🏠Real Estate: Exploring the Surge in RWAs Amid the Crypto Winter
The “crypto winter” began with Terra’s collapse and was worsened by FTX’s decline, marking a major setback for the previously flourishing DeFi sector. DeFi’s Total Value Locked (TVL) has remained stagnant for over a year, now sitting at about 77% below its peak at the end of 2021.
In contrast to the overall trend, a specific DeFi sector known as Real World Assets (RWA) is experiencing rapid expansion. Over the course of this year, the total value within this category has surged by over 70%. This article will delve into the realm of tokenized assets tied to tangible assets, exploring their characteristics, ties to conventional finance, and future potential.
-There is a consistent increase in the desire for tokenized assets, spanning real estate, stocks, and treasury bonds.
-RWAs offer a wide array of avenues for market participants to create earnings and broaden their investment portfolios.
-This sector comes with distinct limitations and risks, such as obligatory KYC procedures, minimum balance prerequisites for complete interaction with platforms, and the potential for insolvency stemming from uncollateralized loans, among others.
What does RWA stand for?
RWA, or Real World Assets, refers to tangible assets and other assets that have a physical existence in the real world. These assets, such as real estate, commodities, and art, are converted into digital tokens to be utilized within the DeFi (Decentralized Finance) sector.
RWAs are fundamental in traditional finance, with the global real estate market worth around $326.5 trillion and gold exceeding $12 trillion in 2020. Despite the significant size of the “real assets” sector, its integration with DeFi remains limited, highlighting considerable growth potential.
RWA’s central idea is to create blockchain-based investment instruments tied to physical assets, replacing paper registrations with decentralized ledger ownership. This facilitates direct trading of assets or portions without intermediaries.
Benefits of this approach include:
-Cutting costs by removing intermediaries like lawyers, brokers, and banks.
-Enabling swift and efficient 24/7 asset trading, as opposed to traditional “business hours” transactions.
-Reducing entry barriers.
-Enhancing asset liquidity.
-Providing transparency in processes.
Real World Assets may encompass stablecoins, such as USDT and USDC, which effectively represent digitized versions of the US dollar.
The RWA ecosystem is developing steadily, constantly adding new projects:
Leading firms, including hedge funds such as T. Rowe Price Associates, WisdomTree, Wellington Management, and Cumberland, are exploring the benefits of on-chain transactions and settlements for currency and interest rate swaps within the Avalanche subnets.
JPMorgan launched the Tokenized Collateral Network (TCN), which BlackRock and Barclays have used for converting shares into digital tokens and OTC trading of derivatives. In July, the Securitize platform issued security tokens for the securities of the Spanish real estate fund Mancipi Partners.
The role of RWAs within the DeFi
DeFi Llama reports a Real World Assets segment TVL of $2.5 billion as of October 17, 2023, surpassing TVL in categories like “Derivatives,” “Yield Aggregators,” and “Crosschain Solutions.”
Various DeFi projects let users invest their crypto assets, especially stablecoins, in traditional financial instruments like government and corporate bonds. stUSDT, a RWA platform on TRON and Ethereum blockchains, allows users to stake USDT with an annual interest rate exceeding 4%. In exchange, they receive a “receipt token” called stUSDT, confirming their investment in real-world assets like short-term government bonds.
The TVL of the stUSDT platform has been growing rapidly since July and has already reached $1.84 billion (as of Oct. 17, 2023).
Total Value Locked (STUSDT)
Constraints and Dangers
While many RWAs exist on public blockchains, they typically don’t provide unrestricted access to financial services. Using tangible on-chain assets often requires KYC/AML procedures, and platforms may restrict access to accredited investors with minimum balances. Consequently, RWAs face restrictions similar to the traditional market. Experts have also raised concerns about potential losses due to borrower insolvency, especially in cases of unsecured private loans.
As the segment expands, an increasing number of projects are emerging to explore RWAs. For instance, stablecoins are being introduced with backing in real-world assets.
In October, Real USD, mainly backed by tokenized real estate, suffered a significant setback as the stablecoin unexpectedly dropped by 50% in value, likely due to a surge in redemptions of assets with low-liquidity collateral.
In conclusion,
-Most RWA platforms thrive thanks to cryptocurrency market participants rather than institutions, but notable players like Franklin Templeton and BlackRock are increasingly interested in tokenizing real assets.
-The market has witnessed the tokenization of stocks, bonds, funds, and various financial products for some time now. TVL on these platforms continues to rise, even during the prolonged stagnation of the broader DeFi sector.
-Despite its rapid growth in the midst of the crypto winter, the RWA sector remains in its nascent stages of development. However, there is a strong indication of gradual maturation and significant potential for this segment in the future, particularly when considering its relatively small size compared to the traditional financial market.
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