The Real-World Asset (RWAs) narrative in DeFi is grossly underrated. The question is, are you paying attention? As the name implies, the RWA narrative aims to represent TradFi and physical assets as digital tokens on a blockchain. The tokenization of these assets makes them easily traded, used as collaterals for credits, and much more.
Some asset examples are agriculture, real estate, contracts, company shares, insurance, private and public infrastructures, private equity, etc. Blockworks, Messari, Binance Research, and a few other theses for 2023 cited RWA as one of the key themes for 2023.
What are real-world assets really about? What matters here? And, maybe most importantly, what does it mean for investors in the market?
Current State of RWA
The Real World-Assets DeFi narrative is heating up with lots of exciting projects in the space. From energy to healthcare to revenue-based financing, DeFi founders are consistently bringing new markets on-chain.
RWA credit protocols have currently originated about $4.2 billion worth of loans to businesses and institutional investors.
Massive? I bet it is.
DeFi users can earn decent yields on an average of 12.4% APR by contributing to these loans.
Real-world assets are about creating new rails from which the most critical financial markets can function without friction. This does not mean speculative betting markets or the make-the-rich-richer markets, but economic markets.
These markets encompass real businesses, most of which are “small”. Is there a better financial method to facilitate their everyday needs more efficiently? Efficient financing of economic business needs is what real-world assets are all about.
There are three critical components to real-world assets:
Credit-Credit, promises to pay back the debt on specific terms and periods. The beauty of credit is that it supports trillions of dollars worth of business and, indeed, most of the global economy.
Security- The presence of collateral, senior capital structures, an airtight legal framework, and only the best for partners. All of these things are used in the world of finance to provide security to the lender.
Transformation- Real-world assets are about truly building the infrastructure that powers the future of finance. We intend to replace the slow, manual, and ageing intermediaries that pollute our financial transaction chains and result in far too many hands in the cookie jar.
Popular examples of RWAs include:
Cash
Metal (gold, silver, etc.)
Real estate
Corporate debt
Insurance
Salaries and invoices
Consumer goods
Credit notes
Royalties
The Use of RWAs in DeFi
The term “real-world assets” emerged in recent years to differentiate cryptocurrencies from traditional financial holdings. Unlike cryptocurrencies that only exist in digital form, RWAs are usually tangible and tied to real-world organizations.
However, blockchain technology has unlocked the possibility of bridging real-world assets to DeFi. Developers typically use intelligent contracts to create a token representing an RWA while providing an off-chain guarantee that the issued token is always redeemable for the underlying asset.
Takeaway
Adopting RWAs within DeFi opens the industry to the world’s largest debt markets. It also provides greater capital efficiency for lenders and unlocks a vast capital pool to borrowers in emerging markets.
Over time, this approach will accelerate mainstream cryptocurrency adoption and provide a stepping stone for DeFi to reach its $100 trillion potential.
Comments