Did you know that tokens can represent ownership of real-life assets, such as property or a house? Thanks to Real-World Asset (RWA) tokenization, it is now possible to connect real-world asset ownership with the digital world. So, what exactly is RWA, and what are the potentials and projects related to RWA? This article will answer all these questions.
Real-World Asset refers to a tangible asset that can be tokenized and potentially used as collateral in DeFi. Examples of tangible assets are bonds, real estate, money, commodities, etc.
When we refer to RWA, we are talking about the tokenization of tangible assets. Through RWA tokenization, smart contracts manage and represent physical assets with tokens, facilitating on-chain trading.
Traditionally, investing in real assets like property or gold was restricted to certain individuals due to high entry barriers and minimum investment requirements. However, with RWA tokenization, these assets become accessible to everyone, regardless of their capital.
RWAs offer opportunities for investors with limited capital to participate in real-world asset markets that were once out of reach. This increased accessibility not only benefits individual investors but also enhances the overall liquidity and openness of the market.
Moreover, RWA tokenization can potentially eliminate geographical barriers, allowing assets to be traded and moved globally.
A token in RWA can function like a digital certificate of ownership representing almost any value object, including physical and digital assets.
How Real-World Asset tokenization works involves several complex steps. However, the ultimate goal is to connect the physical and digital worlds through blockchain technology.
The RWA tokenization process involves selecting the token type, choosing a blockchain for token issuance, appointing a third-party auditor to verify the asset off-chain, issuing the asset, and finalizing the token allocation.
Read also: DeFi Red Flags and How to Stay Safe in DeFi.
Over the past 15 months, demand for US Treasury yields has increased significantly due to the Fed’s interest rate hikes. Interest rates increased from 0.25% in March 2022 to 5.25% (July 2023).
As an attractive low-risk alternative, crypto lending protocols offer around a 3% yield on stablecoins. It has led to the emergence of several protocols that bring these off-chain yields into the blockchain network, such as Franklin Templeton (an international asset management company) and Ondo Finance (a DeFi startup).
Franklin Templeton (BENJI) issues nearly 50% of all tokenized US Treasuries on Stellar, while Ondo Finance (OUSG) issues half of them on Ethereum.
Digital Asset's blockchain startup has attracted attention from major corporations such as Goldman Sachs, Microsoft, and Deloitte, all of which are focused on tokenizing digital assets through their partnerships. In addition, Germany's top tech company Siemens has also issued a 64 million US dollars digital bond on a public blockchain in February 2023.
Read also: What is Bitcoin ETF?
Real-World Asset is considered stable and can be alternative collateral in DeFi. It enables access to decentralized financial services for various types of businesses. The potential uses of RWA in the DeFi sector are as follows:
As the DeFi ecosystem continues to expand, an increasing number of new protocols and projects are emerging to support RWA tokenization. Data from rwa.xyz shows that the number of active loans on the Maple protocol reached more than 900 million US dollars as of May 7, 2022. Here are some protocols and projects that support RWA in DeFi:
Maple Finance is a DeFi protocol focusing on decentralized lending using RWA as collateral. This protocol focuses on institutional borrowers.
Data from DefiLlama, Maple RWA has a TVL of 31.03 million US dollars as of July 25, 2023. This amount places Maple RWA in 6th place by the TVL.
Centrifuge is a protocol that integrates real-world assets (RWAs) into the DeFi space. It creates a more open and accessible financial system.
This protocol also has high security. It applies strict legal standards, KYC checks, and technical audits to ensure user safety and reliability.
CFG token holders also have voting rights in developing the protocol, making it more democratic.
Goldfinch is a decentralized credit protocol that enables crypto asset lending without crypto asset collateral – with off-chain collateralized loans.
Its primary business is providing loans to companies. It targets borrowers such as debt funds and fintech companies and provides them with credit loans in USDC.
Realio Network is a distributed network that modernizes storing, issuing, analyzing, and exchanging assets (tokens). It enables the issuance of tokens that comply with strict regulations and provides a complete infrastructure for the success of RWA tokenization.
One of the main challenges in RWA is the regulatory issue. Real-world assets must comply with various financial regulations in multiple jurisdictions. The RWA tokenization process must pay attention to and comply with legal requirements, including KYC (Know Your Customer) and AML (Anti-Money Laundering) rules. It is to ensure compliance and safety in using such assets in the DeFi ecosystem.
Additionally, it is crucial to establish a clear linkage between tokens representing RWAs and the related physical assets in the real world. When real-world assets are tokenized, a well-defined mechanism is necessary to connect the token to its actual physical asset. Failure to establish these linkages properly may result in integrity and value concerns for RWA tokens.
After knowing what RWA is, you can invest in RWA tokens such as MKR, SNX, and others without worrying about fraud on Pintu. In addition, all crypto assets on Pintu have passed a rigorous assessment process and prioritize the principle of prudence.
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