RWA Tokenization: It is All About Trust

Real World Asset tokenization (RWA) is to represent “assets” in Web3 and blockchain environments via, obviously, “tokens”. In theory, you can perform financial operations (sell, invest, use as collateral etc.) on those assets in a much efficient and streamlined way. Reality might be more nuanced. It may not be a precise description but enough for the purpose of this article.

Even though RWA covers more, I am going to focus on debt. It is mainly the sale of debt via an instrument such as asset backed securities (ABS), bonds, etc. Debt market is huge.

Trust

“A man I do not trust could not get money from me on all the bonds in the Christendom” — J.P. Morgan, Testimony of J.P. Morgan (p.50)

It is really hard to disagree with one of the great bankers about money. Money and credit are about trust, before everything else. So, we are going to put trust at the heart.

I am certainly not an expert in blockchain, tokenization or any of the underlying systems and technologies. Though, the perspective is really simple: I send some money to somewhere, with the promise of better returns. So, most of the questions are simply in the line of “Do I trust this system with its blockchain and everything else?” and “Do I trust the counterparty and/or issuers?”.

Although regulations are rapidly evolving regarding blockchain, it would be safe to keep to assume that, anything that goes south on-chain is harder to legally enforce in the real world. Therefore, establishment of trust is even more crucial.

High level status of the RWA landscape (source:RWA.xyz)

Lay of the Land

• Let’s start with some name dropping. Centrifuge, Goldfinch, Maple, Credix, Huma, Clearpool and Obligate. There are of course more and then more will join every day.
• Centrifuge is one of the largest, if not the largest. 556M USD total assets financed, 1432 assets tokenized and +55% YoY Total Value Locked growth. They have pools, tranches and everything.
• Centrifuge recently announced Series A funding of 15M USD.
• Goldfinch is backed by A16Z (news source).
• Investor interest is quite high in the area with specialized VCs and others. Blocktower, Circle Ventures,
• Obligate is issuing bonds for various parties. What I like about them is they have credit agencies Credora and Moody’s scoring these debts. They are some serious company with significant off chain experience.
• Huma is offering credit lines to borrowers to use them as they will. Each borrower has a pool. Investors earn yield as they stake money in borrower pools and borrowers use the money in the pools.
• Many providers have Discord channels for direct dialogue with the community.

One should ask “What happened in 2022?” (source:RWA.xyz)

• It is not all roses. Goldfinch is having trouble with defaults on some of its borrowers; Tugende, Stratos, and recently Lend East. Almavest seems to be the next in line. Goldfinch may soon be a cautionary tale about counterparty risk. To be honest, their auditor selection process and due diligence processes are a bit vulnerable.
• Maple’s volume is almost completeley wiped out in 2022.
• So far, Credora is the most popular on-chain credit assessment solution. Moody’s is also known to provide services to Obligate.
• There are interesting innovations as well. Goldfinch parent company Warbler Labs announced Heron Finance, “a robo-advisor for private markets”.
• Check out RWA.xyz, its Tokenized Asset Coalition and its insights and reports. Plus some more articles Coindesk article, Zeeve article, Galaxy article. You may add more interesting resources on the comments.

What to consider?

• On-chain lending’s primary value proposition is a streamlined and cost effective process. It cuts the middlemen and paper processing times. In return, on-chain yields should be higher.
• As a side effect of the absence of legal framework, (in theory) almost anyone who pass KYC can access private debt market and enjoy higher yields.
• Beware the counterparty risk. As a lender, you are legally protected only by a thin layer, if any. Therefore, trust is mainly on the platform.
• Technical audits on the platform are a given, but borrower audits and credit scoring are essential to building trust.
• Some platforms provide extra security on default. Warbler Labs, parent company of Goldfinch, took on the losses of some (Stratos) of the defaults on its platform (trivia: Stratos founder Rennick is a founding member of Goldfinch). Though, it is not a given. They are reluctant to provide the same support for the delinquency/default of LendEast pool.
• Don’t be fooled by the “decentralized” and “autonomous” claims. It almost never is, and it is used as a good excuse if you have a problem. The concept is not inherently a bad thing, though. It is just useless as an investor.

What’s next?

We have seen just the beginning. On-chain private credit/debt market is an emerging market. There is significant interest, tempered with occasional events.

Significant portion of RWA tokenization applications are merely re-ledgering of the off-chain operations. In the future, we might see more on-chain native applications.

Innovation is supported by significant investment from both blockchain investors and established VC firms. It seems that path to platform success has two main pillars: Establishing trust and institutional support.