Real-World Assets (RWAs) in Crypto & Why They Matter

Cryptocurrencies have revolutionized the way we approach assets and finances. They created unprecedented levels of utility and inclusion compared to the established markets, but they still need to catch up when it comes to sheer capitalization and widespread adoption. However, that might change with the introduction of real-world assets in crypto.

The concept of real-world assets (RWAs) leveraging cryptocurrency and blockchain technology represents a groundbreaking shift in how both decentralized (DeFi) and traditional (TradFi) finance spheres function. It features levels of flexibility, accessibility, liquidity, and financial democratization never seen before.

But how exactly can we bring real-world assets into the crypto sphere? Better yet, can you become the owner of these resources, and is it worth it in the first place? We’ll answer all these questions and more as we explore the intricacies of real-world assets in crypto. Let’s jump in!

What Are Real-World Assets (RWA) in Crypto?

Real-world assets in crypto are established commodities from traditional finance tokenized and brought over into the DeFi space using blockchain technology. Classic cryptocurrencies, like BTC and ETH, exist solely in the digital space. BTC established itself as a store of value cryptocurrency, while ETH created a programmable network in the form of an EVM.

However, even though blockchain technology has come a long way since its inception and there is nowadays crypto with real-world use, the application for these digital currencies is still limited. On the other hand, real-world assets exist in a much bigger market and have many more use cases.

The tokenization of RWAs makes them usable in the DeFi space. That adds valuable characteristics to real-world assets, such as efficiency, transparency, enhanced security, and more. On the flip side, the process brings value and liquidity to the realm of cryptocurrencies, further facilitating its growth and attracting new investors.

There are many different TradFi assets that can be tokenized and “brought” into the digital realm. The original RWAs that were first tokenized and adapted to operate in the crypto sphere are stablecoins. Companies like Tether Limited Inc. and Circle keep reserves of fiat money while issuing USD-pegged USDT and USDC stablecoins, respectively.

With the launch of NFTs, art and collectibles became another popular form of RWAs. Fractional ownership made expensive pieces more liquid and allowed investors to purchase only parts of these assets.

In recent times, the most popular types of real-world assets in crypto have become debt instruments and bonds. There are numerous platforms and services that facilitate lending and borrowing, tapping into credit markets, and more.

Usage of Real-World Assets in DeFi

Real-world assets can have vastly improved usage in DeFi due to blockchain’s features such as efficiency, security, and transparency. This integration of TradFi resources and DeFi technology represents significant advancements for both ecosystems.

For starters, the immense value of TradFi assets adds liquidity to decentralized finance, facilitating its growth and increasing the user base. On the other hand, tokenization of RWDs adds utility to them, making them usable within various DeFi protocols and real-world asset crypto projects.

One of the best ways to examine the usage of RWAs in DeFi is through examples. So, here’s a list of real-world assets in crypto and protocols that facilitate their use and management:

• stUSDT is a token issued by the TRON network RWA platform. The token is given to crypto owners who submitted their USDT stablecoins for staking into a money market fund. The fund is fully decentralized and governed by a DAO that manages more than $500 million in total value locked.
• Ondo Finance is a growing platform designed for investing in exchange-traded funds. It allows stablecoin holders to exchange these crypto tokens for US dollars, purchase real-world assets, and gain new tokens in their wallets as proof of ownership.
• Backed Finance gives cryptocurrency enthusiasts access to publicly traded securities. It’s a centralized platform where users must perform KYC verification before buying securities. They can then sell these assets on secondary markets to anonymous traders. For every purchased security, buyers get a bToken of the same value.
• MakerDAO, the protocol behind the biggest decentralized stablecoin, recently disclosed that almost 80% of their revenue comes from real-world assets.

Real-World Assets Tokenization Process

The tokenization process of real-world assets involves minting digital tokens that represent their ownership. This is commonly done by companies that manage real-world assets, which they can store for safekeeping while issuing cryptocurrency to their buyers, much like bills of sale.

One of the simplest ways of understanding how tokenizing real-world assets works is by looking at the example of a stablecoin, like USDT. The company behind USDT, Tether Limited Inc., is solely responsible for minting and burning this cryptocurrency, as well as maintaining its peg to the fiat dollar. Here’s how the process goes:

• Backing. Tether claims that every USDT they issue is backed 1:1 to the USD. As a result, their private reserves need to equal the USDT total supply at all times to maintain the peg.
• Purchase. When an individual or an entity wants to purchase new USDT tokens from Tether, they usually send the equivalent amount in USD to the issuer’s bank account.
• Minting. Tether stores newly acquired fiat assets in their reserves and mints USDT in return. The stablecoin can be issued on several different networks, including Bitcoin, Ethereum, Tron, and Algorand.
• Redeeming. When someone wants to redeem their USDT holdings for real-world assets, they send them back to Tether. The company transfers USD from its bank account to the holder’s and burns the corresponding number of USDT tokens.
• Usage. While in circulation, USDT can be used like any other DeFi asset. Users can stake them, trade, provide liquidity, and more.

5 Benefits of RWAs

Converting real-world assets into crypto tokens brings multiple benefits to both ecosystems. TradFi becomes more flexible and efficient, while DeFi experiences growth and adoption. So, let’s explore some of the key advantages of RWAs.

#1. DeFi Growth

The cryptocurrency market capitalization hovers around $1 trillion, while more than $800 trillion in tangible assets can be tokenized. Bridging the gap between these two markets will likely result in unprecedented levels of growth of decentralized finance.

Adding value to the market doesn’t only benefit current participants, but it also draws in more investors and helps broaden adoption. It attracts individuals and entities who might be skeptical about cryptocurrencies but know the value of RWAs.

#2. Enhanced Liquidity

Many traditional real-world assets face liquidity problems. For instance, the cost of famous art pieces or real estate can be prohibitive for most buyers. On the other hand, there’s also the issue of accessibility since not everyone can take part in IPOs or private credit investments.

The tokenization of these assets introduces fractionality, creating new types of ownership models. It also makes these tokens available to anyone, regardless of aspects such as geographical location or credit score.

#3. Transparency

Blockchain is a decentralized and transparent ledger that keeps permanent records of every transaction. Every network participant can check the information stored or even track transactions in real-time.

This gives tokenized RWAs exceptional levels of transparency. This is especially true compared to traditional assets, where centralized entities store and manage most records and details about transactions and ownership.

This kind of transparency reduces the risk of malicious actors attempting to hack the system or commit fraud, leading to increased trust among investors.

#4. Efficiency

The automated nature of blockchain technology improves asset trading and management. As a result, tokenized real-world assets are much easier to buy, sell, and transfer. Users can take advantage of smart contracts and dApps to execute instant trades without middlemen.

Reducing the number of participants required for each operation makes it much faster and cheaper to manage real-world assets in crypto. Reduced fees and improved throughput create an overall more capable and effective environment.

#5. Innovation

The merge of traditional assets and blockchain technology leads to innovation on both fronts. By leveraging fungible and non-fungible tokens in combination with TradFi asset value, developers can make new financial products or improve existing ones. This ranges from the fractionalization of real estate, art, or property to the creation of credit market protocols for blockchain lending.

Challenges Associated With the Tokenization of Real-World Assets

While real-world asset tokenization is an innovative concept with many advantages, it’s not without challenges. Some of these challenges stem from the nature of cryptocurrencies and blockchain, while others are unique and depend on the services that specific platforms and protocols provide.

For example, one of the biggest concerns with credit market protocols that facilitate borrowing and lending is the default risk. The volatility of cryptocurrencies coupled with undercollateralized loans resulted in lenders being unable to get their capital back on multiple occasions.

Platforms like Maple Finance, TrueFi, and Centrifuge all saw millions of dollars in losses. While this issue has been mitigated with the shift toward using stablecoins to reduce volatility, the overarching problem remains.

Another challenge comes from the fact that many real-world asset platforms feature human factors. Humans still perform Know Your Customer procedures and Anti Money-Laundering (AML) processes, which means there are biases in who gets approved and who gets rejected. Ultimately, that goes against the decentralized nature of cryptocurrencies.

Centralization creates another issue, which is trust. If a centralized entity tokenizes real-world assets, their buyers and holders need to trust the issuing company not to manipulate the system. For example, this is one of the most prominent concerns with USDT, which is one of the largest cryptocurrencies by market cap.

While the company claims they have enough capital to back every USDT they minted, there’s an ongoing debate about the validity of these claims. Tether Limited Inc. has yet to provide undisputed proof of these claims, and there haven’t been proper audits to corroborate them.

Finally, there are always concerns regarding regulatory compliance. Regulation surrounding the crypto sphere is unclear, at best. Things get even more complicated once you introduce TradFi elements, like securities.

The Future of Real-World Assets

Real-world assets in crypto have an exciting future ahead. The process of tokenization brings many benefits to established goods and commodities, increasing their flexibility and facilitating financial inclusion.

If RWA tokenization continues its projected growth, the DeFi space is likely to see expansion and broader adoption. Many crypto enthusiasts will turn to RWAs to diversify their portfolios and gain exposure to traditional markets. On the other hand, TradFi investors might be attracted by blockchain and crypto perks such as transparency, efficiency, and fractional ownership.

Technological advancements and blockchain innovation could make the tokenization process more accessible and secure. As crypto developers continue to work on interoperability, it’s likely that it’ll positively affect tokenized real-world assets, making it easier to trade and manage them.

Ultimately, one of the most influential aspects of the future of RWAs is likely going to be regulatory clarity. As heavily regulated TradFi assets enter DeFi, the regulatory pressure from centralized government authorities will increase.

Initial endeavors might slow the expansion of decentralized finance and RWAs, but the long-term results could be positive. They could bring much-needed stability to the space, attracting risk-averse investors concerned about crypto volatility and unpredictability.

Key Takeaways

The integration of real-world assets and blockchain might be the turning point for both spheres. It represents the unification of finance and technology that’s unlike anything we’ve seen before. The process brings immense value and liquidity to DeFi while simultaneously enhancing TradFi assets.

While it’s unclear how far this partnership can go, the advantages are plainly visible. The road ahead is not without challenges. Still, tokenized real-world assets have the potential to reshape the financial future, and they are worth keeping an eye on!