RWA Narrative Explanation: What projects are worth following?

Original Author: AYLO & FLOW

Original Translation: Deep Tide TechFlow

We are at an important moment in the history of cryptocurrency.

In the past few weeks, we have witnessed a 180-degree turnaround in the United States’ attitude towards cryptocurrencies. Surprisingly, all eight Ethereum ETFs have been approved by the SEC. In addition, the US House of Representatives has not only passed the Crypto FIT 21 bill, but also legislation to prevent the creation of a central bank digital currency. But more notably, it is striking to see cryptocurrencies even becoming a significant issue in the upcoming US presidential election.

Therefore, if you are a large financial institution, the message is clear: cryptocurrency will not disappear, and it is best to familiarize yourself with it and start exploring its different use cases to avoid being left behind.

From this perspective, it seems obvious that there is tremendous potential for growth in the field of tokenization of real-world assets.

But what exactly is this trend, why is it causing such a frenzy, and how can we maximize its use? These are the topics we will explore in this article.

Case of Tokenization of Real World Assets

If software is eating the world, then tokenization of real-world assets is eating the capital market.

In recent years, the real world assets (RWA) have become one of the most promising use cases for blockchain technology by putting real world assets on the chain. The case of RWA is simple: it bridges the stability and value proposition of real world assets with the innovative features and potential efficiency of blockchain technology and decentralized finance (DeFi).

In fact, many people see this area as a new hot spot in the financial industry. Recently, we have even seen the biggest names in finance, such as BlackRock and Franklin Templeton, show strong interest in this field and launch their own tokenization funds.

(Source: Bloomberg)

In theory, any tradable real-world asset can be tokenized and put on the blockchain. This includes tangible and intangible assets, as well as fungible or non-fungible assets. The following is a non-exhaustive list of some of these assets.

Why is tokenization so important?

If there were no obvious advantages to asset tokenization, RWA would not have received such great attention. The table below explains the main advantages of tokenization.

The core theory of DeFi is that blockchain can create a better standard for seamless exchange of different assets. In this sense, RWA is just about recognizing the value proposition of DeFi and extending it to every tradable asset to build the next generation of markets - a more transparent, secure, fair, and open market.

Understanding the Trend of RWA

We are entering the era of tokenization in the market. Gradually, all assets will be put on the chain, challenging the status quo of the global capital market over the past 30 years. This is especially true when we consider that the trend of RWA is at the intersection of two trends shaping the world today: financialization and digitization.

• Financialization: Today, finance has no boundaries, and the economy is becoming increasingly borderless. Individuals transfer ownership of assets to each other globally. Everything has a market, everything has a price, and everything becomes tradable. Therefore, it becomes more meaningful to establish more efficient, transparent, fair, and open market mechanisms.
• Digitalization: The world is becoming increasingly digital. We have connected phones, watches, and soon we will have connected brains. In this sense, it seems logical progress for proof of ownership of assets to migrate to the blockchain network.

In this sense, RWA is fully capable of capturing these two trends.

Main Challenges

Without a doubt, the on-chainization of real-world assets offers very interesting features. But it also brings many challenges. The main challenges revolve around:

• Regulation: Currently, there is no clear answer to where to establish a market for tokenized assets without encountering a complex regulatory environment. However, as people’s understanding of cryptocurrency continues to evolve, this situation may change.
• Liquidity: Providing suitable market structure for real-world assets to achieve liquidity and market making may be a challenge, especially for highly illiquid markets that trade 24/7.
• Education: It will take a long time for everyone to understand the true value proposition of putting real-world assets on the chain, because blockchain technology and its trade-offs may be difficult to understand in the early stages.

Development of RWA

Stable Coin Pegged to the US Dollar

Stablecoins supported by fiat currency are the first killer use case for tokenizing real-world assets. In recent years, this market has seen a significant rise. Today, the total market capitalization of the two largest fiat-supported stablecoins (Circle’s USDC and Tether’s USDT) exceeds $130 billion, compared to around $5 billion at the beginning of 2020.

Commodity-supported Tokens

The tokenization of precious metals has also become another popular application of RWA. Some examples include Tether Gold (XAUT) or PAX Gold (PAXG), which are tokens backed by physical gold. Although this is a relatively new market, it is growing rapidly, with a total market capitalization of approximately 8.4 billion US dollars for XAUT and PAXG.

Tokenization of Government Bonds

The latest trend in RWA is the tokenization of US Treasury bonds. According to the data from 2 1co, we have noticed a rapid rise in the market capitalization of this field, exceeding $1.3 billion. But what’s even more interesting is that traditional financial institutions are entering this market. For example, the BENJI token represented by Franklin Dupton has accumulated deposits of approximately $370 million, while BlackRock’s BUIDL token has received deposits of over $380 million.

The beginning of the next chapter

This trend of tokenization has just begun and is expected to continue to rise rapidly. According to the forecast of Boston Consulting Group, by 2030, the tokenization market of global financial assets is estimated to reach $160 trillion, and may eventually become the bridge we have been waiting for to connect traditional finance and DeFi, building the next generation market.

Looking ahead, we can envision a future where not only pure financial assets, but almost all easily tokenizable assets, from luxury watches to artworks to real estate, will be tokenized on the blockchain. This is the future of finance.

Seize this opportunity

After reading these, I believe you must be asking yourself now: ‘Okay, I understand, but how can my investment portfolio take advantage of this new trend?’ Don’t worry, I have prepared an RWA watchlist for you (+ a BONUS).

But before delving into it, a reminder. Currently, the cryptocurrency market is characterized by significant speculation, so caution is necessary. Therefore, the following content is not a prediction, but rather some thoughts. And as data availability increases and time passes, these thoughts may undergo significant changes.

This is not an exhaustive list, just some projects that I have researched and think are worth following. There are many other projects in this category that I obviously missed.

RWA Project

Are you ready? Now let’s explore some projects that you may want to add to your watchlist:

• Chainlink ($LINK)

In short, Chainlink recently updated their description of the network as a “universal platform for creating the future global market on-chain”. By bridging the gap between real-world data and blockchain, Chainlink is key to tokenizing real-world assets.

The tweet I wrote earlier is still very relevant today. Chainlink is actively collaborating with Swift, The DTCC, and some of the largest banks in the world. These are not speculative partnerships. Very real pilots and case studies have been conducted to demonstrate the feasibility of the technology, and on-chain settlement of RWA is only a matter of time.

(See tweet here)

Long term, I am very bullish on Chainlink.

• Ondo Finance（$ONDO）

In short, Ondo is building the next generation financial infrastructure to improve market efficiency, transparency, and accessibility. It allows retail and accredited investors to access the bond market on-chain through products such as USDY (tokenized notes backed by US Treasury bonds) and OUSG (short-term US Treasury bonds).

About ONDO, there are a few things you need to know:

(See detailed tweet)

ONDO is one of the top-performing new tokens in 2024. I think this project is very interesting and has gained a lot of momentum recently. However, it may be a bit overhyped and overvalued at the moment. Nevertheless, it is definitely worth adding to your RWA watchlist.

• Pendle Finance（$PENDLE）

In short: Pendle is a decentralized finance protocol that allows users to tokenize and sell future yields. It is an innovative tokenization model solution that provides users with flexible and dynamic yield management options.

This is also a very good protocol for earning points.

• TrueFi （$TRU）

In short, TrueFi is a modular on-chain credit infrastructure that connects lenders, borrowers, and portfolio managers through smart contracts, governed by $TRU.

• Mantra Network（$OM）

In short, Mantra is a security-first RWA first-tier blockchain designed to comply with real-world regulatory requirements.

Get a deeper understanding of this project through this tweet:

• Polymesh Network ($POLYX)

In short, similar to Mantra, Polymesh is an institutional-grade permissioned blockchain specifically built for regulated assets.

If you want to learn more about why this project is important, you can check out this tweet:

• Centrifuge ($CFG)

In short, Centrifuge provides infrastructure and an ecosystem to tokenize, manage, and invest in a complete, diverse portfolio of real-world assets. The asset pool is fully collateralized, investors have legal recourse, and the protocol has no restrictions on asset types. The asset pool includes structured credit, real estate, US government bonds, carbon credits, consumer finance, etc.

• Dusk Network ($DUSK)

In short, Dusk is a permissionless, ZK-friendly Layer 1 blockchain protocol focused on the tokenization of real-world assets.

You can learn more about Dusk here:

• Clearpool ($CPOOL)

In short, Clearpool is a decentralized financial ecosystem dedicated to creating the first permissionless institutional liquid market.

• Polytrade ($TRADE)

In short, this is a market for real-world assets. It brings together tokenized treasury bills, credit, stocks, real estate, commodities, as well as collectibles, artworks, intellectual property, creator royalties, luxury goods, and more, from all chains onto one platform.

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