In the ever-evolving world of decentralized finance (DeFi), Real World Assets (RWAs) have emerged as a significant development when it comes to bridging the gap between traditional finance and blockchain technology just exactly the same way #SocialMining has been impacting the #Web3 space by enabling Web3 Enthusiasts contribute and earn valuable rewards which can be traded for $BTC $ETH $BNB or other Cryptocurrency of their choice.
One of the most prominent projects that can never be neglected when it comes to RWAs is MakerDAO, a pioneer in the DeFi space known for its stablecoin, DAI. In this blog post, we will be exploring the concept of Real World Assets(RWAs) including how MakerDAO is leveraging them, and it impact on the future of Finance.
What Are Real World Assets (RWAs)?
Real World Assets as the name implies refer to tangible, physical assets that exist in the traditional financial system but are tokenized to be used within blockchain ecosystems. These can include physical assets can be seen such as real estate or landed properties, bonds, invoices, and even commodities like gold, silver and bronze. The tokenization of these assets allows them to be traded and used as a collateral. Also they can be leveraged within #DeFi platforms, providing liquidity and financial inclusion in ways you can ever imagine.
Also, tokenizing Real World Asset allows them to be more easily traded, fractionalized, and used as collateral in various financial operations. This process helps to bridge the gap between traditional banking system and digital assets which can help to potentially unlock new liquidity and also bring about investment opportunities for users. For example, a tokenized real estate can easily be traded on a blockchain platform irrespective of your location, giving room for investors to buy and sell shares of landed property in a more similar way they trade stocks.
Real World Assets are considered highly valuable in the world of Cryptocurrency and Decentralized Finance because they bring stability and real-world value into the erratic, volatile and speculative digital asset market.
The Importance of RWAs in DeFi
Integrating Real World Assets into Decentralized Finance platforms helps to solve the following challenges:
Increase In Liquidity: According to Jordan Cole from BlockApps, he stated that "By tokenizing traditionally illiquid assets like real estate, RWA tokenization enables asset owners to unlock liquidity and allows investors to trade these tokens on decentralized exchanges". There's also definitely no doubt Real World Assets can help generate over millions of dollars of liquidity into the DeFi ecosystem, allowing for more robust financial products and services.
Stability: One of the major benefit that can never be ignored when it comes to Real World Assets is it's ability to bring about stability in the DeFi ecosystem. By collateralizing stable and well-understood assets, RWAs can help reduce the volatility often associated with crypto assets which provides more stable and efficient predictable returns.
Regulatory Compliance: Real World Assets can facilitate better compliance with existing financial regulations since they already have legal frameworks within traditional finance, making them more adaptable to regulators. Also, Real World Assets tokenization democratizes access to investment opportunities by enabling global investors to participate in markets that were previously restricted due to geographical or financial issues.
Diversification: There's a popular saying that "Never put all your eggs in one basket". By integrating RWAs with Decentralized Finance, DeFi platforms can diversify their asset pools which helps to reduce reliance on highly volatile cryptocurrencies and spreading risk across different asset with different use cases.
MakerDAO: A Pioneer in Integrating RWAs
According to CoinMarketCap, MakerDAO is ranked the top 4 RWAs Tokens by Market Capitalization. MakerDAO has long been a trailblazer in the DeFi space and it is mostly known for its stablecoin, DAI, which is pegged to the US dollar and backed by several crypto assets enabling it's stability. However, recognizing the potential of RWAs, MakerDAO has increased its collateral options to include these assets which helps to create new possibilities for both the platform and its users.
How MakerDAO Uses RWAs
MakerDAO's integration of RWAs into its protocol is a strategic move to boost the stability and scalability of it's stable coin known as DAI. The process works as follows:
Tokenization: The process begin by tokenizing traditional assets which has to do with creating digital representations that can be used within MakerDAO's system.
Collateralization: These tokenized assets are then used as collateral to mint new DAI, MakerDAO's stable coin. This can be done by locking the RWAs in a smart contract, similar to how crypto assets are used as collateral.
Debt Issuance: Once the RWAs are collateralized, users can borrow DAI against them. This allows asset owners to unlock liquidity without selling their assets which is also a significant advantage over traditional finance methods.
Interest Payments: Similar to crypto-collateralized loans, users must pay interest on their borrowed DAI. This system is also adopted by traditional banking system. The interest rate is determined by various factors, such as type of asset and market situation.
Liquidation: If the collateral value drops below a certain limit, the assets can be liquidated to repay the loan which ensures the stability of the system.
Case Study: Societe Generale(SC-FORGE) and MakerDAO
One of the most notable examples of Real World Assets practical example within MakerDAO is its collaboration with Societe Generale, an investment firm which is authorized to perform MiFID2 investment services under the supervision of the Prudential Supervision and Resolution Authority (Autorité de contrôle prudentiel et de résolution), and under the control of the Financial Markets Authority (Autorité des Marchés Financiers – AMF) and registered as PSAN (“Prestataire de Services sur Actifs Numériques” / Digital Asset Service Provider).
On September 2021, Societe Generale submitted a proposal to MakerDAO to use covered bonds (a type of debt instrument) as collateral for DAI loans. This was a groundbreaking moment for Decentralized Finance, as it marked the first time a gigantic financial institution collaborated with a decentralized protocol in this way.
Early last year (January, 2023), Societe Generale–FORGE (SG-FORGE) facilitated a loan to its parent company (Societe Generale) which was used to refinance covered bonds held by the bank, which were issued as Security Tokens directly on the Ethereum public blockchain (referred to as OFH Tokens). SG-FORGE secured the funds for this loan from the crypto market by borrowing DAI stablecoins through MakerDAO, a leading decentralized finance (DeFi) protocol. The OFH Tokens were used as collateral for the loan and pledged by SG-FORGE to MakerDAO.
The success of this collaboration demonstrated how RWAs can be used as a tool to bring legitimacy and mainstream adoption to the DeFi space. It also highlighted the flexibility and efficiency of MakerDAO's system as it is capable of accepting both traditional and digital assets.
The Future of RWAs in DeFi
The integration of RWAs into DeFi platforms like MakerDAO is just the beginning. As this new technology develops and more traditional financial institutions explore blockchain, the scope for RWAs will continue to expand. Here are some potential developments to watch:
Institutional Adoption: As seen with Societe Generale, more traditional financial institutions are likely to join the DeFi space by using Real World Assets to unlock new revenue streams and improve liquidity.
Adoption of More Asset Types: It is undoubtedly that most RWAs in DeFi are majorly focused on real estate and bonds. There's high chance, we start seeing expansion into other asset types including commodities like Agricultural Products, intellectual property, and even carbon credits.
Enhanced Stability : Real World Assets can play a crucial role when it comes to stabilizing stablecoins like DAI, making them more resistant to market fluctuations and increasing their demand as a reliable store of value.
Conclusion
Real World Assets play a great role for more adoption in Decentralized Finance system as it bridges the gap between traditional finance and the innovative world of Blockchain Technology. MakerDAO's integration of RWAs into its platform has set a precedent for the industry, demonstrating the potential for these assets to enhance liquidity, stability, and accessibility in decentralized finance.
As the adoption of RWAs continues to grow, we are likely to see a new era of financial innovation, where the lines between traditional and decentralized finance intersect to create a more inclusive and efficient global financial system in the DeFi Ecosystem.
Thank You for your time and I hope you have a great day ahead with love from @hardaeborla ❤️💕
Reference Links
https://lisk.com/blog/posts/real-world-assets-are-transforming-emerging-markets
https://makerdao.com/en/
https://www.sgforge.com/refinancing-dai-stablecoin-defi-makerdao/
https://blockapps.net/blog/understanding-the-technology-behind-rwa-blockchain-basics/
https://coinmarketcap.com/view/real-world-assets/
