What are Real World Assets (RWA)?
RWAs are becoming one of the significant trends in the cryptocurrency market and are rapidly gaining momentum. Messari predicts that the RWA market in 2023 will be valued at $3.5-10 trillion, but right now, it is still at an early stage, just like the crypto market as a whole.
What are Real World Assets?
Real World Assets or RWAs are a class of assets that include any goods that exist physically, such as:
- real estate,
- collectibles,
- gold,
- commodities,
- treasury bonds.
The RWA sector is part of the global TradFi marketplace, which includes all traditional financial instruments, including currencies, stocks, precious metals, and other exchange-traded commodities.
RWA is the largest segment of the entire financial world. The capitalization of real estate alone worldwide exceeds $326 trillion. Even the capitalization of gold, which reached $13.67 trillion as of February 2024, is almost 8 times more significant than the exact figure of the entire crypto market.
In cryptocurrency, the RWA sector represents tokenized assets backed by an underlying real-world asset. Tokenization allows linking a digital asset represented, for example, in the form of NFTs or ERC-20, BEP-20, and similar tokens.
Here are some examples of tokenized RWAs:
- PAX Gold is a stablecoin whose rate is linked to and backed by gold;
- In addition to PAX Gold, there is another gold-backed stablecoin, Tether Gold (XAUT);
- Harbor Real Estate Token (HRET) is a token that allows investors to own a share of real estate.
New players are emerging in the RWA segment that could be part of the future trend in the crypto market. One of them is Ondo Finance, the most significant crypto project in the RWA sector by capitalization at the time of writing. Ondo Finance provides institutional-grade financial infrastructure and maintains a fund that invests in portfolios of significant management companies such as BlackRock and PIMCO.
Also gaining popularity is the recently launched Parcl protocol on Solana, which allows trading of real estate futures in regions such as London, Denver, Washington DC, San Francisco, New York, and Los Angeles.
Another notable project in the RWA segment is Goldfinch, which allows you to earn returns from actual companies. Users can lend companies in USDC tokens and receive up to 17% annualized returns. The project was backed by some of the most significant funds, A16z and Coinbase Ventures. The Creditcoin project is somewhat similar to Goldfinch, except that its function is to select startups where fintech investors will be ready to invest digital assets.
Why do tangible world assets need tokenization?
The very emergence of cryptocurrencies was caused by the imperfection of the complex, inflexible, and costly traditional financial system based on outdated bureaucratic mechanisms. Virtually all transactions, such as the transfer of virtual currency, the transfer of gold, or the sale of a collectible, are accompanied by the involvement of intermediaries, and the transactions themselves can take days or even weeks. Among other things, all of this makes transactions quite expensive.
Tokenization of assets solves all these problems and has the following advantages:
- Minimizing the cost of intermediaries in transactions between sellers and buyers;
- Instant exchange through a smart contract, which also immediately records information about the transaction on the blockchain — it can be used as proof of ownership;
- Accessibility of financial services that can be used by people anywhere in the world;
- Transparency;
- Inability to acquire some assets as they are indivisible.
Finally, tokenized assets allow you to own a share instead of buying an expensive commodity. For example, you can issue tokens backed by a piece of real estate, each of which will provide the investor with a share and receive dividends from renting it. In the traditional system, equity ownership is a rather complicated process, especially when selling shares. It usually involves all the owners, and their consent must still be obtained. Instead, tokenized assets can be freely sold on the market, transferring ownership to another buyer.
Challenges and prospects for RWAs
The main problem of integrating the RWA sector with the crypto market has been regulation: so far, no clear rules have been defined in the laws of different countries. This makes it difficult to predict the prospects of RWA in the context of the crypto industry.
Many assets related in one way or another to the traditional finance sector (TradFi) have already suffered due to regulatory problems: USD Coin (USDC) and Binance USD (BUSD) stablecoins, Ripple, which works closely with hundreds of banking institutions, and several other crypto projects. It's still unclear how all this could turn out for the entire cryptocurrency industry. However, most analysts are optimistic about the future of the crypto sector and RWA as part of it.
The RWA sector has rapidly gained momentum over the past year as a decentralized finance (DeFi) market segment. DeFi Llama's analytical data shows that as of February 2024, the number of blocked assets (TVL) in the RWA sector amounted to $4.33 billion. In other words, the RWA market in the DeFi segment has grown more than 30 times in just two years.
According to CoinGecko, the capitalization of the RWA segment of the crypto market was $35.4 billion, which is still only about 2% of the total capitalization of all cryptocurrencies. At the time of writing, the leading solutions in terms of capitalization are:
- Avalanche,
- Chainlink,
- Internet Computer,
- MakerDAO,
- Synthetix,
- Ondo,
- Pendle,
- Centrifuge.
So far, their figures amount to a few hundred million dollars, but for the crypto market, it is quite decent, especially for relatively new crypto projects.
