RWA Data Report: The forces behind driving blockchain adoption
Original author: Jose Oramas
Original compilation: Deep Chao TechFlow
RWAs are expected to become one of the dominant forces in blockchain in the coming years. This year alone, the total value locked (TVL) of RWAs has doubled from $1.25 billion to over $6 billion, making it one of the fastest-growing DeFi sectors.
This explosive growth is largely due to the emergence of new revenue streams, including tokenized U.S. Treasuries, corporate bonds, ETFs, and the rise of on-chain credit in emerging markets. RWAs have also attracted a wave of new institutional capital into DeFi; 97% of institutional investors believe tokenization can revolutionize asset management and become a $16 trillion business opportunity by 2030, according to the Boston Consulting Group.
In this report, we review these new revenue streams, current market leaders, and the benefits of tokenization. We will also discuss future legal challenges and the predicted size of the tokenization market by the end of the century.
Current Growth: Where are we now?
This section will review the major RWA categories in terms of growth, including on-chain credit, tokenized treasuries and bonds, and real estate, as they have had the largest growth in both dollar amounts and user activity.
On-chain credit reappears
On-chain credit has grown 84% this year, roughly $210 million from January 1 to September 30. Centrifuge is responsible for 70% of this growth.
Several on-chain credit protocols that were market leaders a year ago have basically been eliminated in 2023, such as Maple, which once claimed nearly $1 billion. But Maple is the second-largest contributor to on-chain credit growth, adding roughly $60 million in active loan value so far in the third quarter.
But competition is now fiercer; new market leaders offer borrowers and lenders higher yields and a wider range of investment options. Centrifuges TVL is now close to $250 million, a 60% increase from May this year.
In this example, the various RWA pools in Centrifuge track real estate, carbon credits, Treasury bonds and emerging markets and provide returns of 7% to 10%. Some even reach 15%. As stated, the average APY in DeFi is below 4%, and in protocols like Aave, it can sometimes be below 3% and 4%.
Regarding exposure to private credit lending, Africa and Asia are currently the most active borrowers of on-chain credit. Kenya has the largest loan amount at approximately US$73 million, followed by Nigeria (US$70 million), then the Philippines (US$53 million) and India (US$40 million).
Most of these countries are considered emerging economies, where most citizens and small businesses are underbanked. Since the financial infrastructure in these countries is often underdeveloped, obtaining traditional loans is difficult.
Protocols like Goldfinch and Credix incentivize users to deposit stablecoins such as USDC and then lend them to businesses in emerging markets. For example, most of Goldfinch’s deals have been with fintech initiatives in Southeast Asia and Africa. All proceeds are used to provide additional support to these startups who are looking for capital to provide financial services to millions of underbanked citizens and businesses.
The fixed APY on these types of transactions is typically higher than 10%, far more than most DeFi lenders can offer today. This is because the returns come from real-world assets and their portfolio is strategically collateralized off-chain.
What can we expect from on-chain private credit?
On-chain credit is similar to Lido and its dominance of the liquidity staking sector. Protocols like Goldfinch have barely seen any growth year over year, with Credix being an exception. Therefore, Centrifuge and Maple were the largest contributors to this $210 million growth and are likely to remain leaders over the next 12 months.
However, on-chain private credit is down 70% compared to last year’s all-time high. There are currently $561 million in active loans, down from $1.54 billion in May 2022, according to RWA.xyz.
It is likely that accelerated interest rate increases in early 2023 impacted demand for on-chain lending, as private credit protocols rely on liquid and illiquid real-world assets.
That said, the next 12-24 months will be critical for on-chain credit protocols. Despite the Feds more dovish stance, it could change its monetary policy if the U.S. reports a stronger economy and a tighter labor market, which would impact the on-chain credit sector anyway, as we As seen last year.
Treasury bills and bonds
Treasury-backed RWAs and corporate bonds have both exploded in value this year, adding nearly $700 million so far, primarily distributed across Ethereum ($339 million), Stella Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.Venture DAO is a multi-chain dApp ecosystem. Our internal products and incubation projects span chains and verticals to ensure sustainable value for ALPHA users and token holders. In May 2023, Alpha Venture DAO was renamed Stella and moved to the Arbitrum ecosystem. Stella strives to be the premier destination for leveragers and lenders to maximize their earning potential. Whatever on-chain strategy a leverager wants to use on leverage (and is secure enough to be backed), Stella will back it with 0% borrowing costs.($323 million) and Polygon ($230 million), with the rest spread across L1s like Solana.
Ondo Finance, Franklin Templeton and Matrixdock are the market leaders, accounting for nearly 90% of all tokenized Treasuries.
Why are Treasury bonds so attractive to cryptocurrency users? Please consider the following points:
DeFi’s median APY has remained below 3% throughout 2023
The number of active developers in crypto projects and chains is at a 3-year low
Overall, the total value locked in DeFi is currently down 30% year-on-year.
Cryptocurrency users are looking for higher yields. Liquid markets like bonds and Treasuries offer higher returns, so it’s not surprising that RWA’s growth is largely due to tokenization and protocols tracking U.S. Treasuries, corporate bonds, and indices.
Let’s review some of the major Treasury issuers in the RWA sector:
Ondo Finance currently has a market capitalization of approximately $160 million. Its flagship product is USDY, a tokenized dollar backed by U.S. Treasuries and on-demand deposits, allowing users to earn income on U.S. Treasuries, money markets, ETFs and high-yield corporate bonds.
Franklin Templeton is more of a traditional financial company that became a crypto advocate when it started experimenting with tokenization, alongside WisdomTree. In January this year, the issuer started with about $100 million in assets. Today, that number equates to $310 million.
stUSDT is also a prominent issuer of Treasury bonds. However, a large amount of suspicious on-chain activity and Justin Suns centralized control have brought stUSDT to criticism, with concerns raised about its long-term sustainability.
real estate
On-chain real estate added $90 million this year, a smaller increase compared to Q3s dollar value.
RealT is currently the market leader, with its TVL increasing by 30% from $62.5 million to $89 million year-to-date.
RealT is an Ethereum-based protocol that provides decentralized real estate investing and a wide range of options to homebuyers and investors. It now holds more than 50% of the market share.
However, Tangible was the market leader not long ago, but after the USDR was unpegged in October this year, the protocol’s TVL dropped from $60 million to $39 million.
Tangible leverages USDR, a stablecoin that relies on the RWA narrative. It is said to be primarily backed by real estate investments. These assets are considered illiquid, making them ineffective in the event of a bank run. By the time it collapses, its too late to push it higher.
Outlook: How big can the tokenization market grow?
Industry reports suggest that the tokenized market could reach approximately $3.5 trillion even in a worst-case scenario (a sustained bear market), and $9 trillion in a bull market scenario according to 21.co.
Meanwhile, the Boston Consulting Group estimates that the tokenization of illiquid assets could become a $16 trillion business opportunity, accounting for 10% of global GDP.
As of October, the total global asset market was valued at approximately $900 trillion, led by sectors such as real estate ($330 trillion), bonds ($300 trillion), and equity ($120 trillion). As of October 20, the total cryptocurrency market capitalization is currently estimated at $1.20 trillion. If the RWA protocol can capture at least 1% of this market share, the DeFi field will gain approximately $9 trillion in capital and liquidity, almost nine times the current market capitalization of the crypto market.
That said, the tokenized market is only a small part of the global asset market. The recent growth of the tokenization market and RWA protocols can be seen as evidence of the potential large-scale applications of blockchain technology. We are seeing increased interest from high-level institutional investors and international financial entities. On October 13, members of the International Monetary Fund, bankers and fintech executives discussed the legal challenges and potential uses of tokenization.
Why are traditional financial institutions so interested in tokenization?
Tokenization can lower barriers and solve operational efficiency issues that many industries face today. The main advantages of tokenization and blockchain technology are:
Greater accessibility and mobility
Reduce transaction costs by cutting out middlemen
Increase transparency
Programmability can provide new investment features and operational options to new issuers.
As we mentioned, Treasuries and real estate account for the largest share of the total market capitalization of global assets. These yield-producing assets do not have the same liquidity advantages, as real estate is often considered a highly illiquid market, primarily due to limited affordability, regulatory barriers, lack of information, etc. Tokenization can be used to offset these Frustration:
Tokenization eliminates the middleman and putting assets on the chain means they can be transferred 24/7
It is completely transparent, all information is stored in the blockchain and can be viewed
It provides greater accessibility and a better operating framework for fractional ownership.
As evidence of this continued institutional interest, DTCC, a US post-trade financial services company with over $40 billion in total assets, is partnering with Chainlink on Swift’s blockchain interoperability project.
Who are the main users of the RWA protocol?
One of the main drivers for the growth of RWAs is that crypto-native users are looking for better opportunities to generate revenue than just staking their governance tokens in the protocol. As a result, much of the demand for RWAs is driven by native crypto users.
Its worth considering that WisdomTree and Franklin Templeton have had considerable success with RWAs. As veterans of two traditional financial industries, we can look forward to the addition of new users, such as institutional customers or ordinary people. The key here is that bonuses in RWAs are easier to explain than bonuses in the traditional DeFi ecosystem, which reaffirms trust and simplicity in the minds of users.
Risks and Legal Challenges of RWAs
Investment opportunities in RWAs rely on the tokenization of assets and their distribution; the platforms that will dominate the RWA narrative are those that provide infrastructure for RWAs, such as compliance protocols (which will play a role due to current laws in various jurisdictions) greater role) and asset providers. This brings a new set of challenges, but also provides opportunities for a wider investor base.
However, there may be some subtle differences when we talk about adoption. The success of RWAs will largely depend on how these agreements deal with/adapt current regulations, as long as the law remains unchanged. So far, Switzerland is the only country with established encryption laws. That said, compliance protocols and infrastructure will become more critical than ever on the path to democratization.
With the rise of RWA, compliance protocols, audits, custodians, and on-chain oracles will become more protagonists. Audits will be an important piece of the puzzle as they can verify on-chain assets and rebuild trust for investors. At the same time, on-chain oracles need to feed off-chain data into the protocol. Additionally, compliance protocols like Tokeny are providing legal guidance and the infrastructure for seamless onboarding and asset management operations.
Another example is Quadrata, a platform that offers technology called web3 Passport that allows businesses and investors to connect their wallets to identity passports.
Final thoughts: The role of RWAs in blockchain adoption
We’ve analyzed how RWAs can bring billions (or even trillions in the best case scenario) of capital to the DeFi market, and how tokenization can strengthen multiple industries such as housing, supply chain, finance and banking, etc. wait.
RWAs are targeting large markets and they require large amounts of liquidity. Liquidity can be obtained by finding large institutions. However, institutions will not come to DeFi unless they are convinced that they are working within the constraints of the law. Another risk is smart contract vulnerabilities, which is why auditors and infrastructure protocols will play a greater role in this ecosystem.
However, there is so much open interest from investors and traditional financial institutions, which tells us that the RWA sector has a lot of potential.
A major challenge for RWAs is dealing with current global regulations. Either regulatory laws become friendlier to crypto assets, or protocols have no choice but to adapt to current rules and try to work around them. So far, Switzerland is one of the few countries that has successfully established a good structural environment for crypto assets.
