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What Are Real World Assets (RWAs) in Crypto?

Intermediate
Crypto
NFT
Sep 28, 2023
12 min read

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Real world assets (RWAs) account for an estimated combined value of over $300 trillion, and they present opportunities to generate yields in DeFi. These assets are linked to investments with real-world value, making them a great way to leverage blockchain technology for financial gain. This blog post will explore what sets RWAs apart from other digital assets and highlight some of the most promising RWA projects to watch in 2023.

Key Takeaways:

  • Real world assets are tangible and exist in the physical world — for instance, real estate, gold or art — and are tokenized and brought on-chain for use in DeFi.

  • Real world asset NFTs are non-fungible tokens representing unique ownership rights to a physical asset, while providing a secure storage and authentication solution.

  • RWAs in DeFi can offer sustainable and diversified sources of yield and new investment opportunities by bridging the gap between traditional finance and crypto.

What Is a Real World Asset in Crypto?

A real world asset (RWA) in crypto is one that exists in the physical world, but has been digitized and made available (tokenized) for use in decentralized finance (DeFi). DeFi is an ecosystem of financial applications that run on blockchain networks, such as Ethereum, without intermediaries or centralized authorities. DeFi aims to create a more transparent and inclusive financial system by leveraging smart contracts, cryptography and peer-to-peer (P2P) networks.

RWAs in crypto can be split into two types: fungible and non-fungible. Fungible assets are interchangeable and divisible, meaning that you can exchange one unit for another unit of the same asset without losing value. Examples include stablecoins, digital tokens pegged to fiat currencies or other assets, or tokenized commodities, such as gold or oil. 

Non-fungible assets are unique and indivisible. Each unit of the asset has distinct characteristics and value. One example is NFTs (non-fungible tokens), which are digital tokens that represent ownership rights to a specific physical or digital asset, such as art, music or collectibles.

How Are Real World Asset NFTs Different?

A real world asset NFT is a unique digital token that signifies physical asset ownership. Unlike other digital assets, like cryptocurrencies or virtual items, real world asset NFTs are directly linked to the tangible world. This characteristic presents certain advantages and challenges that distinguish them from other NFTs. Some benefits of real world asset NFTs include the following.

  • Scarcity and provenance: RWA NFTs can establish digital scarcity and provide proof of ownership for abundant or difficult-to-verify physical assets. They create a digital record of ownership and value on a blockchain by certifying the authenticity and ownership of items such as artwork or collectibles.

  • Improved liquidity and access: By using NFTs, physical assets that are typically difficult to sell or access now have new methods of ownership and tradeability. They also make it possible to divide an asset into smaller units, which can be sold and bought by multiple people worldwide on a global marketplace, lowering the barrier to entry and increasing the asset's liquidity.

  • Unlocking value: Physical assets that are underutilized can be transformed into sources of yield through the innovative use of NFTs. For instance, owners of such assets can generate passive income by lending or renting them out to other users on a DeFi platform, or combining them with other digital elements to create new forms of expression or utility.

Some of the challenges of real world asset NFTs are as follows.

  • Securing ownership rights: Legal and technical solutions are required to ensure the enforceability and security of ownership rights. Clear legal frameworks are necessary for NFTs in order to define the transfer, enforcement or revocation of ownership rights in case of disputes or fraud. A reliable mechanism such as a barcode or smart lock is needed to link the digital token with the physical asset.

  • Complex regulatory and compliance environment: Navigating regulatory uncertainty and compliance issues can prove challenging for those dealing in NFTs. They must consider various laws and regulations, depending upon the asset's physical location as well as the locations of the buyer, seller and blockchain network operation. Such laws may oversee taxes, anti-money laundering or securitization.

  • Reliance on trust: The tokenization process hinges on trust and reputation among the involved parties. In the case of an NFT, the accuracy of physical asset representation, secure storage, proper verification, fair pricing and safe transfer all rely on the honesty and competence of the asset originator, custodian, auditor, platform and network.

Analyzing RWA in DeFi: How Can It Be Used to Generate Yields?

RWA use in DeFi can generate yields by leveraging the benefits of both traditional finance and crypto. By tokenizing physical assets and bringing them on-chain, RWA in DeFi can offer:

  • Sustainable and diversified sources of yield: Investing in real-world assets through DeFi can offer stable and predictable returns, as cash flows and collateral from sources like interest payments on loans or dividends from stocks back these assets. RWAs in DeFi can also be used to diversify portfolios by providing exposure to different asset classes and markets that aren’t correlated with cryptocurrencies, thus helping to balance risk-return profiles.

  • New opportunities for investment and innovation: DeFi's use of RWAs has the potential to unlock fresh value and open up new markets for physical assets that traditional finance often neglects, such as niche collectibles, social impact projects or emerging markets. RWA tokenization in DeFi offers new and exciting ways for people to interact with their physical assets, including community building, personalization and even gamification.

Depending upon the asset and platform type, there are different ways to use the RWA concept in DeFi to generate yields. Some of the common methods are as follows.

  • Lending and borrowing: RWAs can serve as collateral or debt instruments on lending platforms. These platforms allow users to borrow or lend crypto (or fiat currencies) at variable or fixed interest rates. Users can deposit their tokenized real estate or gold as collateral, and borrow stablecoins. Alternatively, a user can lend their stablecoins to a borrower through a tokenized loan backed by a business or car.

  • Trading and investing: You can use RWA as a trading or investing tool on exchange platforms that permit purchasing or selling crypto or fiat currencies at current market rates. For instance, you can buy or sell tokenized stocks or bonds on a decentralized exchange (DEX). You can also invest in a tokenized fund or index that follows the performance of a collection of RWAs.

  • Staking and farming: RWA in DeFi can be used for staking or farming instruments on reward platforms that allow users to earn additional tokens or fees by locking up their tokens for a while, or providing liquidity to a pool. For example, users can stake their tokenized carbon credits or art on a governance platform and earn governance tokens or voting rights. Alternatively, users can farm their tokenized U.S. Treasury bonds or commodities on a yield platform and earn yield tokens or transaction fees.

Top 5 RWA Projects in 2023

There are multiple RWA projects in DeFi with distinct visions, strategies and niches. Following are the top RWA projects in 2023 to keep an eye on.

  • Unikura: Unikura is a marketplace for web3 that unites collectors worldwide with unique collectibles from Japan, such as vintage toys, manga books and anime figures. Employing the power of NFTs, Unikura creates digital scarcity and provenance for these collectibles and provides secure storage and authentication solutions. 

Users can pay with crypto wallets like MetaMask, eliminating the hassle of international payments. Unikura also has a Discord community for users to share updates about new collectibles, participate in exclusive conversations and enjoy real-world benefits. The project is currently in a closed beta and offers special discounts on its NFTs.

  • Centrifuge: The Centrifuge protocol allows asset originators to obtain liquidity from DeFi by tokenizing their RWAs, such as mortgages, invoices or royalties. This capability is achieved through a two-token system: Tin tokens represent safe, low-return investments, while Drop tokens represent higher-risk, higher-return investments. Users can invest in these tokens using stablecoins such as Dai or USDC and earn interest from the underlying cash flows. Centrifuge’s native token, CFG, is for governance and rewards.

  • Maple Finance: Maple is a reliable platform that offers cryptocurrency and RWA lending pools. It allows crypto funds and market makers to borrow capital from lenders, who deposit stablecoins into lending pools. Fintech companies and SMEs can use Maple to tokenize their RWAs and use them as collateral to borrow stablecoins from the lending pools. Each lending pool is managed by a pool delegate responsible for underwriting, servicing and monitoring the loans. Maple’s native token, MPL, is used for governance and rewards.

  • Goldfinch: Goldfinch is a credit platform that operates without intermediaries or collateral, enabling anyone to lend to emerging markets. It follows a three-tiered model in which Borrower Pools, consisting of applicants seeking loans, are backed by lenders or backers who provide capital. Auditors, who are experts in credit analysis, assess the creditworthiness of the Borrower Pools. Goldfinch users can earn interest by lending to Borrower Pools that offer RWA-backed loans. The credit protocol’s native token is GFI.

  • Creditcoin: Creditcoin is a platform that facilitates connections between lenders and borrowers from different blockchains and asset classes. With Creditcoin, users can lend or borrow any tokenized asset, such as cryptocurrency, fiat, stocks, bonds or RWAs. The system operates on smart contracts that automatically match lenders and borrowers based on their preferences and risk profiles. Its native token is CTC.

How Sustainable Is the Use of RWA in Crypto?

The sustainability of RWA use in the crypto world depends upon several critical factors. One crucial aspect is the adherence of RWA platforms and issuers to relevant laws and regulations in their jurisdictions, including obtaining necessary licenses and approvals. This measure will ensure the legitimacy and protection of RWA tokens and their holders. 

The reputations and trustworthiness of parties involved in the tokenization process are also vital for RWA use in crypto. They need to provide transparent and accurate information about assets and their valuation, risks and performance, in addition to ensuring their security and availability. 

The blockchain technology used for RWA tokenization must be robust, interoperable and compatible with other blockchains and protocols, particularly those related to DeFi. This will enable RWA token holders to leverage their assets with different DeFi strategies.

The Limitations of RWA

However, RWA use in crypto also faces challenges and constraints that must be addressed to achieve their full potential.

  • Regulatory uncertainty and compliance issues: The laws and regulations governing RWAs vary based on asset type, location, jurisdiction, and platform and network used for tokenization. Unfortunately, these regulations may not be clear or consistent with each other, resulting in legal ambiguity and complexity. They can also change over time or differ across regions.

  • Legal enforceability and security issues: Legal and technical measures must be in place to ensure that token ownership rights are valid, secure and enforceable in both digital and physical contexts. This necessity requires a well-defined legal framework that outlines how ownership rights are transferred, enforced and revoked in cases of disputes or fraud. It also entails a reliable mechanism that connects the digital token to the physical asset, such as a barcode or smart lock. However, executing and maintaining these solutions can be tough, leading to legal and technical risks for RWAs.

  • Scalability and trust issues: RWA's success depends upon the reliability and scalability of the platforms and networks that enable tokenization. There must be ample capacity, speed and security to manage the complexity, volume and variety of transactions and data involved. Besides, trust and reputation are critical among all parties involved in the tokenization process, including the asset platform and network, originator, custodian and auditor, to ensure that the RWAs are accurately represented, fairly priced and securely transferred. These challenges could be difficult to resolve or verify, resulting in scalability obstacles and trust issues.

What's Next for RWA Tokenization?

RWA tokenization is poised for significant growth and adoption in the coming years, presenting new opportunities for yield generation, risk management and innovation. This trend is expected to extend to financial instruments such as corporate bonds, equities and derivatives, resulting in faster settlement times, reduced costs and increased liquidity for these markets. Matrixport, a digital asset platform, has already launched tokenized short-term treasury bills (STBT) on the Ethereum and Stellar blockchains, providing investors with access to risk-free rates without the complications of traditional trade execution and settlement.

Physical assets also offer opportunities. MakerDAO, a decentralized lending protocol, has partnered with Huntingdon Valley Bank (HVB) to use commercial real estate properties as collateral for crypto-native protocols.

Increased integration and interoperability between RWA tokens and DeFi protocols will enable RWA token holders to utilize their assets in various DeFi strategies, including lending, borrowing, swapping and staking. The Monetary Authority of Singapore has already launched a pilot program called Project Guardian, which involves tokenizing bonds and deposits that can be used in permissioned liquidity pools on Polygon.

Platforms and projects facilitating RWA tokens' creation, issuance and management will drive further innovation and experimentation in this area, reducing entry barriers and encouraging diverse stakeholders to participate. 

Polkastarter is an example of such a platform, providing a decentralized launchpad that offers cross-chain token pools and auctions.

The Bottom Line

Real world asset (RWA) tokenization of physical assets brings them on-chain and can drive more value and innovation within both the crypto space and traditional financial systems. Doing so presents new opportunities for investment and innovation, sustainable and diversified sources of yield, and new ways to interact with physical assets. However, this approach also faces challenges such as regulatory uncertainty, legal enforceability, scalability, and trust issues that need to be addressed through further development and innovation. 

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