Exploring RWA: The future of finance is onchain!

16 min readMar 10, 2024

Discovering Real World Asset Tokenization, an Onchain Analysis of Traditional Financial Asset Crypto Tokens; let’s try to visualize these objects on some protocols dedicated to the future of finance on blockchain

Versione italiana dell’articolo disponibile Qui; Italian Version available Here.

RWAs are tokenized traditional financial assets that live on Blockchain

TL;DR; Let’s try to explore Real World Assets on some of the main protocols that are starting to bring traditional finance onchain.

In this article we talk about Real World Assets, i.e. the transformation of traditional financial assets such as treasury bills, shares, etc. into onchain tokens. After a brief introduction of what RWAs are, let’s try to explore some of these tokens on chain; in this process I try to understand what visibility an investor has on these tokens and how applicable Web3’s “no trust” is in this area; let’s select a tokenized US Treasury bond on the platforms and see which features can be viewed onchain. By trying to visualize these tokens we will discover that everything is still not as easily viewable and verifiable as we would hope.

Disclaimer:
The content presented in this article is created entirely by human writers WITHOUT the use of AI or automated writing tools

INDEX

Introduction
Tokenization
- RWA Token Characteristics
- From asset to token
- Tokens for RWAs
Let’s explore some onchain examples
- Centrifuge
- Ondo Finance
- Maple Finance
Conclusions

Introduction

RWA (Real-World Assets) are digital tokens that represent traditional financial assets (they are potentially able to represent any asset, shares, raw materials, real estate, and much more from copyrights to art etc.) and they are one of the trends that the market expects as a growth engine for blockchain and web3 in the near future; in fact these could be the tools that will push traditional financial institutions to increasingly integrate blockchain technologies into their business.

To date (February 2024) Real-World Assets are already an established reality, with blockchains specialized in this type of management, but we can see that while the market has had the opportunity to experiment a lot on some types of assets (mainly on Stablecoins), in other areas are at the beginning and much development is still expected, both technological and administrative, legislative and regulatory; in fact, we can see from the examples we report (see graphs below) how the current volumes of stablecoins are much higher than the various types of identifiable RWA such as Treasuries, Private Debt and Commodities (the latter mainly linked to gold e.g. PAXG).

In this article we will refer to RWA in the sense of tokens collateralized by traditional assets in the physical world; there are also “synthetic” RWAs which have other characteristics and will be explored in depth elsewhere.

Tokenization

“Tokenisation is the process of digitally representing an existing real asset on a distributed ledger (Hileman and Rauchs, 2017)”

The tokenization of a physical and traditional asset can be seen as an evolution of what has been done so far in traditional finance; already today, anyone who owns an asset owns a dematerialized version of it (no one has the physical coupon of a share on the stock exchange or buys barrels of oil, but instead directly “owns” a digital version of it); the right of ownership on this dematerialized version of the right of possession of a specific asset is, in any case, managed and delegated to a financial institution which validates and guarantees the link between the “physical” asset and its digital version. It is precisely at this point that tokenization on blockchain and DEFI are introduced; DEFI so far had the opportunity to demonstrate its onchain capabilities, but has, for now, been developed mainly only on more purely digital instruments and in the field of crypto assets (cryptocurrency, fungible and non-fungible tokens); bringing traditional assets into the blockchain will allow ease access to these assets and significantly help the growth of the crypto market, and on the other hand it will allow issuers to exploit the functionality and capabilities of the blockchain across their entire offering.

What I am interested in exploring here is not so much what the role and advantage of blockchain is in this area (please refer to the extensive bibliography available online for those interested), but rather to delve deeper into the process of creating these tokens and what the current possibilities of access to tools of this type are.

RWA Token Characteristics

Some fundamental characteristics must be guaranteed by a tokenized asset so that it can be recognized as an RWA (we leave aside the legislative — regulatory aspects of which I am not sufficiently expert and which, despite being an aspect of fundamental importance for the development of this area, are constantly evolving, subject to different interpretations and still not standardized):

Transparency and verifiability of the “links” with the traditional “physical” asset: the possibility of verifying without a shadow of a doubt the association between an RWA Token and its characteristics and off-chain collateralization (for example, we can think to a commodity and how its tokenized version must always be able to allow verification with the offchain information of the commodity it represents) avoiding depeg with the offchain asset, i.e. that the offchain version diverges from the onchain version
Crosschain traceability: RWA standards must allow the portability of RWA assets between one chain and another in a simple way, guaranteeing the consistency and reliability of the link with offchain information
Identity and Provenance: must guarantee the certainty of the origin of the emitter and allow emitters and owners to have a guarantee of the certainty and identity of the counterparty without revealing sensitive information
Privacy: it must allow confidentiality to be preserved by allowing issuers, investors and institutions to verify its characteristics as well as origin and ownership without revealing sensitive information (zero-proof)

From asset to token

Let’s see from a theoretical and high-level point of view what the steps are to tokenize a real asset:

Off-Chain Formalisation: in this phase, also typical of traditional assets, the characteristics of the asset are formalised, such as the economic value, ownership and legitimacy of the title and the legal characteristics
Tokenization: in this phase, the formalized offchain information is brought to the blockchain; the characteristics of the asset are therefore implemented in a token through the metadata of the token itself (in the second part of the article we try to display an example of real coding and tokenization); these characteristics through the blockchain will therefore be completely transparent and accessible and unfalsifiable
Regulation: the requirements for issuing an RWA on blockchain must be implemented, i.e. the issuers must be certified and legally recognized rather than AML steps must be envisaged

Another fundamental element is the alignment with the real/traditional world; the alignment of the value of the on-chain asset with its off-chain counterpart becomes even more important; Oracles will therefore become even more fundamental for bringing data from external providers, i.e. all those actors who contribute to defining the price of the asset, onto the chain; we already have examples of various cases, the main of which are related to Stablecoins and their peg.

Tokens for RWAs

For the creation of these onchain RWAs, various types of tokens are used, i.e. protocols defined for the creation and implementation of token objects within the reference ecosystem (in this article we will refer to the Ethereum standards as at the moment standard facto for the development of blockchains in this area); in fact, rules are defined for the creation and interaction of tokens with the blockchain; these rules, among others, define how tokens can be transferred and how they can interact with other smart contracts; to do this, a series of functions are defined that must be implemented in the token’s smart contract.

There are various standards for tokens on blockchains, the main are:

ERC-20: as fungible tokens, widely used for utilities, governance etc
ERC-721: Non-fungible tokens to represent unique pieces, widely used for the uniqueness of digital assets in the NFT boom
ERC-3643: standard for Assets, Securities, etc. offers advanced features and compliance modules; It allows user verification and is typically permissioned in nature

These Token standards are the basis on which RWA protocols are based in the creation of more specialized tokens for the on-chain management of RWA; in particular we can look for example at the ERC-4626 and ERC-7540 standards which introduce specific features such as synchronous and asynchronous requests for investment and redemption.

To create an onchain representation of a real asset, the issuer will create a token on the chosen blockchain (mainly a non-fungible token); this NFT will contain information relating to the asset to identify price, financing, etc.; this information, being on a blockchain, will be public by its nature, but other information of interest to investors will need to be kept more private allowing access to investors and issuers in a secure manner.

In this, the protocols that allow RWA management are equipped with private data management layers; due to the nature of the assets managed, unlike the blockchains we are used to, the services that want to manage tokens and RWA services will have a mixed nature, with part public and part private; in particular they will insert private data management layers that allow the verifiability of additional metadata without these being publicly available.

The dual nature will also be linked to the type of participation in the network, partly permissionless and partly permissioned; in fact, the issuing entities, based on the applicable regulations, must be entities authorized to issue these kind of assets and, at the same time, the investors must be able to be traceable to comply with the applicable legislation and regulations.

RWA protocols will tend to use pools of different assets, this to increase the liquidity associated with the assets making the opportunity more attractive for an investor; in fact RWA assets can also be illiquid as they have a long-term horizon; therefore an investor will invest in a pool that will be composed of multiple NFTs and which will be able to repay the investor as the different onchain NFT assets expire and are terminated.

The investor will therefore be able to see publicly what the pool is made up of and the details of which NFTs/Assets have been repaid and which are still active.

These mechanisms are already typical of traditional finance, but on the blockchain they should allow for greater transparency and traceability of history, as well as ease of access.

Let’s explore some onchain examples

In this second part of the article we are going to analyze some examples of these RWAs; to do this we will explore some cases from protocols currently present the largest volumes (see image at the beginning of the article).

In the next steps I will try to put myself in the shoes of a retail investor who wants to inform himself and verify the characteristics of an RWA, I will try to understand to what extent we can obtain visibility and ease of access to information relating to the tokenization process of the physical asset and its onchain visibility.

Centrifuge

As a first example, let’s try to follow an RWA listed on Centrifuge (we choose this chain for illustrative purposes only, there are other chains and apps on the market that provide services with similar characteristics).

Access for an investor, as described in the introductory part of this article, will be linked to an onboarding process because it must be possible for the platform to comply with legislation and regulations, having at its disposal the information necessary to respond to requests in particular regarding the AML; for details of the investor’s onbording and KYC process, please refer to the available documentation.

The investor onboarding process is twofold:

platform onbording: the investor must pass KYC to be eligible to invest in a pool
pool onbording: in order for an investor to invest in a pool, he must first sign a contract with the pool issuer; in turn the emitter will sign the same contract; Once the agreement has been signed by both parties and the issuer has approved the investment request, the investor can make an investment in the pool.

Investors can be both retail entities and more complex entities with a specialized onbording process for the two types.

Let us therefore try to see the characteristics of an RWA in which we might be interested in investing; through the platform we have visibility on the active pools.

The pools are supported on different chains (for those hosted on Ethereum the chain icon is shown directly on the logo).

The first pool on the list is a pool that offers US Treasury securities, one of the main examples of RWA instruments currently available on the blockchain-based market.

If we access the pool we can see details such as the type of asset and in particular the emitter

If we analyze the process of creating a pool (“Launching a Pool” paragraph in the Centrifuge documentation) we notice that the onboarding process is a protocol governance process and passes through proposals from the issuer; in particular the “Pool Onboarding Proposal” is a community-owned and CFG governance-driven process for onboarding RWAs into DeFi through the Centrifuge protocol; this process is designed to try to guarantee the quality of the financing in an open and participatory manner on the part of the community.

Through the pool page it is possible to reach the associated POP; here we can analyze some details of the assets associated with the pool:

In particular, in this proposal we find an interesting illustration of how the RWA creation process works with a clear indication of which processes take place onchain and which offchain:

In this representation we note the role of the issuer of the NFTs that will be inserted into the pool; in particular, the emitter will haveoffchain agreements with a Broker who will be the custodian of the traditional assets from which the onchain representation will be created via NFT.

What, therefore, we should expect to be able to visualize onchain are the characteristics of the NFT that represents this bond; in particular, the documentation states that each NFT will represent a specific Treasury Bond (segregated by CUSIP/ISIN) purchased by the fund.

Let’s try to verify these NFTs onchain.

In the detail of the pool assets we see the value and details of each treasury bill represented and the expiry date.

If we analyze the details of one of the NFTs we can see the details of the cash out for purchasing the voucher and the expected deadline as well as the ISIN code.

So far we have been able to view a lot of useful information related to RWA, but all via the frontend of the Centrifuge portal; our goal would be to see the details of these NFTs directly onchain.

From the reporting detail of the asset we can see that the NFT relies on the CELO chain, an L2 of Ethereum:

Browsing the CELO chain we can find the details of the Token:

Detail of the token associated with the pool on the CELO chain

We have therefore only partially found traces of the token on the blockchain; we cannot easily find further details, such as the individual tokens relating to treasury bonds in the pool; we can see these from the interface, but we cannot have visibility onchain.

Ondo Finance

Let’s try to see if similar protocols/apps allow greater ease in analyzing and finding the relevant Tokens onchain.

Still referring to the US Treasury bond products, in the list of RWAs reported by rwa.xyz we find two protocols that have been among the most present in the RWA market in recent years, Ondo Finance and Maple; these protocols are active on the Ethereum, Polygon and Solana networks; let’s try to see if through these protocols we can have greater onchain visibility compared to what we managed to achieve on Centrifuge.

The first product we find on the list for Ondo Finance is OUSG (Ondo Short-Term U.S. Government Bond Fund); a fund relating to short-term US government bonds; this product is slightly different from the one seen on centrifuge (this allows to access shares of an ETF, while the one seen previously allowed you to access bonds directly), but this is of less importance compared to our objective of verifying the tokens of the ETF on-chain RWA.

OUSG Token addresses on the supported networks

From the Ondo finance token page we can view the token addresses; let’s try to analyze the one on Ethereum:

The OUSG Token by Ondo Finance on Ethereum

On Etherscan we see the characteristics of the token such as the token holders

We can therefore have visibility on the individual tokens, but these are security tokens that do not appear to have direct metadata (except in the denomination) links with the underlying; these tokens, which represent participation shares, can be minted in a permissioned way within the ONDO app; anyone who wants to make a mint must have completed the onbording process and comply with the mint requirements (for example for the token taken as example the minimum mint value is $100K); from the documentation it appears that once the mint has been made it is possible to exchange the token directly onchain, only at the time of redemption must it be done on the ONDO app.

Even in this case, despite having found some onchain information, there still remains a non-direct link between the token present onchain and the offchain world.

Maple Finance

So let’s quickly try to do the same analysis from Maple finance; in the RWA.xyz report the main asset on this platform is “Maple Cash USDC1”; by accessing the platform (we search on the Ethereum network for simplicity even though other networks are also supported), we can access the details of the relevant pool:

By entering the pool we can identify some more details, such as all the loans and the debtors who issued them with relative reference to the onchain identity.

Detail of a debt product inserted into the pool

Each pool is a smart contract on the Ethereum network:

Example of smart contract of the analyzed pool

We can therefore find the token on the Ethereum network:

When a lender calls the “Deposit” function of the pool’s smart contract, the contract releases LP liquidity tokens for the investment made.

Also in this case we therefore find the token and the pool code on chain, without, however, having an on chain connection to the offchain data.

Conclusions

RWAs are undoubtedly a great area of development for blockchains, in particular if we think about mass adoption in the institutional and financial sector with the onboarding of the processes of traditional institutions and institutions onto these technologies; not only will these allow broader access to financial instruments, they will allow an optimization of financial processes, but they will allow the creation of new forms of financial investments even in areas that are currently less or not integrated into traditional financial areas; they will allow us to create completely new products and connect the digital world to the traditional one.

By delving deeper into this area, however, my doubts and perplexities about how physical assets can be brought into the blockchain context have widened; beyond futuristic scenarios where physical assets can be digitized on a distributed register through new forms of digitization such as evolved smart tags that can uniquely classify a physical asset and whose physical asset cannot have value without them and without its digital version, the assets tested so far in RWA mode that we have explored highlight, in my opinion, a nature that is still partially disconnected from the underlying traditional asset; what I would have expected, perhaps naively, was to be able to read on chain a direct link with the traditional asset to which the token refers, and that these were exchangeable and redeemed in a permissionless way directly onchain. However, we have seen how difficult this is, on chain we are able to find the token associated with a product (or rather the pool in which the product is inserted) and little more like the address of the issuer.

By their nature these RWAs still require a lot of offchain preparation and this is natural in order to comply with the legislation and regulations required for these types of objects, but the connection with the information available onchain still seems to me to be connected in a somewhat opaque way to the offchain information and therefore the analysis and information process for a retail investor is rather complex and in any case introduces elements of trust, if only on the portals where the RWAs are made available.

As seen, the onboarding process which, if it is expected and certainly appropriate for the issuer, probably represents a significant obstacle for the retail investor and therefore even more so configures these tools as a possible evolution and optimization for sector operators who will find in these technologies the key on the one hand to optimizing one’s processes and finding new areas of development.

Disclaimer:
The article here includes some examples for illustrative purposes only. It should be noted that these cases do not in any way constitute suggestions or advice on the use of the example platforms.
Furthermore, it should be noted that the article was written based on my current knowledge, there may be inaccuracies, errors or omissions. Readers are therefore advised to conduct further research and consult additional sources before making decisions or taking actions based on the content provided herein.
DYOR