introduction
DeFi protocols have made rapid progress from 2020 to 2021. The total locked value (TVL) of DeFi has surged from hundreds of millions of dollars to hundreds of billions of dollars. The summer of this year was called "DeFi Summer". In 2022, the growth rate slowed down. In this process, a large amount of funds poured into the DeFi field, various innovative DeFi applications emerged in an endless stream, and the market was keen to participate in token airdrops and DeFi mining-related activities, which created one opportunity after another for early participants to quickly gain wealth. The total locked value of DeFi surged from $1.1 billion on June 1, 2020 to a peak of $184.75 billion on December 1, 2021, an increase of 250 times. However, after a series of market fluctuations and panics, the DeFi market began to slump. As of October 24, 2023, DeFi's TVL has fallen 80% from its peak and is currently stable at around $40 billion.
Source: https://defillama.com/
As the crypto market enters a "cold winter", regulatory issues and some CEX issues have led to market turmoil. In addition, the US dollar has entered a rate hike cycle, and the previously attractive annualized rate of return (APR) is no longer what it used to be. Against this backdrop, the market has begun to seek low-risk investment opportunities to cope with the Crypto Winter. This period coincides with changes in the macroeconomic environment and rising U.S. Treasury yields, making Real World Asset Tokenization a very important value capture channel in the current crypto market.
RWA is currently the hottest topic in the Web3 and cryptocurrency markets, and is considered to be the engine driving the next bull market. According to DeFillama data, there are more than 20 projects in the RWA track, with a total TVL of more than $6 billion, ranking sixth in the TVL ranking of the DeFi market.
Source: https://defillama.com/categories
RWA Overview
RWA, the full name of "Real World Assets", refers to real physical assets that can be tokenized, converted into digital assets and traded on the blockchain. Introducing real-world assets into the DeFi field requires tokenization, that is, converting assets with real value, such as gold, real estate, etc., into digital tokens so that their value can be represented on the blockchain and used in DeFi protocols. In other words, RWA represents the value of real-world assets that are tokenized and used on the blockchain.
Unlike traditional asset securitization, which builds a bridge between traditional capital markets and real assets, RWA tokenization builds a bridge between real assets and crypto finance. Its purpose is to introduce real-world assets into DeFi, give full play to the global advantages of DeFi, and give real assets more liquidity. RWA covers a wide range of underlying asset types, including tangible assets such as gold and real estate, and intangible assets such as government bonds or carbon credits, as well as cash (US dollars), precious metals (gold, silver, etc.), insurance, consumer goods, credit notes, royalties, etc.
Currently, USDT, the stablecoin that occupies the third place in the cryptocurrency market capitalization, can be regarded as the most successful RWA token because it maps the US dollar to the blockchain and performs tokenization.
Since the birth of blockchain technology, market participants have been exploring how to bring RWA to the chain. Traditional financial institutions such as Goldman Sachs, Hamilton Lane, Siemens and KKR are actively working to put their real-world assets on the chain.
In its research report "Money, Tokens and Games", Citibank predicts that by 2030, up to $5 trillion in funds may be transferred to new forms of digital currency, such as CBDC and stablecoins, about half of which may be based on blockchain distributed ledger technology. The tokenization of real-world assets (RWA) will be the killer app to drive the blockchain industry into a multi-trillion dollar scale.
Why RWA is so popular
Between 2017 and 2018, entrepreneurs in the crypto market were keen on mapping artworks, real estate or securities to the chain. At that time, the concept of DeFi had not yet been introduced to the crypto market, and the concept of STO (Security Token Offering) was not mature. The industry was relatively empty, and it was more about equity assets, such as the issuance of company stocks or equity assets, and less about bond assets.
In the past, the main sources of cryptocurrency and DeFi income were trading, leverage, and the issuance of new tokens. After the DeFi Summer, the issuance of various governance tokens caused the market to prosper for a time. The DeFi income during this period was very considerable, with APR generally above 20%. At that time, the U.S. Treasury bond interest rate was close to zero, resulting in the market's lack of interest in asset classes other than cryptocurrencies.
1. DeFi asset yields fall, while US Treasury yields soar
As the crypto enters a bear market and the United States enters a cycle of interest rate hikes, the yields of various assets have inverted. For example, the APY of Curve pools and the APY of lending-type assets such as Compound are less than 1% (referring to the income without additional subsidies). In contrast, the interest rate of US Treasury bonds has reached 5.5%, which is also much higher than the LSD yield of Ethereum. DeFi in a bear market can no longer meet the needs of some institutions in terms of yield and stability. Various factors have led many funds to no longer choose to stay in DeFi, but prefer to return to the US dollar field to buy Treasury bonds.
Source: https://dune.com/lido/lido-morning-coffee-dashboard
2. BTC spot ETF is expected to pass
If the Bitcoin spot ETF is approved, it will bring long-term benefits to the RWA track. This will help large financial companies such as BlackRock to promote the tokenization of real assets. After experiencing the bear market, the blockchain industry is also in urgent need of new narratives to ignite market sentiment and explore the direction of the next crypto market. At present, the approval of the BTC spot ETF is just around the corner, so some people believe that RWA+ETF has the potential to trigger the next round of cryptocurrency bull market, so RWA is regarded as the next important development narrative in the DeFi field.
3. Giants in various fields are accelerating their layout in the RWA track
For example, Goldman Sachs launched GS Dap to tokenize traditional assets, and Siemens issued $60 million in bonds with the help of RWA. Citigroup pointed out in its report "Money, Tokens, and Games" that RWA will be the killer weapon to drive the blockchain industry into a trillion-dollar scale, because almost any asset that can be expressed in value can be tokenized, and optimistically predicts that by 2030, the scale of RWA will reach 4 trillion US dollars.
According to data from rwa.xyz, as of October 24, the total number of RWA credit agreements was 1,771, with a total loan amount of more than 4 billion.
Source: https://app.rwa.xyz/
What RWA projects exist today?
1. MakerDAO
MakerDAO is a decentralized mortgage lending platform on Ethereum founded in 2014. It achieves over-collateralized loans by locking crypto assets such as ETH in smart contracts and minting DAI, a stablecoin pegged to the US dollar.
MakerDAO has raised the DSR (DAI deposit rate) several times this year, and has recently raised it to 8%, which is much higher than the US Treasury yield. Driven by high deposit rates, MakerDAO's deposit scale has increased significantly.
According to Dune data, as of October 24, 59% of MakerDAO's total assets were RWA, and more than 65% of its revenue came from RWA.
Source: https://dune.com/steakhouse/makerdao
Source: https://dune.com/steakhouse/makerdao
The on-chain U.S. Treasury bonds issued by MakerDAO (MKR) and its issued stablecoin DAI are currently among the common use cases of RWA.
2. Maple Finance
Maple Finance was created in 2020 and officially launched in May 2021. Maple Finance is an institutional capital network that has launched a licensed KYC loan secured lending program since 2021, providing credit experts with the infrastructure for on-chain lending business and connecting institutional borrowers and lenders. Maple Finance does not use the standard DeFi collateral model, which relies on the ability to slash collateral assets in the event of underpayment, but instead enables users to provide low-collateralized loans to well-known companies based on reputation.
As can be seen from the figure below, Maple Finance launched a cash management pool for US Treasuries in May, and the protocol revenue has gradually increased since then.
Source: https://dune.com/maple-finance/maple-finance
3. Ondo Finance
Founded in 2021, Ondo Finance is a blockchain-focused service company whose main mission is to create and manage institutional-grade financial products, such as U.S. Treasuries and money market funds, and build DeFi protocols on top of these financial products. Ondo's goal is to develop decentralized and composable protocols and provide tailored services to meet the different needs of organizations, DAOs (decentralized autonomous organizations), and high-net-worth individuals. The platform's vision is to bridge the gap between traditional finance and decentralized finance by introducing real-world assets (RWAs) to the DeFi space.
According to Dune data, as of October 24, Ondo Finance held $176 million in short-term U.S. government bond funds.
Source: https://dune.com/steakhouse/ondo-finance
Summarize
When the DeFi market was in a slump, RWA took on the task of restoring market confidence. It is a compelling narrative that introduces the value of various real assets into the DeFi ecosystem and eliminates the barriers between traditional finance and the crypto world. Its rise is also one of the signs of innovation in the crypto field. However, what cannot be ignored is that it also has multiple risks, such as regulatory risks, the traditional financial system makes the settlement process too cumbersome, and DeFi's own security issues. Overall, RWA is still the trend of future financial development. With the improvement of supervision and the change of the market environment, more international financial giants will participate in this trend.
Author: Snow
Translated by Sonia
Article review: Edward, Wayne, Elisa, Ashley He, Joyce
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