Written by: The Open Platform
Translation: Blockchain in Vernacular
Disclaimer: This article discusses various aspects of the tokenization of physical assets (RWA), including the involvement of major financial institutions, the integration of blockchain technology, and potential advantages and challenges. It is important to note that the legislative and regulatory environment related to the tokenization of RWA is changing rapidly. Current laws and regulations are still being formed, and future developments may have a significant impact on the views and results discussed in this article. The information provided in this article is based on the current market understanding and status at the date of publication. Readers are advised to pay close attention to ongoing legislative changes and consult legal and financial experts when considering investing in tokenized assets.
RWA Tokenization involves converting physical assets such as cash, stocks, bonds, loans, real estate, commodities or art into digital tokens on the blockchain, making these assets more accessible, liquid and transparent. The concept has gained significant traction recently, providing a bridge between traditional financial instruments and the world of digital assets.
We have discussed the topic of real estate tokenization before. In the second half of 2023, this area was mostly stagnant. Due to technical, regulatory and market challenges, RWA tokenization has experienced many failed attempts. As a result, real estate tokenization has now become a smaller part of the RWA market.
However, in the second quarter of 2024, RWA became the second largest digital asset narrative, accounting for 11% of the web traffic among the narratives tracked by CoinGecko. The industry now shows a rich and diverse landscape, covering a variety of markets and including stakeholders from both decentralized finance (DeFi) and traditional finance (TradFi).
Source: Binance Research, “Real Assets: The Bridge Between Traditional and Decentralized Finance”
In this article, we explore the latest trends in the tokenization of real assets (RWA) and highlight successful pilot projects that define the state of RWA in Q2 2024. We will also summarize the current narrative surrounding the RWA market and look ahead to possible future waves of tokenization.
1. Increased institutional participation drives the revival of dormant markets
In 2024, several major financial institutions made strategic deployments in the RWA space for the first time. The increased attention to RWA tokenization may have been driven by successful pilot projects launched by traditional financial giants such as BlackRock and Franklin Templeton and leading decentralized finance (DeFi) players such as Ondo Finance.
Source: RWA.xyz, accessed on August 22, 2024
BlackRock, Franklin Templeton, and Ondo’s proprietary tokenized financial products account for more than 60% of the total market value of tokenized government securities:
Source: RWA.xyz, Dune.com, accessed on August 22, 2024
BlackRock's BUIDL, formally known as the BlackRock USD Institutional Digital Liquidity Fund, is a tokenized fund based on the Ethereum network that was launched on March 20, 2024. The BUIDL fund is composed of cash, U.S. Treasuries, and repurchase agreements, and aims to provide qualified investors with the opportunity to earn U.S. dollar returns through blockchain technology.
As of July 2024, BUIDL has grown into the largest tokenized Treasury bond fund, with over $500 million in assets under management.
The three projects participating in BUIDL (Ondo Finance, Securitize, Maple Finance) are among the top tokenized government securities protocols. Source: Dune.com, accessed on August 22, 2024
Multiple blockchain projects have contributed to the success of BUIDL. Securitize is responsible for compliance and investor management, ensuring that tokenized products meet regulatory standards. Maple Finance provides an on-chain credit market, facilitating the creation and trading of credit products. Swarm Markets, as a licensed decentralized finance (DeFi) platform, facilitates the tokenization and trading of RWAs within the regulatory framework. Boson Protocol enables BlackRock to explore new ways to tokenize and trade RWAs through a blockchain-based e-commerce market. Polytrade provides a market for managing RWAs, supporting the democratization of investment opportunities and improving asset liquidity. Finally, Ondo Finance, as the issuer of the tokenized short-term US Treasury bond fund OUSG, deploys most of its assets on BUIDL, providing practicality for traditional investors (Source: BeInCrypto, CoinDesk, CoinMarketCap, The Defiant).
Franklin Templeton's tokenized project, the Franklin On-Chain U.S. Government Money Fund (FOBXX), is another example of the integration of traditional finance with decentralized finance (DeFi). Launched in 2021, the fund is the first U.S.-registered mutual fund to use blockchain to process transactions and record share ownership. The project uses the Stellar and Polygon blockchains to support BENJIToken, which represents shares of the FOBXX fund. The program allows peer-to-peer transfers of tokenized shares and aims to provide investors with stable returns and increase liquidity and accessibility to U.S. government money funds. Franklin Templeton developed this project independently but worked with blockchain networks to implement the technology (Source: Franklin Templeton, BeInCrypto).
Franklin Templeton’s RWA strategy is different from BlackRock’s, which relies heavily on collaboration with existing blockchain projects. BlackRock’s BUIDL focuses on integrating various DeFi platforms to tokenize U.S. Treasuries and other fixed-income products, while Franklin Templeton’s strategy focuses on using public blockchains to enhance the transparency and efficiency of traditional money market funds.
Translation: 90% of the tokenized US Treasury asset market value comes from Ethereum and Stellar. Source: RWA.xyz, accessed on August 22, 2024
Ondo Finance is an example of a successful non-institutional issuer of tokenized U.S. Treasury assets. Launched in late 2023, Ondo Finance's USDY project is designed as a stable-yield stablecoin backed by U.S. Treasuries and bank deposits. USDY represents a stable and yielding digital asset that provides yield to holders through integration with traditional financial instruments. Unlike typical stablecoins, USDY generates yield from the underlying U.S. Treasury assets, making it an attractive option for DeFi users and institutional investors seeking stable returns.
Ondo Finance's Short-Term U.S. Government Bond Fund (OUSG), which represents tokenized short-term U.S. Treasuries, complements USDY and provides a safe and yielding alternative for investors seeking to gain exposure to U.S. Treasuries in the DeFi ecosystem. Together, they offer diversified investment options that provide stability to DeFi users while also bringing attractive returns.
$ONDO is the largest RWAToken by market capitalization. Source: Coingecko, accessed on August 22, 2024
JPMorgan and Goldman Sachs are also working on similar initiatives in the tokenized U.S. Treasury space, such as JPMorgan’s Onyx and Goldman’s RWA market concept (J.P. Morgan | Official Website) (BeInCrypto).
These institutions have the resources, expertise, and regulatory influence to navigate the complex environment of tokenization and are expected to become the main driving force in the RWA tokenization space. BUIDL demonstrates how traditional finance (TradFi) can accelerate the adoption of DeFi protocols such as Ondo Finance while also incorporating these protocols into its use.
It’s worth noting that all of the instruments discussed in this section are fixed-income instruments, which is currently the dominant part of the RWA tokenization space, and which we’ll explore in depth in the next section.
2. Trend changes in the RWA market: from equity to fixed income
RWATokenization market leadership has shifted to the fixed income space, which is beyond U.S. Treasuries. Tokenized fixed income securities, such as raised credits, have gained significant attention due to their stability and regulatory clarity. These assets provide predictable returns and are easier to integrate into existing regulatory frameworks.
According to RWA.xyz, tokenized credit accounts for the largest share of total RWA value:
RWA.xyz, accessed on August 22, 2024
Tokenized credit involves converting traditional debt instruments, such as loans and bonds, into digital tokens on the blockchain. This process is used by a variety of entities such as investment funds, specialized financial companies and fintech startups to generate returns through interest payments received from the underlying loans.
According to RWA.xyz, the top funded credit tokenization protocols by total value of all loans are Figure, Maple, and TrueFi:
Source: RWA.xyz, accessed on August 22, 2024
Figure uses blockchain technology to simplify and modernize the lending process, focusing primarily on home equity lines of credit (HELOCs), student loan refinancing, and mortgage refinancing. The platform uses its own blockchain, Provenance, to provide these services, aiming to increase efficiency, reduce costs, and improve transparency in loan origination, servicing, and transactions. Figure is unique in that it uses blockchain throughout the entire loan lifecycle, which sets it apart from other traditional and tokenized lending platforms (Source: Figure Lending).
Maple Finance provides a decentralized infrastructure for institutional borrowing, supporting the creation of loan pools. Their strategy involves leveraging digital asset collateral, such as BTC and ETH, to provide high-quality, risk-adjusted returns. The platform runs on Ethereum and Solana and works with blockchain credit risk management companies to provide managed credit portfolios (Source: Maple Finance).
TrueFi is a decentralized finance (DeFi) platform focused on uncollateralized lending. Launched in November 2020, TrueFi runs on Ethereum and Arbitrum, connecting borrowers and lenders through smart contracts governed by TRUToken. Borrowers undergo a rigorous credit assessment, including KYC and AML checks, and are assigned an on-chain credit score to determine loan terms. This process enables TrueFi to provide loans without collateral, improving the accessibility and efficiency of the lending market (Source: TrueFi | Docs).
According to a McKinsey report, raised credit, along with U.S. Treasuries, is in the first wave of tokenized asset adoption.
Source: McKinsey, From Ripples to Waves: The Transformative Power of Tokenized Assets
McKinsey’s report, “From Ripples to Waves: The Transformative Power of Tokenized Assets,” states that interest in tokenized investments is influenced by the efficiency and profitability of current processes, the degree of outsourcing, and the key players and their fees.
U.S. Treasuries and raised credit typically involve high transaction volumes and relatively low margins, making blockchain’s cost savings in terms of efficiency and automation particularly attractive. Processes for these assets are often more standardized and scalable, which lowers the barriers to tokenization, accelerates time to impact, and strengthens the business case for early adoption. Because these activities are often outsourced to achieve economies of scale, there is a strong incentive to adopt more efficient blockchain solutions to further reduce costs and improve returns.
The high potential cost savings, quicker return on investment, and standardized nature of these financial products make tokenized U.S. Treasuries and raised credit ideal candidates for early adoption in the tokenization space.
3. Tokenized real estate: success through specialization
Real estate is a part of the RWA field where the benefits of tokenization are particularly obvious. Tokenization allows for fractional ownership, increases liquidity, and lowers investment barriers, making real estate investing more accessible and opportunities more democratized. Despite its significant benefits, this area has been relatively dormant to date and is expected to be a significant part of future adoption. Nonetheless, there are already some companies making significant progress in this area. For example, RealT has become a successful program offering fractional ownership of real estate in the United States.
RealT is a blockchain platform that enables fractional ownership of real estate through tokenization. RealT's marketplace is a dynamic investment and trading platform that represents ownership shares of specific U.S. properties. These tokens provide pro rata ownership and rental income and can be traded on secondary markets.
As of August 2024, RealT's monthly primary market sales are approximately $2.9 million, with an all-time high of $5.9 million.
Dune.com, accessed 22 August 2024
RealT's monthly primary market sales of $2.9 million are significant, especially when compared to traditional real estate metrics. In the United States, the median home price as of mid-2024 is $412,300 (Source: Federal Reserve Bank of St. Louis, 2024). Traditional real estate companies typically facilitate the sale of a single property, meaning each transaction may represent only one sale. For example, a real estate agent may close several properties each month, with each transaction having a significant impact on their monthly sales total. The monthly sales a typical real estate agency may handle vary widely, depending on the size of the market and the number of agents. For a small to medium-sized brokerage, hitting $2.9 million in monthly sales can be significant, equivalent to about 7 median home sales. Larger brokerage firms with multiple agents may handle higher transaction volumes, but given the fragmented nature of traditional real estate sales, this still underscores the scale of what RealT has accomplished.
Large online real estate platforms like Zillow or Redfin facilitate billions of sales each year, but those sales are spread across a vast market of millions of listings. However, these platforms do not sell properties directly, but connect buyers and sellers, and their revenue comes from commissions, advertising and lead generation rather than direct sales. For a company like RealT that sells fractional ownership directly, $2.9 million in monthly sales is particularly significant in a market that is still emerging and niche.
In our previous report, we have expressed skepticism about the widespread adoption of real estate tokenization due to its failure to meet the needs of individual investors, lenders, and tax authorities. RealT primarily deals with residential properties in the United States, which are suitable for fractional ownership and tokenization. This means that the platform may not be as versatile as other platforms when dealing with more complex real estate transactions, commercial properties, or regions with less friendly legal frameworks. Instead, by focusing on a specific area, RealT is able to create a streamlined and scalable model that appeals to a specific group of investors.
4. Tokenization of equity and its significance to TON
While the above projects focus on integrating RWA with traditional financial institutions to attract institutional investors, TON's RWA strategy is more focused on DeFi. TON aims to allow ordinary DeFi users to diversify their portfolios by holding equity in private companies, a traditionally closed and opaque field. MMPro enables the acquisition and trading of tokenized equity through the TON ecosystem.
MMPro is a new DeFi protocol that provides tokenization services for company equity, such as pre-IPO shares of companies such as Ledger, Consensys (Metamask), Ripple, Circle, and Animoca%20Brands. Tokenizing equity involves converting shares of private companies into digital tokens on the blockchain, enabling fractional ownership and trading on digital platforms. This process makes equity investments more accessible, liquid, and transparent, in line with the service characteristics provided by MMPro.
Through MMPro%20Trust, investors can gain partial ownership of company shares through RWA%20NFTs. These NFTs can be traded on secondary markets such as Getgems and stored in Tonkeeper.
Source: https://rwa.mmprotrust.com/
While it is still early days for TON’s RWA space, examples like MMPro Trust demonstrate the potential to mobilize all aspects of the ecosystem, including secondary markets, wallets, and related companies. This approach has significant value for ecosystem participants, who can now diversify their portfolios through equity, while also providing new opportunities for individuals outside the ecosystem who have traditionally invested in listed stocks and are seeking to diversify through raised equity. By bridging these two worlds, TON’s RWA program creates new opportunities for DeFi users and traditional investors, bringing vitality and possibilities to the future of asset tokenization.
However, adoption of tokenized private equity may be a longer process. The regulatory environment for private equity is still evolving, which creates uncertainty and presents significant compliance challenges. Private companies are often less financially transparent and have more complex ownership structures, making it more difficult to accurately assess their value and risk. Unlike fixed income instruments with predictable returns and mature markets, private equity requires extensive due diligence and investor protection, which further slows adoption.
However, protocols that successfully navigate these challenges and establish themselves early in the tokenized alternative asset class market can gain first-mover advantage. By building trust, setting industry standards, and creating network effects, these early adopters can position themselves as leaders and capture market share as the ecosystem matures and regulatory frameworks improve.
5. Future Outlook
RWAs (Real World Assets) face significant launch difficulties, which hinders their initial adoption. These issues manifest themselves in several ways: a lack of established liquidity and market participants, limited trust and recognition from traditional investors, and slow adoption due to regulatory uncertainty.
There is often a significant mismatch between the tokenized product offered and the target market, often due to insufficient apparent benefits of tokenization and limited buyer demand. These challenges have led to significant changes in the RWA space over the past year, with institutions such as BlackRock and Franklin Templeton now pushing for the adoption of more viable and attractive tokenized fixed income instruments that offer clearer advantages and better meet market demand.
Overview of the current RWA narrative. Source: The Open Platform.
TON is well-positioned for the future wave of adoption of tokenized assets, including private and public equities, commodities, and real estate. By then, the regulatory environment is expected to be more mature, thanks to the current success stories driven by large institutions. This evolving landscape will provide TON and other blockchains with the opportunity to gain first-mover advantage in second- and third-wave markets, leveraging their innovative DeFi-focused approach to provide new and attractive investment opportunities.
