Original Author: Binance Research
Original Compilation: Golden Finance
1. Key Points
The tokenization of Real-World Assets (RWAs) continues to gain traction as user adoption increases and large institutions enter the space.
Combined with lower DeFi yields, rising interest rates have sparked interest in tokenized government bonds.
Currently, the funding size for tokenized government bonds exceeds $600 million, with an annualized yield of approximately 4.2%.
It is projected that the tokenized asset market will reach $16 trillion by 2030, with significant growth potential, far surpassing the $310 billion in 2022.
Many protocols have integrated RWAs or participated in their growth. This article provides a brief overview of MakerDAO, Maple Finance, Ondo Finance, and others.
2. Overview
It has been over four months since Binance first released a report on Real-World Assets. What market landscape changes and latest developments have occurred since then? This report will explore all of this.
2.1 Introduction to Real-World Assets
Before delving into charts and the latest market data, we summarize several key points about Real-World Assets (RWAs) in this section. It covers the basic concepts of RWAs and serves as a quick introduction to the field.
What are Real-World Assets?
As the name suggests, Real-World Assets represent tangible and intangible assets in the real world, such as real estate, bonds, commodities, and more. The tokenization of RWAs allows us to bring these offline assets onto the blockchain, opening up new possibilities in composability and potential use cases.
Figure 1: Examples of Real-World Assets
By tokenizing RWAs, market participants can enjoy higher efficiency, increased transparency, and reduced human error, as these assets can be stored and tracked on the blockchain.
How does the tokenization process work?
To put RWAs on the chain, ownership and representation of the assets must be recorded on the blockchain. While the specific mechanisms may vary, the typical process involves tokenizing the assets on the chain after the transaction terms are established.
Figure 2: Example of on-chain tokenization process
2.2 RWA Ecosystem
The RWA ecosystem is diverse and steadily expanding as more projects enter the market. Some projects provide support in areas such as regulation, technology, and operations to bring real-world assets into the crypto space. We broadly refer to these projects as "RWA infrastructure." Additionally, there are "asset providers" focused on proposing and creating various categories of RWAs, including real estate, fixed income, stocks, etc.
Figure 3: RWA ecosystem map
Blockchain: Permissioned and permissionless blockchains tailored for RWAs.
Securitization / Tokenization: Bringing RWAs onto the blockchain.
Compliance: Ensuring compliance services for investors and issuers.
Real Estate: Proposing and creating RWAs supported by real estate.
Climate Products: Proposing and creating RWAs supported by climate assets.
Private Credit: Proposing and creating RWAs supported by private fixed income.
Public Credit / Stock: Propose and create RWAs supported by public fixed income and stocks.
Emerging Markets: Propose and create RWAs from emerging markets.
Trade Financing: Propose and create RWAs supported by trade financing.
3. RWA Growth and Outlook
The RWA market is in the early stages of development but has shown signs of growth, and the Total Locked Value (TVL) is also increasing. Currently, according to protocols tracked by DeFi Llama, RWAs rank as the tenth-largest sector in DeFi as of the end of June 2023, up from thirteenth a few weeks ago. One significant contributor is stUSDT, launched in July, which allows USDT holders to earn income based on RWAs.
Figure 4: RWAs ranked tenth on DeFi Llama
It should be noted that the above data may be underestimated as it does not capture all protocols, and data may be difficult to obtain when tokenizing on private blockchains. Nevertheless, the rising ranking of RWAs as a sector demonstrates the increasing adoption of RWA protocols.
Through the number of RWA token holders as a proxy for RWA adoption rate in Figure 5, we also observed steady growth in this data point. Currently, there are over 413,000 RWA token holders on the Ethereum blockchain. While this may not be a large number, the number of RWA token holders has significantly increased compared to a year ago, more than doubling from 179,000 to the current 413,000.
Figure 5: Steady growth in the number of RWA token holders
3.1 Rise of US Treasury Bonds
One highlight in the RWA space in recent months has been the tokenization of US Treasury bonds. US Treasury bonds refer to sovereign debt issued by the US government and are widely regarded as risk-free assets in traditional financial markets. With rising interest rates, the yield of US Treasury bonds has steadily climbed and now significantly surpasses DeFi yields.
Figure 6: US Treasury bond yield surpasses DeFi stablecoins
Intuitively, assuming other factors remain constant, capital flows to the most competitive yields, and US Treasury bonds excel in this aspect. Investors today can invest in tokenized US Treasury bonds on the blockchain without leaving it, enabling them to benefit from real-world returns. This fully demonstrates the usefulness of RWAs.
In fact, the tokenized US Treasury market is currently valued at approximately $60.3 billion. This means that investors are effectively lending this amount to the US government with an annualized yield of about 4.2%.
Figure 7: Tokenized US Treasury market valued at $60.3 billion
Agreements and companies involved in the US Treasury market include Franklin Templeton, Ondo Finance, Matrixdock, etc. Robert Leshner, the founder of Compound, recently announced the launch of his new enterprise, "Superstate," and submitted documents to the US Securities and Exchange Commission to create a short-term government bond fund that uses Ethereum blockchain as a secondary ledger tool.
It is important to note that investing in tokenized US bonds carries risks. For example, investors holding positions in US bonds are exposed to term risks associated with such investments, where interest rate fluctuations may cause price fluctuations (although the term risks for short-term notes are relatively lower). Other key considerations include tokenization structure, fees, and KYC process.
3.2 Prospects for RWAs
According to a report by Boston Consulting Group, the market size of tokenized assets is expected to reach $16 trillion by 2030. This would account for 10% of the global GDP by the end of 2030, a significant increase from $310 billion in 2022. This estimate includes the tokenization of on-chain assets (more relevant to the blockchain industry) and the fractionalization of traditional assets (such as Exchange-Traded Funds (ETFs) and Real Estate Investment Trusts). Given the potential market size, even capturing a small portion of this market would have a tremendous impact on the blockchain industry.
Figure 8: Estimated market size of tokenized illiquid assets in 2030 reaching $16 trillion
Even at $16 trillion, tokenized assets would still only represent a small portion of the total global asset value, estimated at $900 trillion (less than 1.8%, and without considering the growth of the future total global asset value). One could even argue that the true potential market is the entire global asset market, as anything that can be tokenized can be represented on-chain as RWAs.
Figure 9: RWAs have significant growth potential
4. What are some RWA protocols?
To showcase how certain protocols integrate RWAs, this section focuses on some market participants. In addition to the protocols mentioned below, our previous reports have covered Centrifuge and Goldfinch, among others.
Note: Mentioning specific projects does not constitute endorsement or recommendation of those projects. The mentioned projects are used for illustrative purposes only to demonstrate the adoption of RWAs. Additional due diligence should be conducted to better understand these projects and the associated risks.
Maple Finance
Maple Finance is an institutional capital network that provides infrastructure for on-chain lending businesses to credit experts, connecting institutional borrowers and lenders. Maple Finance has three main stakeholders: borrowers, lenders, and pool delegates.
- Institutional borrowers can access financing options on Maple Finance.
- Lenders can earn returns by lending assets to borrowers.
- Pool delegates are credit professionals who evaluate, manage, and underwrite loans.
While Maple Protocol previously focused on unsecured cryptocurrency lending, it has recently ventured into RWA-based lending. Previously, unsecured cryptocurrency lending left Maple with over $50 million in bad debt. These losses stemmed from the collapse of centralized exchanges last year, which spread to Maple's crypto-native borrowers.
Currently, Maple Finance is one of the market leaders in the private lending space, with over $332 million in outstanding loans.
Figure 10: Outstanding loans of private lending companies
Capitalizing on the increasing demand for US Treasury bonds, Maple launched a US Treasury fund in April, allowing non-US accredited investors and entities to directly access US Treasury bonds. The fund is backed by US Treasury bonds and repurchase agreements, with a target net annualized yield of the current one-month US Treasury rate minus 1.0% annual fees and expenses. This essentially provides a cash management solution for stablecoin holders to earn returns.
In general, products such as Maple Finance's RWAs demonstrate the potential to address today's challenges while providing another way for crypto users to earn returns on their held assets.
Figure 11: Maple's cash management solution addresses current challenges.
MakerDAO
As the protocol behind the DAI stablecoin and the third-largest DeFi protocol, MakerDAO is undoubtedly a familiar name to many in the crypto space. Borrowers deposit collateral into MakerDAO's vaults and can withdraw debt denominated in DAI in return.
MakerDAO's attempts at integrating RWAs can be traced back to as early as 2020 when MakerDAO voted to allow borrowers to collateralize RWA-based assets in their vaults. Since then, MakerDAO's RWA vaults have grown to $2.3 billion. It's worth noting that the growth in RWA holdings has mainly occurred in the past year or so, alongside the rise in real-world yields.
Figure 12: MakerDAO currently holds over $2.3 billion in RWA positions.
Considering that RWAs account for 49.2% of MakerDAO's total assets, it is also a contributor to the protocol's income on a year-on-year basis. Specifically, since the end of 2022, the share of RWAs in protocol income has significantly increased, currently accounting for 50.8% of the protocol income.
Figure 13: Significant increase in RWAs' contribution to MakerDAO's income over the past year
Figure 14: RWAs account for over half of MakerDAO's annual income
RWAs, especially US government bonds, are likely to continue playing an important role in MakerDAO's balance sheet in the foreseeable future. Recently, MakerDAO purchased $7 billion worth of US government bonds in June, bringing its US government bond holdings to $12 billion. Having a diversified collateral base, including the risk of RWAs, allows MakerDAO to take advantage of the current yield environment and diversify risks.
Ondo Finance
Ondo Finance provides institutional-grade investment products and services on the blockchain. The company is led by former Goldman Sachs employee Nathan Allman and has received support from notable investors such as Peter Thiel's Founders Fund, Coinbase Ventures, and Tiger Global.
Ondo offers four RWA products, providing investors with a range of access to cash management products and bond funds. During the process, investors can deposit USDC and exchange it for USD++++++++++, to purchase assets such as ETFs or funds. In return, new liquidity providers will receive a custody certificate that can be further used in other protocols.
Figure 15: Ondo Finance products
Ondo Finance is currently one of the market leaders in the tokenized US Treasury bond sector, second only to traditional financial asset management company Franklin Templeton.
Figure 16: Ondo Finance holds a market share of 25.9% in the tokenized US Treasury bond market
It is worth noting that Ondo Finance has recently expanded its operations to the Polygon network as part of a "strategic alliance," launching its OUSG token on the Polygon network, which tokenizes Blackrock's iShares Short Treasury Bond ETF. This is Ondo Finance's first expansion beyond the Ethereum network, and we will be keeping an eye on the impact of this move on adoption.
5. Notable Developments to Watch
In 2023, tokenization is referred to as the "killer application of traditional finance" by JPMorgan and as the "future market" by Larry Fink, CEO of BlackRock.
Interestingly, we have noticed that besides DeFi protocols, traditional financial institutions are showing increasing acceptance of tokenized RWAs. For example, global asset management company Franklin Templeton has launched its own funds on public chains. Additionally, some institutions are also exploring the establishment of their private blockchains for asset tokenization.
Looking ahead, it can be anticipated that traditional exchanges may play a role in the secondary trading of tokenized RWAs, especially as adoption increases. According to reports, the Australian Securities Exchange may consider listing tokenized RWAs on its platform in the future. As this field continues to mature, regulatory developments will be a driving force for mainstream adoption.
Figure 17: Timeline of institutional adoption and market development
January 10, 2023: Goldman Sachs launched its new digital asset platform, GS DAP, developed using the Daml smart contract language and its privacy-enabled blockchain, Canton. Its goal is to achieve the digital representation of assets and automate workflows within the ecosystem, including "tokenized assets, digital currencies, and other financial instruments."
January 31, 2023: Intain launched its IntainMARKETS solution on Avalanche, providing a tokenized market for structured financial products.
February 15, 2023: Siemens, the largest industrial manufacturer in Europe, issued a $64 million one-year digital bond on Polygon. Investors include Dresdner Bank and Union Investment, aiming to simplify processes and eliminate the need for central clearinghouses.
April 26, 2023: Franklin Templeton announced the on-chain integration of its US Government Money Fund on the Polygon blockchain. This $272 million fund mainly invests in government bonds, cash, and repurchase agreements.
May 9, 2023: Canton Network launched a consortium of financial institutions on its blockchain, including BNP Paribas, Chicago Mercantile Exchange, Goldman Sachs, and Microsoft. It aims to provide a decentralized infrastructure for tokenization and blockchain interoperability.
June 2, 2023: MakerDAO has approved multiple proposals to open RWA vaults to generate yield for its assets USDC and DAI. In April, the protocol opened an insurance vault for Coinbase custody and approved up to $500 million USDC stablecoin for a 2.6% yield. Subsequently, on June 2, the community voted again to approve a collaboration with BlockTower to open a new vault with a maximum investment of $1.28 billion in short-term US government bonds.
June 7, 2023: Centrifuge launches its new product Centrifuge Prime, providing technical and legal frameworks for DAOs to invest in RWAs. Previous partners include Aave and MakerDAO, both of which utilize the Centrifuge platform.
June 21, 2023: The Monetary Authority of Singapore collaborates with the Bank for International Settlements to propose a framework for designing tokenized digital assets' open and interoperable networks. The tokenization experiment called "Project Guardian" has been conducted in wealth management, fixed income, and forex, with participating banks including Standard Chartered, HSBC, DBS, and Citibank.
June 23, 2023: Mitsubishi UFJ, Japan's largest bank, is discussing with institutions the use of its blockchain platform Progmat to issue stablecoins pegged to foreign currencies, including the US dollar, for global use. The bank also plans to utilize the platform to facilitate the issuance of securitized tokens by third parties.
June 28, 2023: Compound's founder has applied to launch "Superstate," a project that will create a short-term government bond fund on the Ethereum blockchain. It will invest in "ultra short-term government bonds," including US Treasuries and government agency bonds.
June 29, 2023: Maple Finance's new lending division, Maple Direct, will provide overcollateralized loans to Web3 businesses. These loans will be collateralized with BTC, ETH, and mortgage ETH.
June 29, 2023: The European Central Bank outlines its exploration of wholesale central bank digital currency and other options to support DLT transactions. This will include conducting experiments using central bank fiat currency starting in 2024.
June 29, 2023: Mastercard is conducting an experimental project called "Multi-Token Network," initially exploring tokenized bank deposits. The future plans include transitioning to central bank digital currencies and regulated stablecoins.
July 2, 2023: The first RWA product on the Tron network, "Collateralized USDT" (stUSDT), is officially launched on JustLend. Users who collateralize USDT on the platform will receive stUSDT. The collateralized assets will be invested in RWAs to generate yield.
July 17, 2023: The Financial Stability Committee has released a work plan to explore asset tokenization projects and evaluate their vulnerabilities and policy implications for the financial system. This is in line with the Payment and Market Infrastructure Committee's exploration of the benefits, risks, and challenges of tokenizing the financial ecosystem of central banks.
6. Conclusion
For blockchain technology, tokenizing real-world assets provides a powerful use case that has the potential to bring the next wave of users into cryptocurrencies. By providing greater transparency and efficiency, tokenization can be an attractive alternative to existing mechanisms. We have already seen traditional institutions exploring this technology, which may address the inefficiencies in current solutions.
The diffusion of tokenized RWAs is also a positive development for cryptocurrency investors, as they now have more opportunities outside of the crypto ecosystem. In addition to being able to take advantage of higher government bond yields, the introduction of RWAs also brings more stable assets to DeFi and increases the diversity of collateral in this field. Looking ahead, we expect continuous innovation and development in the RWA space, bringing more use cases and driving the adoption of cryptocurrencies.
