Real world assets are taking centre stage in the DeFi world, with many dApps specializing in this field. If you haven't yet understood what they are and their potential, this series of articles will unveil all the secrets of this DeFi trend.
In this first article of the "Understanding Real World Assets" series, we will cover:
- What are RWAs?
- Which assets are most commonly tokenized?
- What are the main issues of RWAs?
What are RWAs?
The term RWAs refers to a range of assets originating in the real world and brought onto the blockchain. In theory, any real-world asset can be brought onto the blockchain and throughout this article, we will discover which categories of assets are currently most affected by this revolution. There are various techniques for bringing RWAs into the blockchain, the main two are:
RWA with collateral
One technique for bringing assets on-chain is by tokenization, where the tokens issued on the blockchain are backed by corresponding physical collateral, ensuring their value. Well-known examples include various stablecoins like USDT or USDC, where dollars serve as collateral.
Another approach to bring real-world assets into the digital world is through the use of synthetic assets. Unlike RWAs with collateral, which require physical possession of the underlying asset used as collateral, synthetic assets, such as those issued by Synthetix, are created from a different collateral asset, SNX in this case, which guarantees their value. This speeds up the process but adds a risk factor because the underlying asset, in this case, SNX, is volatile compared to the various synthetic assets. It's crucial that the collateral asset always guarantees the value of the issued synthetic.
Over the past year we have seen an explosion in the TVL of dApps dealing with RWAs, this is because there are several advantages to completing this process and bringing these assets on-chain, including:
- Leveraging blockchain technology and its benefits of decentralization, security, and efficiency.
- Bringing external yields to the native crypto world, increasing overall liquidity.
- On-chain tokens provide a higher level of transparency compared to the traditional version, thanks to the public nature of the blockchain.
Which assets are most commonly tokenized?
As mentioned earlier, through a tokenization process, almost any asset can be brought on-chain. We should not limit our thinking to classic financial assets like stocks, bonds or commodities, but also consider physical assets like real estate or luxury items. Despite this generalization, there are specific assets that are particularly interesting to bring on-chain.
Market Cap RWAs by Type - Source: Galaxy Research
As you can see from this chart, Gold and precious metals are the type of real-world assets that have been most tokenized and brought on-chain. An example is PAXG, which is present within the MetalSwap dApp, where each issued token represents an ounce of gold in the real world. The on-chain representation of gold through tokens makes it much easier for exposure to this asset, especially for retail investors who can now quickly and securely participate in its price.
MetalSwap's future goal is to integrate new commodities into their dApp to expand their user base. While waiting for viable solutions to bring on-chain tokens representing other commodities beyond gold, the role of decentralized oracles, which we'll discuss later, is crucial for implementing these RWAs within dApps like MetalSwap.
Bonds (U.S. Treasury)
The second most important and capital-intensive asset is the U.S. Treasury bonds. Many dApps purchase these assets, tokenize them, and make them available through blockchain infrastructure. Given the rising interest rates, there is significant demand for this type of real-world asset, with an estimated 664 million treasury tokens as of now, according to rwa.xyz.
For the first time in history, thanks to blockchain, one can expose themselves to American bonds without geographical or financial limitations, in an extremely easy and verifiable on-chain manner. This innovation also leads to the creation of yield-bearing stablecoins, which are tokens pegged to the dollar that steadily give income to the holders due to the yields from the underlying asset, i.e., American bonds.
The third category of assets highly involved in the tokenization process is private credit fields. Here, companies worldwide use blockchain as a framework to find lenders and obtain loans more quickly and efficiently compared to real-world procedures. DApps like Maple and TrueFi had reached approximately 1.77 and 1.73 billion dollars in active loans by August 2023.
Other growing categories of Real World Assets include real estate and the representation of equities on the blockchain.
What are the main issues of RWAs?
We introduced this issue in the section of commodities and now it's time to delve deeper. As mentioned, it's not enough for a token representing a real-world asset to be released on-chain; it must be implemented by decentralized oracles. DApps operating with RWAs, such as MetalSwap, require receiving the asset's price feed for the correct functioning of financial operations. The price feed must also be provided in a decentralized way to be secure from attacks. Chainlink is currently the leading project in the field of oracles and the development of new price feeds is continuously evolving.
The decentralized and permissionless nature of major blockchains is undoubtedly an advantage that leads dApps to integrate real-world assets into their services. However, this clashes with the regulatory aspects that these assets must adhere to. The development and integration of these assets into DeFi are moving slowly, partly due to the need for a regulatory framework that is only starting to develop now. It is hoped that this framework will create a secure and innovation-friendly environment.
While blockchain technology offers robust security features, it is not immune to cyber attack. Hacking attempts, vulnerabilities in smart contracts and breaches of digital wallets all pose risks to tokenized assets and investor holdings, especially on decentralized ledgers. Continuous advancements in security measures are required to mitigate these risks.
In this first article of the “Understanding Real World Assets" series, we began to dive into this new world, trying to emphasize the basic aspects to know in order to start taking the first steps. In the next episode we will go deeper and we will analyze the main dApps in RWAs ecosystem.
-The DeFi Foundation
✎ What is MetalSwap?
MetalSwap is a decentralized platform that brings Hedging Contracts on financial markets with the aim of providing coverage to those who work with Digital Assets and an investment opportunity for those who contribute to increase the shared liquidity of the project. Allowing the protection for an increasing number of operators.
With MetalSwap we enable Hedging Contracts on the DeFi field, AMM style.