The concept of integrating RWA and DeFi

Real world asset tokenization (RWA) specifically refers to the conversion of relevant rights of traditional financial and physical assets into digital tokens on the blockchain, which represent the ownership or shares of traditional financial and physical assets. Traditional financial assets include stocks, bonds, funds, income sharing agreements, and accounts receivable. Physical assets typically include real estate, art, precious metals, etc. On a theoretical level, any valuable asset can be tokenized. The advantages of asset tokenization are mainly based on decentralization and underlying blockchain technology. By creating ecological applications, we can address the drawbacks of traditional finance.

The full English name of DeFi is Decentralized Finance. DeFi allows users to interact directly with smart contracts from their cryptocurrency wallet. Smart contracts are automatically executed contracts, with protocol terms written directly into the code. By automatically executing the protocol, all participants can immediately determine the outcome without the involvement of any intermediaries and without time loss. DeFi is similar to LEGO bricks, combining basic financial modules and different smart contracts to help investors achieve their investment goals. Smart contracts can mutually call and splice basic financial modules. Generally speaking, DeFi runs on public blockchains (mainly ETH and Solana). RWA is an important component of the basic financial module. The integration of RWA and DeFi is a milestone innovation in the digitization of traditional financial assets and physical assets.

The core value of RWA and DeFi integration

The core value of RWA lies in the bridge connecting the digital asset world, which is mainly reflected in the following four aspects:

Firstly, closely integrated with DeFi, the market potential is enormous. Enterprises or organizations can more conveniently utilize the DeFi ecosystem to obtain financing through RWA, especially when they have physical and financial assets that cannot be quickly realized and need to quickly replenish cash flow. RWA not only provides an off chain market for the DeFi ecosystem, driving the connection between DeFi and the real world, but also provides new opportunities for expanding investment scope for traditional financial customer groups.

Secondly, RWA optimizes the traditional financial asset trading model. Traditional financial and physical trading markets are usually labor-intensive, while blockchain technology, with its real-time settlement and all-weather trading characteristics, significantly reduces the operating costs and entry barriers of market participants. Tokenization allows illiquid assets to be subdivided into small investment portfolios, reducing the consumption of paperwork, money, and time by investors, thereby achieving more equitable market conditions, and giving rise to new business and social models such as shared property ownership.

Thirdly, RWA increases the liquidity of physical assets. Tokenization is a special type of securitization, with the core function of converting low liquidity assets into high liquidity assets. By introducing real-world assets into the DeFi ecosystem, market efficiency can be improved, and investors can also access unique investment opportunities and previously unimaginable liquidity. Tokenization cannot actually increase liquidity for some asset classes that are inherently illiquid, such as private equity and credit, infrastructure, real estate, and art. However, tokenization can fully utilize the advantages of direct interaction with the investor community, increasing the application of DeFi scenarios, and reducing the high discount on assets issued due to a lack of liquidity. At the same time, tokenization has the characteristic of being able to fragment assets, dividing unit assets into smaller denominations. This lower investment threshold can allow investors who were previously unable to participate due to high thresholds to participate and bring additional liquidity. The importance of these features has been demonstrated in the cryptocurrency and DeFi markets.