By Filippo Pozzi
Compiled by: Vernacular Blockchain
what are they?
How do they work?
What impact might they have on the financial world?
Let’s answer these and other questions in this RWA-themed deep dive.
The growth of the DeFi ecosystem has highlighted the unique advantages offered by this decentralized infrastructure based on the exchange of digital assets, and has even pushed traditional financial entities to explore the possibility of extending these advantages to physical assets, giving rise to an emerging field, referred to as RWA.
Today, we will take a deep dive into the concept of RWA (Real World Assets), focusing on the following points:
What is RWA?
The process of asset tokenization
Why tokenize physical assets?
RWA Market Data Analysis
let's start!
1. What is RWA?
Let’s immediately answer the simplest, yet at the same time the most important question from our research: What do we mean when we talk about real world assets (RWAs)?
Real World Assets, or RWAs, are tokenized assets of any physical, digital, or data-based asset that exists outside of a blockchain. By tokenizing an RWA, you are essentially creating a digital twin of a physical asset on the blockchain.
Therefore, we can imagine RWA as a digital representation of a physical world asset that exists in the blockchain through a token. Simple, right?
As stated in the definition above, the tokenization process can be applied to a variety of assets such as government bonds, real estate, private credit agreements, precious materials, etc., allowing access through decentralized applications.
Having laid the foundation for our discussion, let us now move on to exploring how the transformation of these assets from physical commodities to exchangeable tokens within the blockchain works.
2. The process of asset tokenization
Asset tokenization is the process of recording the rights to a specific asset as digital tokens that can be owned, sold, and traded on the blockchain. The tokens created represent the ownership portion of the underlying asset.
Depending on the type of asset involved, the tokenization process may be different. Since I am not a technical expert, I will focus on purely descriptive rather than technical explanations. In general, the process can be summarized in the following steps:
Valuation and Documentation: Determine the value of the asset through market valuation.
Asset digitization: Creating a digital representation of an asset on a blockchain, recording its ownership and related details.
Token creation: Generate digital tokens representing parts of assets and use smart contracts to manage their issuance and distribution.
Oracle Integration: Use oracles to verify and validate asset data, ensuring the integrity of information on the blockchain.
Token issuance and trading: Issue tokens and allow them to be traded on decentralized or centralized trading platforms to facilitate liquid market access to assets.
These general steps outline the basic asset tokenization process, which is flexible and can be adapted to the specific needs and characteristics of the assets involved. For example, in the famous Chainlink decentralized oracle project, the concept of Proof of Reserve was introduced during the asset tokenization phase, which is a mechanism for transparently and reliably verifying that an entity actually holds the claimed reserves of an asset. For those who are more interested, I have left some in-depth articles in the "Useful Links" section at the bottom of the article.
3. Why should physical assets be tokenized?
Tokenizing physical assets within the blockchain provides many significant advantages to end users. Let’s look at some of the most relevant advantages:
1) Elimination of intermediaries: One of the most significant advantages of tokenization of physical assets is that peer-to-peer direct transactions can be conducted without the need for intermediaries as counterparties, thus relying entirely on smart contracts.
2) Speed and operational continuity: Since the entrusted counterparty is eliminated, all “physical” requirements are also eliminated, making the entire process simpler, faster, and available 24/7.
3) Operating costs: Another significant benefit of avoiding interaction with physical counterparties is reflected in operating costs. Just consider the fees required at the closing of a traditional home purchase transaction, compared to what might be required using a decentralized smart contract, and the difference is clear.
4) Barriers to entry: In the transition to a permissionless system, we can eliminate all barriers to entry in one fell swoop, such as nationality or social background typical in the "traditional" world.
5) Convenience of asset splitting: By converting physical assets into digital assets, we have the opportunity to split the latter into multiple identical or different parts through simple smart contracts according to user needs.
6) Security and Trust: By bringing these assets to the blockchain, we have the opportunity to interact with distributed smart contracts that are used thousands of times a day. This allows us to operate in a trustless and transparent system, eliminating the risks of relying on centralized physical institutions.
4. RWA market data analysis
To complete this research, I used two sources, which we will analyze one by one: the Nifty0x Dune dashboard and the rwa.xyz website.
Let’s start with the Nifty0x Dune dashboard:
Reference blockchain for asset tokenization (excluding collateralized fiat currencies)
As can be expected, the reference blockchain in the field of asset tokenization is undoubtedly Ethereum, thanks to the reliability and stability it has demonstrated over a long period of time. Although second-layer solutions are becoming increasingly popular in this field, the field of asset tokenization, which is closely related to more "traditional" fields, tends to choose blockchains that offer the highest levels of security and reliability, given the importance of the assets managed.
Notably, after Ethereum, we see the rise of blockchains that are not usually ranked high in market cap in the DeFi space, such as Stellar, Polygon, and Gnosis (with a particular focus on tokenization of real estate assets).
Number of users with tokenized assets
As the chart clearly shows, the total number of users grew steadily, peaking at around 60 million active users. What is particularly interesting is that after a period of drawdown between 2022 and 2023, the number of new users has begun to grow significantly again, indicating a resurgence of interest in this space and further hinting at the relationship between asset tokenization and decentralization. The increasing adoption and acceptance of technologies and platforms related to globalized finance.
Now let’s turn to the analysis of the data reported by rwa.xyz. The rwa.xyz website gives us the opportunity to explore a wealth of data related to the world of RWA in a highly technical and pragmatic way. Although the interface may not be intuitive at first, using the website is still an extremely useful tool for monitoring key data in this field.
RWA Value
With value approaching all-time highs of over $160 billion, the category of tokenizing fiat currencies through stablecoins such as USDT and USDC has come to the fore in the RWA space, highlighting the critical importance of fiat tokenization in the decentralized finance ecosystem. Due to their ease of tokenization and high utility, stablecoins play a vital role in facilitating fast and efficient transactions on the blockchain.
RWA Value (excluding collateralized fiat currency)
To provide a clearer picture, the site allows us to exclude the collateralized fiat currency category from the chart, allowing for a more detailed analysis of the market situation in different subcategories.
After excluding the collateralized stablecoin category, we find ourselves in a very interesting situation. While the previous chart showed the value of RWAs close to its 2022 all-time high, after excluding stablecoins, clear signs of unprecedented expansion emerge in other subcategories.
Of particular importance is the private credit category, which shows an almost exponential growth trend and is valued at nearly $8 billion, positioning this category as the second most important in the RWA space.
Next, the chart clearly shows that government bonds are also experiencing a period of strong growth in the real asset market, with a value of nearly $2 billion. This category reflects the growing interest in tokenizing government debt securities, leveraging the potential of blockchain to improve access and liquidity to these assets.
In addition, the commodity category has also become another important area for tokenizing physical assets, focusing on gold through PaxGold tokenization. This choice reflects the interest in making traditionally illiquid physical assets liquid, allowing investors to participate in the gold market in a more flexible and decentralized way.
These figures highlight the evolving landscape within the real asset tokenization industry, with multiple asset classes benefiting from the technological innovations offered by blockchain and smart contracts.
Now let’s analyze each subcategory, excluding stablecoins, as I consider them a separate category within RWAs and I have decided to dedicate a dedicated article in the coming weeks to delve deeper into them.
5. Key analysis of the private credit market
Now, let’s focus on the RWA market data in the private credit sector. As the previous data highlighted, this category appears to be the most important one after collateralized stablecoins.
According to rwa.xyz, as of the end of 2022, the undisputed market leader in the private credit space is the Figure.com platform.
Figure.com is a US-based online lending platform that uses blockchain technology to provide a variety of financial services, including personal loans, mortgage refinancing, home equity credit, and equity release services. Through their website, loans can be obtained using physical collateral, which is evaluated through an economic evaluation process developed by the platform. It is important to note that this is not a real physical asset (RWA) project in the strict sense, as no tokenization of physical assets is performed. However, blockchain technology is used to make the lending process faster, cheaper, and safer.
The second place in terms of transactions processed is a protocol that I think is much more interesting: Centrifuge. I won’t go into the details of each project in this post to avoid getting too deep into the discussion, but I will post more about it in the coming weeks.
For the sake of completeness, here are the main protocols according to the data: Maple, Goldfinch, Clearpool, TrueFi, Credix, HomeCoin, Florence Finance, and Ribbon Lend.
Focus on U.S. Treasuries
Now let’s turn to the US bond tokenization category.
As we can see from the chart, this category has seen explosive growth in recent times, likely due to rising interest rates making these instruments more attractive, leading to a market cap of over $1.5 billion for the category. Obviously, these numbers are still very small compared to the traditional financial world, but it is worth noting that the increased use of these products, with players like BlackRock leading the rankings with the "BlackRock USD Institutional Digital Liquidity Fund" product, highlights that interest in this category of RWAs is growing and undoubtedly deserves special attention.
Focus on raw materials
The last category we looked at involved raw materials.
As we can observe from the data in this space, Paxos’s PAXG product represents the tokenization of gold, while Tether’s XAUT also represents the tokenization of gold. They are almost the only examples of tokenization in the raw materials space, which indicates that the market interest in other raw materials is relatively low at the moment.
That’s all for today. If you have any questions, please ask in the comments section.
