Deep dive into Real Word assets

What are they, how do they work and what impact could they have on the financial world? let’s answer these and other questions through this RWA themed deep dive.

credit: blaze.tech

The growth of the DeFi ecosystem has highlighted the unique advantages offered by this decentralized infrastructure based on the exchange of digital assets to the point of pushing traditional finance entities to explore the possibility of extending these benefits to real assets, giving rise to a new emerging field that it is called by the acronym of RWA.

Today we will dive into a deep dive with the aim of offering a complete overview of the concept of RWA (Real World Asset) focusing in particular on the analysis of these points:

• What are RWAs
• Process of tokenizing an asset
• Why do we tokenize real assets?
• RWA market data analysis

LFG!

What are RWAs

Let’s immediately answer the simplest but at the same time the most important question of our research: what do we mean when we talk about Real World Assets (RWA)?

Real World Assets, or RWA, are tokenized assets that refer to any physical, digital, or data-based asset that derives its value from its existence outside of the blockchain. By tokenizing RWAs, you essentially create a digital twin that exists on a blockchain of a physical asset.

Let us therefore imagine an RWA as a digital representation, through the use of a token, of an asset existing in the physical world within a blockchain. Simple, right?

As described in the definition above, the tokenization process can be applied to a variety of assets, such as government bonds, real estate, private credit agreements, precious materials and much more, thus allowing access through the use of decentralized applications.

Having created the basis for our conversation, let’s now move on to discover how this process of transformation of these assets from physical goods to exchangeable tokens within a blockchain occurs.

Process of tokenizing an asset

Asset tokenization is the process by which rights to a specific asset are recorded in the form of a digital token, which can be owned, sold and traded on a blockchain. The tokens created represent an ownership portion of the underlying asset.

The tokenization process may differ depending on the type of asset involved. Not being a technical expert, I will focus on a purely descriptive rather than technical explanation. In general, the process can be summarized in the following steps:

1. Valuation and Documentation: Determine the value of the asset through market valuations.
2. Asset Digitization: Create a digital representation of the asset on the blockchain, recording its ownership and relevant details.
3. Token Creation: Generate digital tokens representing parts of the asset, using smart contracts to manage their issuance and distribution.
4. Oracle Integration: Use oracles to verify and validate asset data, ensuring the integrity of information on the blockchain.
5. Token Issuance and Exchange: Release tokens and allow them to be traded on decentralized or centralized exchange platforms, facilitating access to the asset’s liquid market.

These general steps outline the fundamental asset tokenization process, which is flexible and adaptable to the specific needs and characteristics of the asset involved. For example, in the famous Chainlink decentralized oracle project, the concept of Proof of Reserve is introduced during the asset tokenization phase which is a mechanism used to verify in a transparent and reliable way that an entity actually holds the declared reserves of a given assets. For those who are more interested, I leave some in-depth articles at the bottom of the article in the “Useful Links” section.

credit: Chainlink

Why tokenize real assets?

The ability to tokenize a real asset within the blockchain offers a number of significant advantages for the end user. Let’s see the most relevant ones:

• Elimination of the intermediary → certainly one of the most significant advantages of the tokenization of a real asset is the possibility of exchange in a Peer-to-Peer manner, i.e. directly without the need for an intermediary to act as a counterparty, thus relying exclusively on a smart contract.
• Speed ​​and operational continuity → having eliminated the fiduciary counterpart, all its “physical” needs are also eliminated, thus making the whole process much simpler, quicker and usable 24/7.
• Operational cost → another significant benefit of avoiding interacting with a physical counterpart is reflected in operational costs. Just consider the fees that are traditionally required at the conclusion of a home purchase transaction, compared to what might be required using a decentralized smart contract.
• Barriers to entry → in the transition to a permissionless system, we eliminate in one fell swoop all those barriers to entry such as the country of origin or the social background typical of a “traditional” world.
• Ease of splitting an asset → by transforming a physical asset into a digital asset we have the opportunity to divide the latter into a multitude of equal or different parts depending on the needs of the users through the use of a simple smart contract.
• Security and trust → by transporting these assets within the blockchain, we have the opportunity to interact with smart contracts distributed and used thousands of times a day. This allows us to operate in a trustless and transparent system, eliminating the risk of having to rely on centralized physical institutions.

RWA market data analysis

To complete this research I used two sources that we will analyze one after the other: the Nifty0x Dune dashboard and the rwa.xyz site.

Let’s start with Nifty0x’s Dune dashboard:

• Reference blockchain for asset tokenization (excluding collateralized fiat currencies)

As easily predictable, the reference blockchain for the asset tokenization sector is undoubtedly Ethereum, thanks to its proven reliability and solidity demonstrated over time. Although Layer 2 solutions are gaining more and more ground in the sector, the field of asset tokenization, also closely linked to a more “traditional” world, tends to favor the use of a blockchain that offers the highest level of security and reliability given the importance of the assets managed.

It is notable to observe how, after Ethereum, blockchains that we do not usually find at the top of the charts by market capitalization in the DeFi context are emerging, such as Stellar, Polygon and Gnosis (with a particular focus on the tokenization of real estate assets).

• Number of users who own tokenized assets

As clearly highlighted by the graphic, the aggregate number of users is steadily growing, reaching a peak of approximately 60 million current users. It is particularly interesting to note that the number of new users, after a period of downsizing between 2022 and 2023, has started to grow significantly again, confirming the renewed interest in this sector thus suggesting a growing adoption and acceptance of technologies and platforms related to asset tokenization and decentralized finance.

Let’s now move on to an analysis of the data reported by rwa.xyz

Through the rwa.xyz site, we have the opportunity to explore a vast set of data regarding the world of RWAs with a highly technical and pragmatic approach. Although the interface may initially be unintuitive, using this site remains an extremely useful tool for monitoring crucial data in this sector.

• RWA value

With a value approaching historical highs, exceeding 160 billion dollars, the category of tokenization of fiat currencies through stablecoins such as USDT and USDC stands out as the undisputed protagonist within the RWA sector, highlighting the crucial importance of the tokenization of fiat coins in the decentralized finance ecosystem. Due to their extreme ease of tokenization and extreme utility, stablecoins play a vital role by facilitating fast and efficient transactions on blockchain.

• RWA Value (excluding collateralized fiat coins)

To obtain a more crystal-clear view of the situation, the site allows us to exclude the category of collateralized fiat currencies from the graph, allowing us to analyze the market in its different subcategories in more detail.

Having eliminated the category of collateralized stablecoins, we find ourselves faced with an extremely interesting situation. While the previous chart suggested that the value of RWA is close to the all-time highs of 2022, excluding stablecoins from this equation, signs of unprecedented expansion in other subcategories of the sector clearly emerge.

Particularly significant is the private credit category, which is showing practically exponential growth, with a value approaching 8 billion dollars, positioning this category as the second most important in the world of RWAs.

Next, the graphic clearly illustrates that government bonds are also experiencing a period of robust growth within the Real World Assets market, with a value approaching $2 billion. This category reflects the growing interest in tokenizing debt securities issued by governments, leveraging the potential of blockchain to improve access and liquidity of these assets.

Additionally, the commodity category emerges as another significant area in the tokenization of real assets, with a primary focus on gold through PaxGold. This choice reflects the interest in making traditionally less liquid physical assets liquid, allowing investors to participate in the gold market in a more flexible and decentralized way.

This data highlights an evolving landscape within the real asset tokenization industry, with several asset categories benefiting from the technological innovation offered by blockchains and smart contracts.

Let’s now analyze each sub-category, excluding stablecoins as I consider them a separate category in RWAs to which I have decided to dedicate an exclusive article to study them in depth in the coming weeks.

• Focus on private credit

Let us now analyze the data relating to the RWA market in the private credit category. As highlighted by the previous data, this category appears to be the most important after that of collateralized stablecoins.

According to rwa.xyz metrics, as of the end of 2022, the undisputed market leader in this sector is the Figure.com platform.

Figure.com is a US-based online lending platform that uses blockchain technology to offer a variety of financial services, including personal loans, mortgage refinancing, home equity lines of credit, and equity release services. Through their site it is possible to obtain loans using physical collateral, which is economically evaluated through a process developed by the same platform. It should be noted that, in this case, it is not a Real World Assets (RWA) project in the strict sense, since no real tokenization of the assets takes place. However, blockchain technology is used to make the lending process faster, cheaper and more secure.

In second place for volumes handled we find a protocol which, in my opinion, is much more interesting: Centrifuge. I will not dwell on the details of the individual projects in this article to avoid going into too much detail, but I will publish further information on the matter in the coming weeks.

Below, for completeness, I mention the main protocols which, according to the data, appear to be: Maple, Goldfinch, Clearpool, TrueFi, Credix, HomeCoin, Florence Finance e Ribbon Lend.

• Focus US treasuries

Let’s now move on to the category of tokenization of American bonds.

As we can see from the graph, this category has seen an explosion in the last period, probably due to the increase in interest rates which has made these instruments more attractive, leading the market capitalization of this category to exceed one and a half billion dollars. Obviously, these numbers are still extremely small when compared to the world of traditional finance, but it is relevant to note the increase in the use of these products with a player like BlackRock leading the ranking with the “BlackRock USD Institutional Digital Liquidity Fund” product, highlighting how the interest in this category of RWA is growing and certainly deserves particular attention.

• Focus on raw materials

The last category of our research concerns raw materials.

As we can observe from the data reported in this sector, Paxos’ PAXG product, which represents a tokenization of gold, together with Tether’s XAUT, which also represents a tokenization of gold, are practically the only examples of use of the tokenization in the world of raw materials, thus revealing a current lack of interest in the remaining spectrum of raw materials on the market.

That’s all for today too, in addition to remembering that in case of any type of doubt regarding the explanation I will be more than happy to read and respond to your comments, I remind you that you can also find me on x as @Filippo_Pozzi_ or by clicking here.

Before saying goodbye definitively, for the most interested readers I leave below a list of useful insights to gather some more information than what is reported in the entire article.

Useful links:

• interview with founders of projects exposed to the world of RWA
• Proof of Reserve chainlink explanation
• article written by Backed on Proof of Reserve
• Binance Academy article RWA
• Dune dashboard Centrifuge

Greetings from Filippo, see you next time!