Addressing the Liquidity Challenges in RWA Tokenisation
This article delves into the challenges of RWA liquidity, examines the solutions of major DeFi players for RWA, and proposes solutions to foster interoperability and eliminate “liquidity islands.”
Introduction
Real World Asset (RWA) tokenisation is a paradigm shift for the financial industry. Tokenisation promises to democratise access to investments, streamline transactions, enhance transparency, and.. bring liquidity to illiquid assets. However, the rapid adoption of RWAs has also unveiled significant liquidity challenges. These challenges stem from the fragmentation of liquidity across various blockchain networks, as institutional investors often prefer different blockchains for their specific requirements, as well as regulatory implications for tokenised securities.
The Liquidity Problem in RWA
DeFi has disrupted traditional finance by offering decentralised alternatives to financial services. Yet, as more real-world assets are tokenised, increased liquidity is a major promise. Tokenised assets such as real estate, bonds, and commodities are now traded on blockchain platforms, but liquidity remains fragmented due to differing blockchain preferences among institutional investors to isolated pools of liquidity, hindering the seamless movement of assets between them.
Institutional Preferences and Blockchain Fragmentation
Institutional investors prioritise security, compliance, and transaction efficiency, often choosing specific blockchain networks that meet these criteria. For instance, some may favour Ethereum for its robust ecosystem, while others might prefer private blockchains for their enhanced privacy and control. This diversification of preferences exacerbates liquidity fragmentation, creating “liquidity islands” where assets are confined to specific networks and cannot be easily transferred or utilised across different platforms.
Current Efforts by Major Players
1. MakerDAO and Centrifuge
MakerDAO, a leading DeFi protocol, has partnered with Centrifuge to tokenise real estate loans, using these tokens as collateral for DAI, its stablecoin. This collaboration has demonstrated how tokenised RWAs can provide liquidity to traditionally illiquid assets like real estate debt.
2. Societe Generale — Forge
Societe Generale — Forge issued a €100 million bond as a security token on the Ethereum blockchain. This initiative showcases how major financial institutions can leverage blockchain technology to streamline bond issuance and trading, thereby improving liquidity and accessibility.
3. Pendle
Pendle offers a unique approach by tokenising yield-bearing assets and supporting RWAs such as U.S. Treasury Bonds. This platform enables retail and institutional investors to manage and hedge yields efficiently, bridging the gap between DeFi and traditional financial instruments.
4. OriginTrail
OriginTrail enhances supply chain transparency and trust by integrating blockchain with knowledge graph methodologies. By tokenising assets, it addresses the challenges of misinformation and fosters a secure data exchange across various sectors.
This are just a few examples of the many more out there in the market already, but showcases the potential of merging TradFi with DeFi.
Proposed Solutions for Interoperability and Liquidity
1. Cross-Chain Interoperability Protocols
Developing robust cross-chain interoperability solutions is crucial for enabling the seamless transfer of assets between different blockchain networks. Projects like Cosmos, Polkadot and Axelar are at the forefront of this effort, allowing for greater integration and liquidity flow across diverse platforms. These technologies facilitate the interaction between isolated blockchain ecosystems, effectively reducing liquidity fragmentation.
2. Standardisation of Token Protocols
Implementing standardised token protocols can ensure compatibility and interoperability between different blockchain networks. Initiatives like ERC-20 and ERC-721 tokens on Ethereum have set a precedent, also ERC-3643 specifically for real world assets. Extending such standardisation efforts to other blockchains will harmonise tokenisation practices and enhance cross-chain operations, thereby improving liquidity.
3. Decentralised Exchanges (DEXs) as a Blueprint
Decentralised exchanges that support multi-chain trading can aggregate liquidity from various blockchain networks, providing a blueprint for unified marketplace for tokenised RWAs. Platforms like Uniswap and Balancer have successfully implemented this model for crypto assets, and a similar approach can be adapted for RWAs to eliminate liquidity islands by enabling free trade of assets across different chains.
4. Regulatory Clarity and Compliance Automation
Clear regulatory frameworks and automated compliance features embedded in smart contracts are essential for reducing legal barriers to tokenisation and cross-chain asset transfer. Regulatory clarity will encourage more institutional participation, while compliance automation will ensure smoother operations within the DeFi ecosystem.
5. Liquidity Pools and Incentives
Creating liquidity pools specifically for tokenised RWAs and offering incentives for liquidity providers can enhance liquidity. This model has been successfully used by protocols like Uniswap and Balancer for crypto assets. By providing rewards for liquidity providers, these platforms can attract more participants and increase the overall liquidity of tokenised RWAs.
How we’re Solving the Issues in RWA
RIVA Markets is poised to revolutionise the private and real estate debt investment industry by leveraging blockchain and AI technologies. Addressing the key challenges of accessibility, transparency, efficiency, and liquidity in the debt market, RIVA Markets offers a comprehensive solution through its novel end-to-end capital market infrastructure.
The Problems RIVA Markets is Addressing
Accessibility: Current debt markets are fragmented, with borrowers struggling to connect with lenders and private debt investors missing out on lucrative opportunities. This gap leads to inefficiencies and lost opportunities in the market.
Transparency: Loan data is always siloed and difficult to access, creating high barriers in both the origination and secondary markets. This lack of transparency leads to increased efforts and costs for all stakeholders involved.
Efficiency: Traditional lending processes are slow and manual, taking months to close deals and resulting in high operational costs.
Liquidity: The secondary market for private debt is predominantly over-the-counter (OTC), leading to significant discounts on the face value of debt instruments due to the lack of a unified trading platform.
RIVA Markets’ Solutions and Services
RIVA Prime: Loan Origination
RIVA Prime offers a blockchain-based system for structuring and originating loans efficiently on-chain. By digitising the entire loan origination process, RIVA Prime ensures transparency, security, and speed, significantly reducing the time and cost associated with traditional loan processes.
RIVA Securities: Securitisation & Tokenisation
RIVA Securities provides a platform for the securitisation and tokenisation of assets. By converting traditional debt instruments into digital tokens, RIVA Securities enhances liquidity and broadens the investment potential. Tokenisation allows for fractional ownership, making it easier for a wider pool of investors to participate in private debt markets.
RIVA Markets: Investment Marketplace
RIVA Markets creates a global marketplace for trading tokenised assets and investment opportunities. This platform aggregates liquidity from various sources, reducing the fragmentation seen in traditional markets and providing a centralised venue for trading tokenised debt instruments.
Leveraging Technology for Interoperability and Liquidity
Blockchain Technology
RIVA Markets ensures full transparency and efficiency in the investment process. The blockchain provides a secure, immutable ledger for all transactions, enhancing trust and compliance. The choice of Provenance Blockchain, known for its institutional-grade security and compliance features, is pivotal in attracting institutional investors and ensuring seamless integration with existing financial systems.
AI for Due Diligence
RIVA Markets employs AI-powered tools to streamline the due diligence process. By automating the analysis of loan data and investment opportunities, RIVA Markets reduces the time and effort required for due diligence, improving the quality and speed of investment decisions.
Proposed Solutions for Enhanced Liquidity
Interoperability
RIVA Markets builds directly on interoperability, leveraging Provenance Blockchain based on Cosmos Tendermint SDK and the partnership of Provenance with Axelar, as well as working on the integration of additional chains to enable seamless transfer of assets between different blockchain networks.
Supporting multi-chain trading on decentralised exchanges enables RIVA Markets to aggregate liquidity from different blockchain networks. This approach provides that unified marketplace needed for tokenised RWAs, eliminating liquidity islands and facilitating free trade of assets across chains.
Global Markets Network
At RIVA Markets we believe that RWA is not a game of “The winner takes it all”. We’re convinced that the market can only really flourish by exchanging assets and liquidity across many markets. Hence, we’re actively seeking partnerships with other RWA marketplaces and building on our interoperability approach for seamless connectivity with all those other market players.
Partnerships with Institutions
RIVA Markets is a capital market infrastructure for institutional investors and since also many financial institutions around the globe working, or even already offering, tokenised asset products and trading infrastructure, we’re aiming to work with as many of them as possible to also exchange assets and liquidity with them.
Working with Market Makers
Market Maker have a crucial role in the traditional financial markets as well as in the crypto market. They ensure the constant provision of liquidity and therewith also keep markets and market prices afloat when there’s no immediate buyer matching the trades. We’re also seeking to work with market makers as this growing space of RWA tokenisation offers tremendous growing potentials for them and therewith further bolsters the market.
RWA DeFi Yield and Liquidity Pools
RIVA Markets is already working on RWA DeFi yield and liquidity pools, enabling DeFi investors to deposit stablecoins into various risk-adjusted pools to gain exposure to the different tranches with different levels of diversification of the underlying assets. This provides new RWA investment opportunities to investors and increases the liquidity for the market. By leveraging the principle of DEXs’ and Automated Market Makers (AMM) through liquidity pools, this will add additionally to a successful grow of the whole market.
Conclusion
RIVA Markets is well-positioned to address the liquidity challenges in RWA by leveraging its innovative blockchain-based market infrastructure with a multi-liquidity approach. By leveraging interoperability and multi-chain support, standardised token protocols, institutional partnerships and market makers, as well as incentivised liquidity pools, RIVA Markets aims to build greater liquidity and create a more integrated financial landscape between TradFi and DeFi. This approach not only enhances accessibility, transparency, and efficiency but also unlocks the full potential of tokenised real-world assets, benefiting the growth of this next generation of asset management.
RIVA Markets’ mission to “Transition the private and real estate debt investment industry to a more accessible, transparent, efficient, and liquid market” is poised to drive significant advancements in the DeFi space, paving the way for broader adoption and integration of tokenised assets in the global financial ecosystem.
Want to learn more about our solution? We’d be happy to hear from you.
