Real World Assets (RWAs) in DeFi

In this edition, we delve into the concept of Real World Assets, benefits of asset tokenization, and future trends. And in our DeFi roundup, we cover:

• BIS 2024 Tokenization Project Confirmed

• Figure Raises $60M for Unique Crypto Exchange

• Hacken Tokenizes Equity with HAI

Real World Assets (RWAs) are forging a crucial link between digital and traditional finance (TradFi) using tokenization blockchain development. This digitization of physical assets enables greater liquidity, transparency, and accessibility, often heralded as a means to modernise and democratise traditional financial markets. While DeFi has historically centred around crypto-native assets, the incorporation of RWAs represents a notable advancement. RWAs in DeFi have captured the imagination of institutional investors, who are now casting their gaze towards these protocols.

The emerging RWA market has already reached a total value locked (TVL)of $4.423b. And, at the forefront of RWA tokenization protocols stands Centrifuge that is tokenizing real-world financial instruments such as invoices and mortgages. Even MakerDAO has been proactively broadening its reserves and forging alternative revenue channels, with real-world assets now accounting for a significant chunk  of its revenue stream.

Tokenized RWAs are like digital versions of tangible objects, such as real estate, commodities (such as gold or even energy resources such as oil), company stocks, intellectual property, debt instruments (such as loans and bonds), and even artwork. This innovation has completely changed how we can use, trade, and handle these assets, unlocking diverse possibilities for financial services using blockchain technology, as well as other uses outside of finance. Tokenizing assets is one of the most exciting things about blockchain. It could cover pretty much everything we do economically. The way we handle money and assets is shifting to digital platforms, and soon, a significant portion of our assets could be tokenized. This means they'll be represented on blockchain networks, making it easier to use and trade them. And, all these blockchain networks will be able to communicate with each other seamlessly, thanks to a universal interoperability standard.

Use Cases:> bonds: RWA tokens offer the opportunity to earn yield through bond RWA tokens, which are backed by sovereign bonds such as US Treasury bills and bonds. Tokenizing these bonds not only enables investors to earn a yield on their investment but also provides the advantages of blockchain technology, including enhanced transparency, liquidity, and fractional ownership. For the first time, treasury notes tokenized on public blockchains like Ethereum, Polygon, Avalanche, Stellar, and others have surpassed $1 billion in market value.> real estate: Tokenized real estate allows individuals to own a fraction of a property and generate rental income from it. This innovation helps democratise real estate investment, making it more accessible. One of the most recognised platforms which offers a way to tokenize many types of assets, including real estate is, Harbor.> commodities: Tokenized fine art provides individuals with the opportunity to own a fraction of a painting or sculpture and earn income from it. This approach makes fine art investing more accessible to individuals who may not have the means to purchase entire artworks. The Blockchain App Factory for example deals with tokenization of commodities.> art and collectibles: Platforms such as Maecenas have revolutionised art and collectible ownership by enabling fractional ownership of artworks or collectibles. This model expands opportunities for investment in the art market.> equipment and machinery: Companies are exploring the tokenization of industrial equipment and machinery, allowing for fractional ownership and usage rights. This facilitates optimised asset utilisation by enabling more efficient sharing of equipment resources.> ondo finance: Ondo Finance invests in highly liquid exchange-traded funds, enabling stablecoin holders to earn yield. Users exchange stablecoins for USD, which are used to buy assets. New tokens representing these investments are sent to users' wallets. Yield generated from these assets is reinvested, and upon redemption, users receive USDC, offering APY between 4.5% to 7.76%.> backed finance: Backed Finance tokenizes publicly traded securities with bTokens, each backed 1:1 by a security held by a regulated custodian. This opens up investment in publicly traded securities, especially for those in emerging markets. Backed Finance's offerings include tokenized fixed income products and equities such as Backed Coinbase Global and Backed CSPX Core S&P 500.> MakerDAO: MakerDAO is incorporating RWAs into its protocol, with a significant portion of its fee revenue now stemming from these assets. MakerDAO's primary product is DAI, a decentralized stablecoin. The incorporation of RWAs into MakerDAO's ecosystem showcases the potential for decentralized finance to leverage real-world assets in maintaining stability and generating revenue.

Tokenizing real-world assets is like turning physical assets into digital tokens that can be traded or used in blockchain transactions. Here's a simple breakdown of how it works:

> asset selection: first, you pick the real-world asset you want to tokenize. This could be anything valuable, like real estate, artwork, or even invoices.

> token specifications: next, you decide what type of digital token you want to create. It could be a "fungible" token, where each token is the same and interchangeable, like money, or a "non-fungible" token, where each token is unique and can represent something specific, like a piece of artwork.

> blockchain selection: then, you choose which blockchain network you want to use to create and manage your tokens. This could be a public blockchain like Ethereum or a private one.

> offchain connection: to ensure that your tokenized assets are reliable and secure, you need to connect them to accurate off-chain data. This could involve using services like Chainlink oracles to verify information about your assets.

> issuance: finally, you deploy smart contracts on your chosen blockchain network to create and distribute your tokens. This process involves minting the tokens and making them available for trading or use.

source: Comprehensive Real-World Assets Guide: RWAs

RWA infrastructure is made up of essential components namely tokenization platforms, oracles, smart contracts, collateralization mechanisms, compliance solutions, and integration with traditional finance. These components enable the conversion of physical assets into digital tokens, secure lending against tokenized assets, and ensure regulatory compliance.

Centrifuge (CFG) has witnessed a price surge on the heels of a strategic collaboration between the decentralized finance protocol Centrifuge and the stablecoin platform MakerDAO. By integrating with MakerDAO, Centrifuge has unlocked a pivotal avenue for liquidity for real-world assets. Through Centrifuge, users can tokenize tangible assets such as invoices or real estate, enabling asset owners to secure blockchain-backed loans against their digital asset tokens.

The Centrifuge Protocol leads the way in bringing real-world assets onto the blockchain. Its platform offers everything needed to finance real-world assets on a blockchain in one place. From tokenization and securitization to liquidity integrations, all aspects work together seamlessly. Plus, it's governed transparently by token holders.

> setting up: the Asset Originator creates a separate legal entity, called an SPV, for each pool to keep things organised. Borrower's Request: Someone wants to finance something like an invoice or a property.

> originating real-world asset (RWA): the Asset Originator checks the request and creates a digital certificate (NFT) to represent the asset as collateral on the blockchain.

> financing agreement: the Borrower agrees to finance the asset through the SPV and locks the digital certificate in a Centrifuge pool tied to the SPV. Money is then drawn from the pool to fund the Borrower's account or bank account.

> financial transactions: all transactions and payments happen directly on the blockchain between Borrowers, the SPV, and Investors. The SPV manages the pool's administration.

> repayment: The Borrower repays the financing plus fees either in cryptocurrency or by transferring money to the SPV, which then converts it to cryptocurrency. Once repaid, the digital certificate is returned.

> bridging real and digital worlds: creates a digital representation of real-world assets, from goods to properties, revolutionizing trading on decentralized exchanges

> accessing capital directly: empowers borrowers to access affordable capital directly from the DeFi market, while lenders, including institutions and DeFi protocols, enjoy diversified yield backed by real-world assets

> on-chain security and service: brings transparency to the credit market as debt management happens directly on-chain. This reduces capital costs for SMEs and supports business growth

> wider scope: corporate securities and real estate are undergoing tokenization, enhancing security, enabling crowdfunding, and delivering superior returns for investors, thus expanding DeFi's investment opportunities

> inclusion of RWAs: previously excluded real-world assets now join DeFi, enhancing lending opportunities and fostering greater institutional adoption

> enhancing asset liquidity: Assets such as real estate or commodities are a hassle, especially if you prefer short-term investments or need to sell fast. However, cryptocurrency exchanges change the game by making it easier to buy and sell illiquid assets. With these exchanges, you can swiftly adjust your investment strategy to keep up with changing market conditions.

Tokenized RWAs are expected to grow and evolve in the future. As regulatory frameworks develop, investor confidence and institutional participation are likely to increase.

Improved interoperability between different blockchain networks could create a global ecosystem for tokenized assets. Advances in blockchain technology and DeFi may lead to new ways to generate income and innovative financial products.

Integration of real-time asset monitoring through the Internet of Things and enhanced security measures could boost public trust in tokenized assets. Furthermore, asset classes such as intellectual property and carbon credits may become more tokenized, offering a wider range of investment opportunities in this dynamic landscape.

aarnâ facilitates the tokenization of strategies into DeFi products, streamlining accessibility to decentralised financial solutions. Investors in DeFi should recognize the potential of RWAs to address current limitations in the crypto market. It is important to find projects with strong infrastructure for integrating RWAs, including reliable onboarding, accurate data from decentralized oracles, and secure smart contracts. Assessing partnerships can reveal a project's credibility and potential for success in DeFi.

The BIS Innovation Hub will launch a blockchain tokenization project and expand its CBDC privacy testing.

Hacken, a blockchain security auditor, offers Hacken Equity Shares (HES) linked to its native token, HAI, allowing token holders to exchange for company equity. This marks Hacken as the first crypto firm enabling community ownership in the business.

top DeFi tweets

@Mansa_mlk believes RWAs are a game-changer for DeFi, offering sustainable yield, asset diversification, and exciting investment prospects, including potential to become a driving force behind SME growth.

@fitforcrypto_ conducted a comparison of five trending RWA projects, highlighting their unique features and key differences.

In a captivating video, @coingecko delves into tokenized real-world assets (RWAs), showcasing various projects pioneering in this space.

aarnâ's mission is to decentralize the alpha value chain, empowering everyone to benefit from DeFi’s transformative potential, and helping manage one’s crypto & digital assets wealth. >> join our beta

hope you liked alpha unhashed. If you’d prefer to see it in your inbox at a particular time, click here & select a time slot.