In 2020, MakerDAO began accepting tokenized traditional assets such as Treasury securities and corporate bonds as collateral for the DAI stablecoin.

At the end of 2022, analysts from Binance Labs , Coinbase , PwC and a number of other experts noted in their reports RWA (real world assets) as one of the most promising long-term trends in the blockchain industry.

According to DeFiLlama , in September 2023, the RWA ecosystem includes at least 25 protocols and ranks eighth in terms of the volume of funds locked in smart contracts (TVL). In addition, the number of token holders of these projects on the Ethereum network has doubled over the past year.

At the time of writing, the total amount of loans backed by tokenized assets is $4.4 billion, and new projects are trying to bring precious metals and even carbon credits to the blockchain.

The Encrypted team figured out what RWA is and what is causing the rapid growth of interest among industry players and traditional financial institutions in tokenization.

What is RWA?

RWAs are tokenized real world assets. In order to create them, tokens that track both tangible and intangible assets must be launched. Off-chain sources can also be used to determine the value and other RWA indicators.

The Ondo Short-Term US Government Bond Fund (OUSG) is an illustration of a REIT. It is an ERC20 token with US Treasury short-term bonds as collateral. or, more accurately, shares of the securities held by the iShares Short Treasury Bond ETF.

The infrastructure for tokenization and RWA trading is provided by dozens of blockchain platforms. This sector, according to DeFiLlama, consists of 25 protocols with a $1.6 billion total TVL.

Tokenization allows traditional assets to be integrated into DeFi infrastructure. This increases their accessibility and trading efficiency through the use of automated market makers and other blockchain solutions.

RWA is a bridge between TradFi and DeFi that has the potential to transform the crypto market landscape by providing new sources of capital, liquidity and profitability.

Important: tokenized assets should not be confused with synthetic ones, like EUR-PERP from Synthetix. The latter, although they track the cost of real goods, are, as a rule, presented in the form of unsecured derivatives.

Main categories of RWA

Theoretically, any asset is subject to tokenization, information about which can be formalized and recorded in the form of a code. These can be both tangible (precious metals) and intangible (copyrights) benefits.

In practice, regulatory requirements and the specificity of goods lead to the fact that some of them are easier to tokenize and are widespread, while others are more difficult.

Thus, crypto market participants have been using RWA based on the US dollar, represented by USDT tokens, as well as other stablecoins backed by fiat currencies for eight years now. While the first tokenized shares appeared only in 2018.

However, the development of blockchain technology and the interest of market participants in new classes of assets led to the fact that in 2023 the following RWAs gained popularity:

• shares and government bonds

• real estate

• credit obligations

• collectibles

Developers are also experimenting with tokenization of carbon credits ( Solid World ) and precious metals ( CACHE Gold ).

Boston Consulting Group indicates that by 2030, the total capitalization of RWA could grow to $16 trillion and include stocks, government bonds, real estate, and investment fund assets.

How does it work?

Analysts identify three main stages of tokenization of traditional assets, be it shares, credit obligations or real estate.

1. Off-chain formalization.

Consists of registering ownership rights and fixing the economic value of the asset. The property must be assessed for condition or monetary value, be registered in accordance with the regulatory requirements of the relevant jurisdiction, and be owned by the RWA issuer.

Example : to tokenize a real estate property, an entrepreneur creates a legal entity. The established company then buys, say, a hotel. Next, based on the monetary value of the property, the enterprise issues N number of shares at N cost. The share reflects the right to a share of ownership of the acquired hotel.

2. Transfer of information

When an asset is formalized in the “real” world, information about its parameters needs to be transferred to the blockchain. For this, smart contracts and tokens of various standards are used, depending on the type of property.

At this stage, developers must create a smart contract containing data about the real asset, based on which the RWA will be issued. Issuers most often entrust the information transfer procedure to a third party.

Example : The hotel owner contacts the tokenization platform and provides documents confirming the ownership of the property, its valuation and the number of shares issued. The platform developers create a smart contract and issue N number of tokens corresponding to the number of shares of the enterprise.

3. Development and maintenance of RWA

This stage requires both maintaining up-to-date information about the tokenized asset and providing liquidity, technical infrastructure for trading and redemption of RWA. Typically, most of these functions are performed by the tokenization platform, making the necessary changes to the smart contract and regulating the circulation of tokens.

To do this, the site needs to maintain constant communication with the issuer, check legal information and provide current quotes for the real asset. Servicing RWA also requires the involvement of price oracles and off-chain specialists, which partially offsets the low costs of blockchain infrastructure.

Why is tokenization gaining momentum?

The possibility of tokenizing real assets was declared by many projects even at the stage of the industry’s formation. The first RWAs appeared back in 2018, but only in the second half of 2022 they began to talk about the segment as a promising and long-term trend in market development.

In 2023, Brian Armstrong even added RWA to the list of projects he would “build now,” which speaks to the prospects and potential of the industry.

Why did developers and investors decide to “blow off the dust” from a long-known technology only now? There are several reasons, and the main one is the protracted downward trend in the crypto market.

According to Coinmarketcap, the total market capitalization of cryptocurrencies in September 2023 was $1.05 trillion. This is three times lower than the peak values ​​observed at the end of 2021. The indicator has been in the range of $0.8-1.2 trillion for more than 12 months, with daily trading volumes in September 2023 even lower than they were after the collapse of Terra.

RWA ecosystem

The RWA segment landscape includes several categories of projects. Binance distinguishes the following subgroups:

• infrastructure - projects that provide the technological base for issuing assets and ensuring compliance. Includes specialized blockchains, technical stacks and legal support for RWA;

• asset providers are platforms involved in the direct tokenization of goods and the development of infrastructure for their further maintenance and distribution.

Providers are in turn classified based on the type of RWA and the tools they provide. Major market areas include:

• real estate

• lending

• public loans (government securities).

With real estate RWAs, you can earn rental income based on your ownership interest in residential or non-residential buildings, tokenize and exchange ownership of those buildings, and more. In this industry, fungible tokens and NFTs are both widely utilized.

Examples of platforms : Tangible , RealT , Lofty , Binaryx .

Lending platforms allow you to receive a loan in cryptocurrency secured by RWA or borrow tokenized assets by providing real securities as collateral. Some projects, such as Maple, allow you to take out unsecured loans.

Examples of sites: Maple , Goldfinch , Centrifuge .

Government bonds are accessible on the blockchain through tokenized public loans. On these securities, users can trade or hold RWA and get paid at a predetermined interest rate.

Examples of sites: Ondo , BondBlox , Backed .

These are just the most capitalized classes of RWA. In general, the ecosystem is wider and includes such areas as agriculture, regenerative finance (ReFi), insurance, various types of financial instruments and some physical assets.

Notable projects

• Centrifuge

• MakerDAO

• Ondo Finance

• RealT

Conclusion:

Real World Asset Tokenization development service (RWA) merges traditional finance (TradFi) with blockchain generation, revolutionizing the way actual-world belongings are offered, bought, and managed. By tokenizing bodily property which includes actual property, artwork, and commodities, RWA introduces liquidity, fractional possession, and accessibility to traditionally illiquid markets. This innovation holds the capacity to democratize funding opportunities, streamline transactions, and decorate transparency and security in the monetary ecosystem. As RWA continues to conform, its effect on global finance is poised to be transformative, unlocking new avenues for investment and paving the way for a greater inclusive and efficient monetary panorama.