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RWA explained: Opportunities of Real-World Assets in 2024

rwa

People are already talking about Real-World Assets (RWA) as a big deal in the crypto scene for 2024. The question is, can turning things like real estate, stocks, and carbon credits into tokens really become a regular thing for everyone?

What is asset tokenization?

In the context of the crypto industry, the term RWA (Real-World Assets) refers to any asset that initially resides off-chain (i.e., not on the blockchain). This includes both physical assets (such as oil, gold, and real estate) and electronically issued assets (bonds, carbon credits, ETFs).

Thus, RWA protocols are projects that tokenize real-world assets, whether in the form of traditional tokens or as NFTs and SFTs.

Check out our guide to asset tokenization for businesses.

What types of Real-World assets (RWAs) exist?

Fun fact: RWA is the largest niche in the crypto market, with a market cap of around $120 billion. Surprised? Well, it turns out stablecoins are nothing but tokenized fiat currencies. (We're talking about stablecoins with real backing, like USDT and USDC, not algorithmic stablecoins.)

USDT has been around since 2014, so the RWA sector has been in the game for 10 years, even though it might seem like a recent trend. However, in this article, we won't dive into stablecoins; instead, let's focus on other types of real-world assets. So, here we go:

  • Precious metals (the second-largest group of RWA assets - $1.1 billion as of September 2023)
  • Real estate and land
  • Stocks
  • Bonds (government and corporate)
  • Commodities like oil, diamonds, agricultural products, etc.
  • Carbon credits
  • Income from all the mentioned assets (yes, you can tokenize income separately from the asset itself)
  • ETFs and other tradable financial derivatives
  • Private credit instruments - for example, loans
  • Intellectual property
  • Works of art and more.

Tokenized asset holders gain specific rights to the underlying asset, whether it be a formal ownership right or a right to receive income.

To clarify, high-value assets (such as real estate and certain stocks) are often fractionally tokenized. This means that N tokens are issued for one unit of the asset, each providing a share of ownership or income rights.

Advantages of RWA: According to RWA startups

Ask the CEO of any RWA project why they believe the future lies in tokenizing real-world assets, and you'll likely hear a similar set of arguments.

From an investor's perspective

  • New Income Streams: Web3 investors can earn from real estate (rental income), stock price appreciation, etc. Tokenized assets are primarily acquired for income, not long-term ownership.
  • Easy Access to Investments: The ability to buy a share in real estate for $100, trade stocks without being tied to a broker, acquire assets not traded in your country of residence, etc.
  • Cost Minimization: Investors pay only the blockchain and platform fees, which can be less than $5 in total.
  • Transparency: Smart contracts enable tracking all operations with real assets on the blockchain.
  • Liquidity upon Sale: For example, an NFT symbolizing ownership in real estate can be listed on a marketplace within minutes, whereas selling a share of a traditional property could take months.

From a market perspective

  • Increased Trust in the Crypto Market: Thanks to the growing share of asset-backed assets.
  • Liquidity Inflow and Cost Reduction on Traditional Markets: As investors from the crypto sphere enter traditional markets.
  • Globalization of Specific Markets: Assets that were previously traded only on specific exchanges or were entirely non-tradable become accessible to investors worldwide.
  • Market Capitalization Growth: As real assets become more liquid, those who value them most will buy, potentially driving up their prices.

Tokenization process for RWA

The detailed process of issuing tokenized assets is outlined in our article. Here, we'll list only the key stages, which can vary significantly depending on the type of real asset.

  1. Developing the business strategy and regulatory framework of the project involves various aspects. This includes detailing how the presence of the underlying asset will be verified, specifying the income distribution process, determining who has the right to purchase tokens, setting minimum investment amounts, deciding on the existence of a DAO (Decentralized Autonomous Organization), enabling users to participate in investment decisions, navigating the licensing process in the chosen jurisdiction, and more. For instance, when tokenizing real estate, a distinct legal entity known as an SPV (Special Purpose Vehicle) needs to be established for each property, be it an apartment or a building.
  2. Acquiring a real asset (such as a rental property, debt obligations, ETF shares, bonds, etc.) involves either purchasing the asset directly or partnering with a traditional market entity that already owns the desired assets. Several traditional companies, including Franklin Templeton and WisdomTree, have ventured into the field of tokenization as well.
  3. The development of smart contracts involves creating them for the tokenized asset itself (ERC-20, ERC-721, ERC-1155), for the pools where funds will be deposited, and typically for the utility token of the protocol that will be traded on the exchange.
  4. Launching and listing the utility token. It's important not to get confused: a platform can have both an investment token, signifying ownership of the underlying asset (such as stocks or a share in a business center), and a regular token traded on the crypto exchange. For example, Centrifuge has $CFG, Maple has $MPL, and so on. Many RWF protocols currently do not have their own token.
  5. Launching pools for underlying assets (where necessary) and commencing the issuance of RWA tokens or NFT minting. 

Dynamics of the RWA market

According to Galaxy's calculations, the Total Value Locked (TVL), which represents the total deposited funds on RWA platform contracts, amounts to $2.5 billion (excluding stablecoins). This figure has increased by 82% in 2023 alone.

According to Outlier Ventures' estimate, the Total Addressable Market (TAM) for RWA could reach $20 trillion by 2030.

The main market subsegments (as per rwa.xyz) include gold (TVL $920 million), US Treasuries (TVL $768 million as of December 10, 2023), private loans (TVL $580 million), and the tokenization of real estate income ($178 million).

Interestingly, in the media, real estate sales are most often mentioned in the context of RWA. In reality, cases of entire apartments being sold as NFTs are few, and they are more of media value. Investors are interested in generating regular rental income on-chain, rather than owning the asset per se or completing a transaction in the form of transferring NFTs.

That Famous Apartment: The penthouse of TechCrunch founder Michael Arrington in Kyiv, sold as an NFT on the Propy platform in 2021. Source: CoinDesk

That Famous Apartment: The penthouse of TechCrunch founder Michael Arrington in Kyiv, sold as an NFT on the Propy platform in 2021. Source: CoinDesk

Major challenges in the RWA sector

Regulation

From the startup's perspective

Currently, only a few jurisdictions have clear regulations that can be applied to tokenized real-world assets, such as Switzerland, Abu Dhabi, Hong Kong, and Singapore. However, regulations vary between countries, and different types of tokenized RWAs are subject to different regulatory approaches.

In most cases, tokenized assets are treated as security tokens and are regulated similarly to traditional securities. This means that startups need to obtain relevant licenses and comply with various restrictions regarding who they can offer services to.

From the investor's perspective

The primary goal of regulation is to protect investors. However, even in countries where the project is based and regulated, there are many unforeseen circumstances not covered by the rules.

For example:

  1. The business center associated with your token ownership is suddenly sold, and the new owner refuses to acknowledge RWA token holders.
  2. The startup sold tokens to investors in the United States, and now, due to SEC demands, it has been fined $10 million, facing bankruptcy.
  3. The territory where you reside becomes subject to international sanctions, and the startup can no longer provide services there.

In all these cases, as an investor, you are likely to incur financial losses. Who and how will protect your rights if the startup is in Abu Dhabi and you are in Russia? This remains uncertain.

Transparency

While smart contracts are believed to ensure transparency, blockchain is unaware of events and transactions occurring off-chain. For instance, a smart contract cannot verify if a startup truly owns the underlying asset it tokenizes and in what condition that asset is. Achieving transparency requires a reliable system of oracles, external audits, and, of course, effective state-level regulation.

Demand

Currently, the demand for utility tokens of RWA protocols often surpasses the demand for their products. For example, as of December 10, 2023, Centrifuge's ($CFG) market capitalization was $222 million, only slightly higher than the Total Value Locked (TVL) of the protocol, which was $248 million. Clearpool ($CPOOL) had a token capitalization ($30 million) higher than its TVL ($27 million).

For comparison:

- Aave's TVL is 4.5 times higher than the $AAVE token capitalization.

- MakerDAO's TVL exceeds MKR's capitalization almost sevenfold.

- Compound's TVL is 6.6 times higher than its capitalization.

Startups in this segment thrive because venture funds readily invest in them, hoping to achieve significant profits during the peak of the bull market. The main advantage of the RWA trend, similar to the AI narrative, is its novelty. During the previous bull rally, these concepts were not discussed, making the potential for token price growth higher compared to the more established GameFi and metaverse trends.

However, sustainable demand growth and effective monetization mechanisms will be required for long-term growth. Institutional investors interested in on-chain investments in bonds and other traditional assets they understand might be the key. Whether retail investors will be attracted by the prospect of a 3-9% return will be revealed over time.

Low liquidity in selling

While technically selling a real asset on the blockchain is indeed much easier than on the traditional market, there's a catch—only if there's a buyer. In the current small RWA market, finding a buyer at a favorable price can be challenging, unless we're talking about standard assets with substantial trading volumes, like Treasury bonds.

Here, we can draw a parallel with the NFT market, especially those tied to real goods like sneakers. In a market downturn, sellers might wait months for a buyer to make an offer ( for instance, the phygital collection RTFKT x Nike).

Top 10 Major RWA Protocols

Lending Platforms

Ranking of RWA Lending Protocols by Total Active Loans Volume. Source: rwa.xyz

These protocols represent the on-chain version of so-called private credit loans—loans issued not by banks, but by individuals and organizations. Typical borrowers include small businesses, and the loans are often secured by some form of asset (such as accounts receivable). Borrowers undergo a verification process. This sets RWA platforms apart from typical DeFi loan protocols, where lenders and borrowers are entirely anonymous, and no checks are conducted.

  1. Centrifuge ($CFG): DeFi lending for real-world businesses in sectors like real estate, carbon credits, and consumer loans in emerging markets. Returns can go up to 10%. Verification is required to join a pool.
  2. Goldfinch ($GFI): Lending protocol offering returns up to 17% (7% in diversified pools) with a focus on regional markets: Southeast Asia, Africa, Latin America.
  3. Maple ($MPL): Loans for institutional investors with returns up to 14%. The app provides detailed information on how funds from each pool are utilized.

Real Estate

A listing on RealT

RealT: Investments in fractionalized residential real estate for rent. Expected yield - 9-10%. Cost of one share - around $50.

Tangible ($TNGBL): $USDR stablecoin backed by real estate, with income distributed among $USDR holders. The platform also offers tokenized real estate, wine, watches, and gold bars.

Lofty: Investments in fractionalized residential real estate in the USA with a yield of up to 15%. Owners can also list their real estate for sale in token form.

Gold

Pax Gold ($PAXG): Each token is backed 1:1 by gold bars in a secure LBMA storage in London. Theoretically, holders can exchange tokens for physical gold, although in practice, this might be challenging.

Carbon Credits

Toucan Protocol ($BCT): Projects with surplus carbon credits can sell them on the blockchain, thereby attracting capital.

US Government Treasuries

Franklin Templeton: A major ETF provider that recently introduced a tokenized version of one of its funds - Franklin OnChain US Government Money Fund.

Ondo Finance ($ONDO): Tokenized investments in an ETF where the underlying asset is U.S. government bonds (a kind of derivative squared). However, the minimum amount is $100,000.

MatrixDock: Investment token STBT backed by U.S. government securities. Also, available for a minimum of $100,000 and only for accredited investors in the USA.

What to expect from the RWA sector in 2024 and beyond?

RWA is arguably the most robust narrative after AI. If a sharp market uptrend follows the Bitcoin halving in April 2024 (as many anticipate), RWA protocols could indeed outperform the narrative tokens of previous years, such as the metaverse and GameFi. (Of course, we're not providing any financial recommendations.)

However, if a massive correction follows the bullish trend, narrative bubbles may quickly deflate. For long-term growth, as mentioned before, an influx of users into end products is necessary: tokenized real estate income, loans, and so on.

Counting on a mass influx of investors from traditional markets in the short term would be naive; RWA products are too complex for them. Demand must come from the so-called "crypto natives"—people with experience investing in crypto.

In the long term, RWAs could indeed become a new entry point for users and capital into the crypto world—the very mass adoption everyone is striving for. For this to happen, RWA investments must not only be financially attractive but also user-friendly for ordinary people.

Larry Fink, CEO of BlackRock, said that the tokenization of securities would be the foundation of the "new generation of markets," and Matteo Andreetto, Head of the Department at State Street Global Advisors, believes that tokenizing ETFs "changes the game." If they are right, RWAs may one day catch up with DeFi in terms of market capitalization—but that might take several years.

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