What are Real World Assets (RWAs) in Cryptocurrency?

Real world assets (RWA) are physical assets that enter the blockchain through tokens. These assets can be any form of physical assets, such as real estate, stocks, bonds, commodities, art, etc.

Cryptography on the blockchain can make these assets easier to circulate, trade, and finance, and can increase their transparency, liquidity, and value.

Obviously, the real-world assets of the traditional financial industry are enormous. However, these assets have hardly been exploited in the DeFi world. This brings real-world assets to the DeFi industry, increases liquidity availability, and provides a new asset class for DeFi participants to leverage for investment returns. In addition, for real-world assets, the impact of cryptocurrency volatility on investment returns may be relatively small.

At present, RWA has three main applications in DeFi:

Used as a stablecoin.

Generate synthetic tokens.

Used as an asset in a lending agreement.



Why is RWA attractive?


The DeFi market is on a downward trend

The DeFi market has been thriving since the beginning of 2020 and is expected to reach a TVL milestone of over $180 billion by the end of 2021. Subsequently, with the downward trend in the market, the locked asset value (TVL) on DeFi protocols sharply decreased to less than $50 billion.

However, as a pillar of technological progress today and a driving force for the entire blockchain industry, DeFi still needs to research better token economics models in the face of high token inflation rates.

Some tokens have lost more than 90% of their value or even disappeared from the market, resulting in a significant decrease in user profits. The yield of DeFi is now only equivalent to TradFi (traditional finance - traditional finance).

It is easy to see that TradeFi offers a much lower risk investment model than DeFi. So when the interest rate between two arrays is the same, DeFi users will gradually exit and return to TradeFi. This situation requires new sources of revenue to revive DeFi, and Real World Assets is the answer.

RWA's New Power

Currently, real-world assets are contributing a significant portion of global financial value. Among them, the debt market (with fixed cash flow) is worth about $127 trillion, the real estate market is worth about $362 trillion, and the gold market is worth about $11 trillion.

At the same time, TVL is only $50 billion, and compared to RWA's market value, the DeFi market is like a small person. If RWA is put on the blockchain, the DeFi market will gain richer asset flows and more diversified profit models, thereby driving growth.

Giants are also beginning to explore RWA

The Hong Kong Monetary Authority also mentioned in the Hong Kong digital dollar pilot plan announced this month that 16 selected companies from the financial, payment and technology fields will carry out the first round of tests this year to conduct in-depth research on the potential use cases of digital Hong Kong dollars in six major fields, including comprehensive payment, programmable payment, offline payment, encrypted deposit, third-generation Internet transaction payment (Web3) and encrypted asset payment.

In fact, in February of this year, the Hong Kong Special Administrative Region government successfully issued 800 million Hong Kong dollars worth of tokenized green bonds. This is the world's first tokenized green bond issued by a government.

At the same time, financial giants are also beginning to explore and develop new plans for RWA tokens. Among them, financial institutions such as JPMorgan Chase, Goldman Sachs, DBS Bank, UBS, Santander Bank, Industrial Bank, Hamilton Lane, etc. have entered the practical/actual testing stage from the research and exploration stage Facilities such as Temasek, HSBC, BlackRock, etc. are still in the exploration and preparation stage.

In recent years, some central banks in China have also applied blockchain technology to supply chain finance, trade finance, payment and other fields, launched blockchain trade financing platform, asset securitization platform, Internet e-commerce financing system and other related platforms, as well as more used to transform and improve the efficiency of financial services in digital form.

DeFi opens up enormous potential for RWA

Not only are DeFi beneficiaries of Real World Assets, but it also helps to build more efficient market models, especially in the context of TradFi's gradually saturated performance.

Since its establishment, TradeFi has had to rely on intermediary systems. The intermediary system includes brokers, identity verification operations, and supervision. This system ensures the security of transactions to a certain extent, but there are limitations in terms of fund efficiency.

According to the International Monetary Fund's 2022 Global Financial Stability Report, TradFi may be more efficient as market participants must pay intermediary fees (including labor and system management fees).

In addition, third parties also control user assets and may even be blocked by the system at times. DeFi models will help eliminate these limitations.

In addition to eliminating intermediary systems, applying DeFi to RWA can also make it easier for users to diversify their investment portfolios through tokens. The liquidity of AMM model is also fast, which can help users complete transactions immediately.

For those familiar with stock trading, this is a huge benefit. Stock investors often need to contact brokerage firms for trading, and there are often delays in trading (such as T+1, T+3).

The final benefit of DeFi for RWA is the transparency of the blockchain ledger, which allows users to observe the flow of transactions and evaluate market conditions. These pieces of information are usually hidden in TradeFi.
conclusion

Real World Assets are real-world assets on the blockchain that create new assets for DeFi. Compared to TradFi, DeFi can also help RWA owners optimize capital efficiency. Some prominent uses of RWA in DeFi are stablecoins, synthetic tokens, and lending. These are just simple applications, so there is great potential for future growth in this field.

However, it is equally important to pay attention to some of the challenges faced by RWA, such as asset valuation and certification issues. When delving deeper, Real World Assets faces many obstacles. Real world assets have not been extensively utilized and are only used as collateral for loans. In the foreseeable future, the risk weighted asset sector will require more legal support to develop. This is the biggest obstacle and also the bottleneck for the rapid approval of the remaining parts.