In recent times, the popularity of RWA has been gradually increasing, and it has even been referred to as the engine of the next bull market, capable of creating a market worth tens of trillions. However, RWA is not a new concept. There was already a wave of FOMO between 2020 and 2021, but it has been lukewarm ever since. So, why has RWA caught people's attention again this year? What are the popular projects in the RWA space? What challenges does the RWA space face in its future development? This article will delve into these questions and uncover the mystery of RWA.

RWA Overview

RWA stands for "Real World Assets" in short, which basically represents all tokenized assets in the off-chain real world. Different from the bridge between traditional assets and capital markets achieved through asset securitization, RWA tokenization serves as a bridge between real-world assets and crypto finance, with the aim of bringing real-world assets to DeFi and providing them with more liquidity by leveraging the advantages of decentralized financial global accessibility. The underlying assets of RWA are very extensive, including but not limited to stocks, bonds, real estate, cash, artworks, precious metals, accounts receivable, insurance, investment funds, and other tangible or intangible assets. Currently, USDT, which occupies the third place in the cryptocurrency market value, can be said to be the most successful example of RWA, mapping the US dollar onto the blockchain and tokenizing it.

RWA Mechanism

The RWA mechanism essentially revolves around how to appropriately value off-chain assets and bring them onto the blockchain, and then provide liquidity for trading.

The RWA mechanism can be divided into three steps: financialization of off-chain assets, trusted financial data, and tokenization of trusted data.

Financialization of off-chain assets: Before bringing off-chain assets onto the blockchain, it is necessary to first determine the economic value, ownership, and legitimacy of the assets. After these considerations, it is also important to think about how to tokenize the ownership, usage rights, and asset delivery methods, making real-world assets adapt to the crypto financial system, rather than simply scanning a few PDFs or legal documents onto the chain.

Financial data credibility: After digitizing clear asset data and writing it into smart contracts on the blockchain. For RWA, in order to depict the real-time value of real assets on the chain, it is necessary to refer to and track external data. However, since the blockchain can only access and process "on-chain" data, an oracle is needed to achieve data connection and provide off-chain asset value data to ensure the credibility of on-chain price data. At the same time, because the blockchain is publicly transparent, the asset-related data after being put on the chain is also completely open and transparent. Although this can make transactions more credible, complete transparency is not conducive to financial transactions. Financial institutions or individuals do not want to disclose their private transactions. Therefore, zero-knowledge proofs (ZKPs) need to be used to solve the privacy issues mentioned above. It provides us with a "have it both ways" solution, using the public verifiability of the blockchain while preserving the confidentiality and privacy of proprietary data for institutions or individuals.

Tokenization of trusted data: The final step is for the RWA protocol to issue tokens to the market or specific investors, which can also be NFTs, to provide liquidity to RWA.

The most challenging part of RWA in operation is not putting it on the chain but what happens before and after putting it on the chain. The native on-chain data is transparent and trustworthy, but off-chain assets bridged to the chain may involve fraud, and the liquidation of off-chain collateral is much more complex than that of on-chain collateral. How to address these issues and close the gap between on-chain and off-chain is the key to the successful operation of RWA.

Why is RWA gaining attention again?

The leading stablecoin lending protocol MakerDAO released its RWA-related plans as early as 2020, and Aave announced its entry into the RWA market in 2021. However, during the bear market in 2022, RWA gradually lost attention. To understand the reasons for RWA's renewed attention, let's first review the major events that have occurred in the RWA space this year.

RWA 2023 Milestones

Institutional Entry: A Top-Down Drive

It is not difficult to see from the above timeline that this year, RWA was brought to the stage by institutions such as Goldman Sachs, Citigroup, Binance, MakerDAO, and other top protocols. Citigroup pointed out in its report "Money, Tokens, and Games" that RWA will be the trump card to drive the blockchain industry into a trillion-dollar scale, as almost any asset that can be represented in value can be tokenized. It is optimistically projected that by 2030, the scale of RWA will reach $4 trillion.

Traditional financial institutions hold a large number of real assets, such as stocks, bonds, real estate, etc. If these assets can be tokenized, it can increase the institution's revenue and competitiveness, and also provide more investment opportunities. According to the data from rwa.xyz, as of July 17th, there have been a total of 1,651 RWA credit agreements, with a total loan amount of over 4 billion, and the disparity between the number of loans and the loan amount indicates that although RWA has increased the liquidity and global reach of traditional financial assets, it is still mainly participated by institutions and companies, and ordinary investors have limited participation in this field.

DeFi Yield Decreases, Low-risk Bond Rates Rise

In addition to institutions spreading positive news from top-down, another important reason for top protocols and investors turning to RWA is the decrease in DeFi yields and the increase in rates of low-risk assets such as US government bonds. Currently, the deposit interest rate for the top lending protocol Aave USDT is about 3%, Compound USDT is about 2.25%, and MakerDAO's stablecoin DAI is about 3.49% (data source: LoanScan).

At the same time, with the continuous interest rate hikes by the Federal Reserve, US Treasury bond rates are rising. Currently, rates for US government bonds with maturities less than one year are around 5.3%, which is higher than the deposit interest rates of many on-chain protocols.

The current DeFi investors in the market, compared to the bull market period, are pursuing high interest rates and high returns. With the increasing market uncertainty, they have changed their investment strategy and are now seeking stable profits that are less affected by the crypto market. The risk-free annualized return of around 5.3% from US bonds is already enough to attract investors to the returns of on-chain US bonds. According to rwa.xyz data, as of July 17th, the total value of on-chain US bonds is about 600 million, with a weighted average yield of 4.23% and a weighted average term of less than one year.

Deep Bearish Fear, Crypto Industry Desperately Needs New Narrative

People in the crypto industry are quite united to some extent. In the face of the current deep bearishness in the crypto industry, everyone is working together to find new narratives to get out of the bear market. The highly anticipated narratives for the first half of this year, such as the Bitcoin Ordinals ecosystem, Bitcoin ETF, and ZKP, all show the efforts to break free from the quagmire. The narrative of RWA overcoming barriers between TraFi (traditional finance) and DeFi (crypto finance) is not inferior to the previous narratives, bringing great imaginative possibilities to the crypto industry.

RWA Hot Projects Check-list

According to CoinMarketCap data, as of July 17th, the total market value of RWA track tokens exceeds 2.4 billion US dollars, which is about 1/20 of the market value of DeFi tokens of over 44 billion. From this perspective, the RWA track still has tremendous imaginative space.

Because RWA is defined very broadly, RWA tracks involve directions such as Layer 1, stablecoins, lending, real estate, public bonds, carbon credit trading, etc., involving over 60 specific projects. The following will take stock of the top six hot projects in the RWA track by market value, helping readers to have a deeper understanding of the RWA track. (Data source: CoinMarketCap, statistics as of July 17th)

MakerDAO (MKR)

• Market value exceeds 900 million US dollars

MakerDAO is a decentralized collateralized lending platform on Ethereum established in 2014. It achieves over-collateralized loans by locking ETH and other encrypted assets in smart contracts and minting stablecoin DAI pegged to the US dollar. MakerDAO is one of the earliest projects to announce entry into the RWA track. In 2020, it voted to tokenize collateralized lending based on RWA, expanding the stablecoin DAI. Currently, MakerDAO is also expanding its layout in the RWA track, mainly in the direction of public bonds.

According to Dune data, currently 48% of MakerDAO's total assets are RWA, and over 50% of its revenue comes from RWA. MakerDAO is transitioning from a traditional DeFi protocol to a new direction focused on RWA.

Synthetix (SNX)

• Market value exceeds 700 million US dollars

Founded in 2017, Synthetix is currently the leading project in the field of synthetic assets in the RWA track, aiming to provide on-chain exposure to real-world currencies, commodities, stocks, and indices. Users can mint synthetic assets (Synths) by staking SNX, and Synths track the prices of various real-world assets.

Synthetix has gone through three rounds of financing, with investors including Coinbase, DWF Labs, and other well-known institutions. As a representative project of synthetic assets, Synthetix failed to lead the RWA breakthrough in 2021, with TVL dropping from $2.9 billion in February 2021 to the current $380 million. In March of this year, Synthetix received a $20 million financing from DWF Labs and announced that DWF Labs would provide liquidity and market making for SNX, hoping for a turnaround.

Centrifuge (CFG)

• Market value of approximately $130 million

Founded in 2018, Centrifuge is an on-chain lending protocol that aims to provide a way for small and medium-sized business owners to collateralize their assets on the blockchain and obtain liquidity. Borrowers can finance their real-world assets without banks or other intermediaries and provide DeFi investors with a stable source of income unrelated to the cryptocurrency market.

Tinlake is the investment application of Centrifuge, serving as an open market for real-world asset pools. Investors can view the funds provided by asset originators and invest in pools that suit them, currently with 17 pools. Centrifuge has a total financing value of $421 million, and it is worth noting that Centrifuge also provides the technology behind leading mortgage lending protocols such as MakerDAO and Aave.

Centrifuge has gone through three rounds of financing, with investors including Coinbase and IOSG.

Reserve Rights (RSR)

• Market cap of approximately $110 million

Founded in 2018, the Reserve Protocol is a decentralized stablecoin protocol that allows users to mint stablecoins pegged to the US dollar, backed by any crypto asset, known as RTokens. The protocol has currently launched three types of RTokens: eUSD (electronic US dollar), ETHPLUS (diversified ETH collateralized index), and hyUSD (high-yield savings US dollar). Due to its stablecoins being pegged to the US dollar, it falls under the category of RWA stablecoins.

Reserve Rights has not disclosed specific financing details, but its investor lineup is impressive, including Coinbase, OpenAI Founder Sam Altman, PayPal Co-founder Peter Thiel, and others. The project team has abundant resources.

Ribbon Finance (RBN)

• Market cap of approximately $100 million

Ribbon Finance was founded in 2021 by former Coinbase employee Julian Koh. Ribbon Finance is also a project in the RWA track of public bond direction, combining options, futures, and fixed income to provide stable returns for DeFi investors.

Ribbon Finance has gone through two rounds of financing, with investors including Coinbase, Dragonfly, and individual investors such as Kain Warwick, the founder of Synthetix.

Polymesh (POLYX)

Market capitalization is approximately $97.6 million

Due to restrictions such as regulation and complex off-chain asset management, native cryptocurrencies on general-purpose blockchains like Ethereum are difficult to meet the trading needs of RWAs. Therefore, Polymesh was born to serve the RWA track. Founded in 2020, Polymesh is an institutional-grade permissioned blockchain specifically built for RWAs and currently has the highest popularity and market capitalization in the RWA track Layer 1 direction.

Polymesh adopts a similar development framework to Polkadot. All participants must undergo KYC verification, including issuers, investors, and node operators. At the same time, its designed asset management protocol enables the issuance and transfer of confidential assets, meeting the confidentiality requirements of institutions. Currently, Polymesh has 3.9K real registered users (after KYC verification), 387M POLYX staked, and 42 node operators (including Binance).

From the six projects mentioned above with a market capitalization over 100 million or close to 100 million in the RWA track, it is not difficult to see that although RWA currently covers a wide range, investors prefer financial projects such as mortgage loans backed by intangible assets. Four of the top six projects belong to this category, while projects involving tangible assets such as real estate, precious metals, and art have not been able to break through and gain market attention.

Will RWA Play Out the Story of "The Boy Who Cried Wolf" Again?

Because RWA is not a new concept, this round of RWA narratives may be accused of being repetitive. According to Dune data, the current total trading volume of RWA across all categories is much lower than the peak trading volume in the last round in 2021. Around October 2021, the weekly trading volume of RWA across all categories exceeded $250 million, and it has been shrinking ever since. Even with the recent increase in popularity, the weekly trading volume is less than $50 million. It begs the question, will RWA play out the story of "The Boy Who Cried Wolf" again this round?

RWA aims at the trillion-level incremental market. Although this pie is drawn quite large, the market may not be able to digest it. Apart from the perspective of trading data, the RWA track also faces many challenges.

Inescapable Regulation

Regulation is always a sensitive term for the crypto industry, and RWA, due to its close relationship with traditional finance, cannot escape this topic. Moreover, due to the different regulatory policies of different countries and regions regarding RWA, and even different management methods for various types of real assets, if global liquidity of RWA is to be promoted, it will require the support of regulatory authorities in various regions. Therefore, there is still much work to be done in terms of regulatory compliance for RWA. Currently, some regions that are friendly to the crypto industry may be the first to try.

Improvement Needed in Technical Infrastructure

There are still many areas in RWA's current technical infrastructure that need improvement. For example, how to protect the privacy and transaction data of users verified through KYC; how to connect on-chain and off-chain data to reflect the value fluctuations of real assets on the blockchain; and the synchronization issue between on-chain and off-chain assets during settlement and delivery.

Valuation and Authenticity Issues of Real Assets

For tangible assets in reality, besides assets such as cash and bonds whose market value has already been estimated, it is difficult to estimate the market price of other tangible assets. The prices of many assets often need to be known through real trading processes, and it is also a problem as to who is responsible for valuing physical assets. At the same time, on-chain data cannot be falsified, but the authenticity of off-chain data cannot be guaranteed. After all, there are also a large number of data falsification behaviors in traditional financial markets. How to identify and prevent fraud and deception in off-chain assets is also a problem that RWA needs to consider.

Uneven Development of RWA Track Projects

Among the many projects in the RWA track, the market value and income of the top stablecoin and bond-oriented protocols far exceed those of other projects. This is unhealthy for the overall track, as investors are currently interested in this track because DeFi returns are low and on-chain US Treasury projects are so popular. However, if the macroeconomy rebounds, DeFi returns increase, and the crypto industry enters a bull market, can the returns of these RWA projects still generally exceed those of other DeFi protocols? At that time, without the support of other direction projects, RWA will be difficult to escape the fate of being short-lived.

Potential Default Risks

Because the collateral or trading assets of the RWA track are off-chain and not ERC-20 tokens like traditional DeFi protocols, the process of asset liquidation in the event of default is much more complex. According to data from rwa.xyz, bad debt has occurred in major RWA protocols such as Centrifuge, Maple, and TrueFi, with a total default amount of over 66 million US dollars and a loan default rate of about 1.6%.

Excessive Centralization

Decentralization is the cornerstone of the crypto industry, but currently, RWA tends to be managed and operated in a centralized manner. Whether it is in terms of the review of real assets, asset custody, user KYC verification, etc., many processes are even executed by the project teams themselves. Although doing so makes the operation of RWA smoother and more likely to comply with regulatory requirements, excessive centralization can also lead to single-point trust failures. Therefore, to make the RWA track more prosperous, more decentralized solutions are needed.

Summary

The cryptocurrency industry has always been criticized for not bringing help and value to the real world. DeFi only forms a closed loop of on-chain funds, and NFTs do not help real-world brands generate more value growth. RWAs are being strongly promoted by institutions because they see their assistance in real asset liquidity. Currently, the bond market size is about $127 trillion, and the total value of global real estate is about $362 trillion. If these assets can interact with the blockchain, the value created will be enormous.

Perhaps in the current environment, the next bull market will emphasize compliance and practicality in the real world. However, it is worth noting that, based on past experiences, most of the cryptocurrency industry's breakthroughs have been bottom-up, and participants and audiences in RWAs are currently dominated by institutions and enterprises, and ordinary investors do not have appropriate entry points yet. The road ahead is long, and RWAs still need more exploration and experimentation.

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