becoming the cornerstone of Defi and an important channel for linking online and offline assets in the crypto world today. RWA, like stablecoins, is playing the role of a bridge.
Why is RWA important? First of all, for physical assets, the biggest advantage of Defi is that it allows users who are rejected by traditional finance to participate in financial activities, and it reduces many third-party intermediate links such as user qualification assessment required by traditional finance. The entire process of financial mortgage lending can be completed only by smart contracts. Putting physical assets on the chain and tokenizing them can actually broaden the scope of physical asset investment.
As for Defi, the biggest improvement of Defi with the addition of real-world assets, Golden Finance reporter believes, is that after Defi products have physical support, some bubbles can be squeezed out, price fluctuations can be slowed down, and relatively stable returns can be provided to users.
At present, Golden Finance reporters believe that the combination of physical assets and Defi can be divided into physical assets such as real estate, artworks, commodities, etc. on the chain, and securities assets such as stocks, government bonds, and funds on the chain according to the categories of physical assets. The other RWA introduces credit lending in traditional finance into Defi to solve the current over-collateralization problem in Defi.
The following are some of the most influential RWA products
Maker Dao
Maker Dao is currently the second largest Defi lending protocol by TVL. On June 1, the MakerDAO community voted 99.99% in favor to establish the RWA treasury BlockTower Andromeda, which will be managed by asset management company BlockTower Capital and invest up to $1.28 billion in short-term U.S. Treasury bonds, with funds coming from Maker's over-collateralized stablecoin DAI. Maker Dao's access to Treasury bonds is actually to use physical assets to reduce the risk of the protocol and improve the stability of the protocol.
In 2020, MakerDAO officially incorporated RWA into its strategic development direction. Subsequently, MakerDAO issued the world's first real-world asset loan based on DeFi. It also jointly launched a $220 million fund with BlockTower Credit to provide funding for real-world assets.
Opening Maker's balance sheet, we will find that their RWA part is mostly risk-free interest rate or highly liquid US Treasury bonds and investment-grade structured credit. We can understand that MakerDAO's purchase of US bonds is that it, as the "central bank" of DAI, has replaced the assets allocated on the asset side of its balance sheet.
Maker can mint DAI out of thin air at no cost and lend it to the government by purchasing treasury bonds, thereby earning the spread. For DAI holders, they can hold DAI without any regulatory risk, creating a win-win situation.
In general, DAI can use external credit capabilities to diversify the assets behind it, and the long-term additional income brought by U.S. Treasury bonds can help DAI stabilize its own exchange rate and increase the flexibility of issuance. In addition, incorporating U.S. Treasury bonds into the balance sheet can reduce DAI's dependence on USDC and reduce single-point risks. Overall, it is beneficial to the development of its protocol.
RealT
RealT mainly tokenizes real estate in the United States. The properties that were originally sold as a unit are fragmented, and each fragment represents a part of the ownership of the property.
In actual operation, users need to purchase the tokens RealToken issued by the project to represent real estate assets, and then they will receive documents proving that they own the assets. RealT uses IPFS technology to permanently store these documents proving the effectiveness of RealToken assets.
The houses tokenized by RealT are mainly distributed in the United States, but the users are not limited to the United States. In other words, it provides global users with an opportunity to invest in American real estate.
How do users make money with Realtokens? First, the shares of Realtokens can be used as the basis for allocating the rent of the corresponding houses (these houses are rented out under a company), and can vote on the decisions of the house (such as buying, selling, loans, etc.), and the landlords who hold Realtokens can also benefit from the income generated by these decisions. Secondly, they have also reached a cooperation with the lending protocol Aave, which can mortgage Realtoken loans in Aave.
According to the dashboard created by Dune user @ k06a , the total sales of realtoken is $80,998,303, the current number of houses is 353, and the number of landlords (realtoken holders) is 14,923. According to DefiLlama data, its current total TVL is $90.27 million.
In fact, in the traditional financial field, there are also operations of securitizing real estate. For example, in 2021, the Shenzhen Municipal Housing and Urban-Rural Development Bureau announced that a certain company had engaged in illegal real estate speculation through joint venture investments, shareholding purchases, and other means.
Therefore, realt's housing securitization method also exists in the real financial world, but in reality, the supervision of financial products is more stringent. For example, in China, this form is not allowed. However, according to the current interpretation of the US Securities and Exchange Commission, RealTokens representing the equity securities of members of limited liability companies are regarded as securities that comply with US securities laws. Yes, there is an entity behind realt, which is a Delaware limited liability company.
Ondo Finance
This is an on-chain treasury bond project. Ondo Finance is a large, highly liquid ETF managed by asset management giants such as BlackRock and Pacific Investment Management Company (PIMCO). It has launched three tokenized U.S. Treasury and bond products, namely the U.S. Government Bond Fund (OUSG), the Short-Term Investment Grade Bond Fund (OSTB), and the High Yield Corporate Bond Fund (OHYG). According to Defillama data, Ondo Finance's current TVL is $130.33 million.
That is, the compliance of the project still relies on the real company products, and they choose to cooperate with real compliant investment management companies. Moreover, when purchasing Ondo Finance's on-chain treasury bond products, it will screen users for KYC and AML. In other words, Ondo Finance is taking the path of compliance, and the company's organizational structure follows the traditional fund company model.
Simply put, its product model is to build a bridge between virtual assets and the purchase of government bonds. Users provide USDC to Ondo, and Ondo will convert these USDC into US dollars and store them in its bank account. Then Ondo will use these US dollars to purchase assets (government bonds, ETFs, funds, etc.). These asset certificates will then be minted and deposited into the user's wallet. When the underlying assets earn in reality, the corresponding tokens will appreciate, and these real-world earnings will be invested in the real world to purchase more assets, realizing compound interest for users.
Later, Ondo also launched Flux Finance, in which OUSG can be used for collateralized lending. According to Deflama data, the current TVL in its protocol is $42.97 million.
Centrifuge
This is a product that NFTs real-world assets and then mortgages them on the chain. The biggest difference from other RWA products is that the mortgagees of assets are mainly small and medium-sized enterprises, and it solves the problem of financing difficulties for small and medium-sized enterprises.
According to the dashboard data in Dune, its current total loan amount is US$390 million, and according to Deflama data, the current TVL is US$870,000.
Specifically, users (especially corporate users) only need to use the Tinlake pool to cast real-world assets into NFTs through invoices, mortgages, etc., and use these NFTs as collateral in their Tinlake pools to raise funds and obtain liquidity in the ecosystem. After its real assets are put on the chain, the operating logic is similar to that of NFTfi. The difference may be that the value of the real assets provided by small and medium-sized enterprises is assessed by a third-party assessment agency, using the compliance assessment method in real-world finance. And third-party certification agencies can also verify the validity of the real assets represented by NFTs at any time.
Centrifuge is a matchmaker that connects two types of users, one is small and medium-sized enterprises, and the other is high-end investors. One is aimed at the difficulty of small and medium-sized enterprises in financing in the real world, and the other is the demand of high-end investors for low-risk and stable returns.
However, the project also has limitations and risks. It is not attractive to small retail investors and has a low annualized rate of return. And if the company involved in the mortgage goes bankrupt, what should be done when the mortgaged assets face liquidation in the real world?
GoldFinch
In terms of addressing demand, GoldFinch is similar to Centrifuge in that it provides under-collateralized loans to companies in emerging markets such as Africa, Southeast Asia, and Latin America. Its biggest feature is that it enables under-collateralized lending.
According to Deflama data, its total TVL is currently $1.57 million. According to RWX.xyz data, its current total lending amount is $110 million. According to the project party, Goldfinch's outstanding loan amount has grown from $250,000 a year ago to more than $38 million at present, serving more than 200,000 borrowers in 18 countries. Goldfinch capital is widely used for various purposes, including motorcycle rentals in Kenya and small businesses in Brazil.
However, they are different in terms of collateral and operation methods. GoldFinch first grants a credit line to a lending institution, through which the lending institution can borrow stablecoins from the protocol's capital pool. After obtaining the stablecoins, the lending institution converts the stablecoins into legal tender and lends the legal tender to its users through traditional channels.
In other words, the project passed through a large intermediary institution that existed in reality, and then lent their "money" to small users. Therefore, one of the key points of the agreement is actually how to evaluate whether the lender is qualified to borrow money without collateral.
In this protocol, it introduces a decentralized auditor. Auditors in the protocol have to stake the governance token GFI to have the opportunity to verify borrowers in exchange for rewards. Auditors only evaluate whether borrowers are who they claim to be, not their credibility.
The borrower then proposes loan terms to the backers. These terms may include details such as the amount sought, the loan term, the interest rate, the background of the borrower, and how the funds will be used. Backers assess the borrower's creditworthiness and, if they agree to the terms, may choose to provide junior funding. The junior tranche is a high-risk pool that is written off first in the event of a default. For this reason, it is also known as "first loss capital." The senior pool, which collects funds from liquidity providers, then allocates funds to the senior tranche. The senior pool can lend up to several times the amount of the junior tranche. The senior tranche is a low-risk pool. It receives payments first and is only written off if the junior tranche cannot fully cover the default. To compensate the junior tranche backers for the additional risk and work of evaluating the borrower, they receive 20% of the proceeds earned by the senior pool. Once the senior pool completes the allocation, the loan process is complete and the borrower can use the funds. Goldfinch functions more like a bank in traditional finance that provides loans, but with a decentralized pool of auditors, lenders, and credit analysts.
Although the protocol has reviewed the identity of lending institutions through layered designs and adopted an incentive structure to minimize the risk of fraud, it is undeniable that because there is no collateral, even in the absence of fraud, unforeseen circumstances may cause borrowers to be unable to repay.
Maple Finance
An undercollateralized corporate lending protocol that allows large centralized institutions to borrow undercollateralized loans from cryptocurrency lenders. Similar to GoldFinch, verified reputable institutions can borrow funds from a pool of funds where people use their reputation to collateralize loans - just like in traditional finance. According to RWA.xyz data, its total lending amount is currently $1.79 billion. It is the protocol with the largest amount of lending funds in the RWX track. According to Deflama data, the current TVL is $31.67 million. It is currently the protocol ranked first in TVL for unsecured lending.
The surprising thing about the project is that its write-off rate for underfunded loans is lower than most CeFi lenders. This is because Maple’s due diligence is more cautious without excess collateral, and the collateral held by CeFi is illiquid during the market crash.
The operating principle of Maple is roughly as follows: In this lending agreement, there are four main stakeholders, one is the pool representative, one is the borrower, one is the lender, and one is the pledger. The pool representative is an industry expert whitelisted by Maple governance who can initiate a lending pool. The representative's task is to negotiate loan terms with the borrower, perform due diligence, and liquidate collateral in the event of a default. Borrowers are companies that borrow money through Maple and repay the principal plus interest. Here, the lenders that Maple wants to attract more are hedge funds, proprietary traders, market makers, exchanges, centralized lenders, crypto miners, and startups. Lenders are crypto investors who provide USDC liquidity to Mapple borrowers through lending pools. They earn governance tokens. Pledgers are users who provide USDC and MPL liquidity to Maple's pledge pool (an insurance-centric Balancer liquidity pool) and then pledge their subsequent BPT tokens.
It can be seen that Maple creates certain strategies through agents, raises funds from liquidity providers in a decentralized manner, and then lends them to institutional investors at a lower collateral rate, relying on the professional skills of agents. Unlike DeFi protocols that only rely on smart contracts, Maple also needs to sign a legal agreement with the borrower, which basically represents the commonality of non-full collateral.
TrueFi
Similar to Maple, TrueFi is also targeting the institutional market. It also requires credit approval. It is the second largest lending protocol in the RWX unsecured lending track, with a total lending amount of US$1.73 billion. The TVL is US$1.58 million.
The division of labor among the roles in TrueFi is clear. Lenders deposit assets such as stablecoins into the lending pool to earn returns; borrowers initiate loan applications and withdraw loans after credit approval; and stakers of TRU, the governance token issued by TrueFi, vote to decide whether to lend funds to the corresponding loan applicants.
TrueFi V3 has also developed a credit scoring model that can give an objective score to lending institutions, with a full score of 255 and a basic score of 0. The score refers to indicators such as company background, repayment history, operation and transaction history, and assets under management. All TRU token pledgers can participate in deciding whether to approve a loan, and no other roles are required to formulate strategies. The vote must be passed with a support rate of more than 80%, and the number of TRU tokens participating in the vote must be no less than 15 million.
TrueFi also has a legal framework that allows borrowers to face legal action if they fail to repay their loans despite the impact on their reputation.
Clearpool
It is also an unsecured loan. The total amount of loans on the Ethereum chain is currently $170 million, and the total amount of loans on Polygon is $80 million. The TVL is $5.97 million.
Its service targets institutions as well. Clearpool has two products, Prime and Permissionless. Clearpool Prime is only available to whitelisted institutions, and no collateral is required for Prime lending. Borrowers create a pool of funds with specific terms in the core smart contract. After the pool is created, borrowers can invite any other whitelisted institution to provide funds for the pool. Loan assets are automatically transferred directly to the borrower's wallet address without the need for Clearpool to keep custody. Clearpool Permissionless requires borrowers to be whitelisted institutions, but has no requirements for lenders.
Compared to TrueFi and Maple, its biggest difference and advantage is the introduction of the concept of a single borrower liquidity pool, which means that liquidity providers can decide exactly what type of borrowers they want to lend to and understand whether they can take more or less risk and get the corresponding return.
Summarize:
In general, as industry insiders, we value the transformative impact of RWA on DeFi. According to a research report by Binance Research, RWA can provide DeFi with sustainable, reliable returns supported by traditional asset classes. It can make DeFi more compatible with external markets, thereby bringing greater liquidity, capital efficiency and investment opportunities. RWA enables DeFi to bridge the gap between decentralized financial systems and traditional financial systems.
Golden Finance reporter summarized the above several leading RWA projects and found that their operating logic is basically similar, that is, acting as an intermediary, expanding more financial scenarios for traditional assets, and solving the borrowing needs of some people who are excluded from traditional finance. The similar form of unsecured lending is to learn the credit mortgage model in traditional finance, solve the problem of Defi over-collateralization, and is a lending method with higher capital utilization. Defi can break the circle and is no longer just a financial game in the small encryption circle. It is indeed the next development direction of Defi. The pursuit of greater influence in the industry is also destined to be connected with the real world.
However, the process of connecting with real-world finance is destined to cooperate with centralized institutions, and it is ultimately impossible to bypass local regulatory laws and regulations. These are the risks of the project.
