Sleepless in Soho:

Midnight musings on RWAs

Disclaimer: All of these are my personal views and not the views of my employer. The content contained in this post does not constitute financial or investment advice whatsoever and is for informational purposes only. All examples mentioned here that would otherwise lead anyone to speculate on future deals are completely hypothetical to simply make a point.

Dear Morgan,

I saw your recent Medium post and similarly find myself having trouble falling asleep at night. There’s something that’s been keeping me up lately and that I keep hearing about–this thing called “RWAs”. I always thought the term stood for “risk-weighted assets”, but I’m not sure that’s what all of Crypto Twitter, LinkedIn, and my friends in Web3 are referring to.

Also, whenever I hear the term, it’s often used together with the word “Avalanche”. The only avalanche I’m familiar with is the snowy kind.

What’s this all about, Morgan? I don’t want to sound silly in front of my friends, but Web3 is intimidating. It’s clunky and has all these random memecoins and sh*tcoins trading out there. I’m used to investing in stocks and managing my portfolio on my trading app, but this RWA thing is new to me. Should I even care?

Sincerely,

Sleepless in Soho

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Dear Sleepless in Soho,

I totally hear you. I think the further those of us who are surrounded by Web3 fall down the rabbit hole, the more that hole starts looking like a mere dot. We often take for granted the terms we regularly use and the concepts we frequently talk about to the point where we start missing the forest for the trees. Even those who work in the industry are so focused on their tiny sliver of the wide world of Web3 that even they become embarrassed to ask seemingly “silly” questions. For as much as the ethos of this industry is about inclusivity and democratization, it can oftentimes feel like the opposite.

But don’t fret, Sleepless, I got you.

RWAs in a nutshell

“RWAs” in Web3 refer to tokenized “real world assets” (until the industry finds a more acceptable term)–in a nutshell, any physical or financial/economic asset out there that’s represented in token form on the blockchain. This tokenization concept is powerful because it:

  • enables people and companies to tap into greater sources of financing;
  • gives retail (people like you and me) and institutions access to a much wider variety of things to invest in;
  • allows for easier and near-instant asset, premium, interest, and other payment transfer and settlement;
  • unlocks historically trapped capital;
  • and much more.

Cool, huh?

Now, RWA tokenization isn’t really a new concept in the grand scheme of things, but it really started gaining momentum last year due to several reasons:

  • Inflation meant that central banks around the world were raising interest rates.
  • Meanwhile, stablecoin holders (i.e., those who hold currencies like USDs in tokenized form) were missing out on the increasing returns generated by the assets backing them.
  • At the same time, the economic downturn and crypto winter, taken together, lowered the value proposition for pure on-chain DeFi–that is, the value of all those memecoins, sh*tcoins, and other coins went down, especially since many of them lacked an underlying yield supporting them.
  • And most importantly, MAJOR traditional asset managers were actually making moves in the space and tokenizing stuff! Just look at what KKR did by tokenizing part of its recent Healthcare Growth Fund on Avalanche (we’ll get to Avalanche shortly!).

Now, there’s seemingly no shortage of assets out there–in varying type and quality–waiting to be tokenized. In fact, this year alone, Van Eck expects financial institutions to tokenize more than $25 billion in off-chain assets.

But why is this relevant for you?

Sleepless, you mentioned you’re used to investing in stocks through your trading app. Beyond public stocks and bonds, there are now so many more investment opportunities out there–most of which have historically been reserved for institutional investors and ultra-high networth individuals with private bankers.

Depending on your risk tolerance, time horizon, accreditation status, and other important considerations, you can now directly access many of those same types of investment opportunities yourself. Whether it’s ESG-related assets, private equity, insurance, art, music, film, wine, the list goes on, the possibilities are seemingly endless.

And what’s more, depending on the asset and regulations under which it’s issued, you may actually be able to trade it or borrow against it much more easily than in its traditional, non-tokenized equivalent.

Think about it this way….

  • If The Pokemon Company were making a new movie and wanted to give fans the chance to not only invest and realize upside, but also get producer credits and other special access, it’s possible through RWA tokenization.
  • If an investor was looking to diversify some of her equity exposure with assets that were less correlated, like reinsurance, and that let her trade out of or borrow against this investment, it’s possible through RWA tokenization.
  • If a private equity company wanted to tap into a wider investor base by lowering investment minimums so that qualified purchasers and accredited investors could directly access their funds, it’s possible through RWA tokenization.

So where does Avalanche come in?

Avalanche is an open-source platform for launching decentralized applications and enterprise blockchain deployments. It’s the first decentralized smart contracts platform built for the scale of global finance, with near-instant transaction finality. Simply put, it’s the underlying platform on which many of the world’s assets are being tokenized, invested in, transferred, and traded because of how fast, scalable, inexpensive, and functional it is.

Ava Labs–the company helping to drive the growth and adoption of Avalanche–has been on a mission to digitize the world’s assets since it was founded in 2018. In that spirit, they’ve made sure that key, regulated infrastructure partners–like Republic, Securitize, INX, and Oasis Pro Markets–have already integrated their tech with Avalanche so that many of the security tokens that are and will be offered on their platforms are powered by this truly innovative blockchain.

Whether you’re talking about an asset issuer or infrastructure provider, it’s because of the Avalanche tech and the Ava Labs team that many partners ultimately #ChoseAvalanche.

How can I learn more?

I would encourage you to check out the platforms above to learn more and get started. In addition, there are a ton of applications out there building on Avalanche that are directly offering real yield backed by RWAs, including Lode, Re, AmFi, Acumen, and Defyca to name a few.

From an Ava Labs perspective, we have an awesome mix of “old” TradFi folk (Luigi and I included), former consultants, DeFi degens, etc. We engage with our community and ecosystem partners all the time about asset tokenization. To that end, please don’t hesitate to reach out to me to discuss via LinkedIn, Twitter, or Telegram.

Hope this was a helpful start to understanding RWAs, and I look forward to chatting with you more about them!

All the best,

Morgan

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