Real-world assets on-chain are thought to have the potential to be one of the driving forces behind the next bull run. It would be wonderful to have a clear, easily available ledger of the items we currently exchange within the established financial system. Which procedures show promise? And what drawbacks do tokenizing things have?
There were other factors contributing to the 2008 global financial crisis besides hazardous mortgage-related securities. Additionally, the “global financial ledger’s” lack of transparency contributed to its escalation. Who owes what to whom began to loom large against the backdrop of collapsing bank stocks and unstable collateralized debt obligations. Because the “database entries” were simply unclear, the banking system froze, necessitating a flash flood by the US government.
What if every one of those problematic assets had been on-chain? Of course, it wouldn’t have stopped the markets from collapsing, but at least everyone’s financial situation would have been known.
What are Real-World Assets?
An application that enables tokenization and trading of real-world assets is known as a Real-world Asset protocol (RWA). They go by the name of asset tokenization protocols as well.
The term “real-world assets” is broad. First of all, it’s critical to understand that in the real world, it’s applied to more than simply tangible objects. Indeed, real estate and land are instances of tangible assets. However, the phrase is also applied to monetary assets like bonds and equities that are part of the TradFi system. Business utility tokens are yet another subset. These provide a novel approach for businesses to provide value to their clientele. It resembles having a tangible portion of the thing. That item can be traded on secondary marketplaces and exchanged for a portion of the product.
In short, anything that can be tokenized and traded but is not crypto-native is a real-world asset on-chain.
Advantages of On-Chain
Capturing ownership of physical things on the blockchain has benefits.
Possession is demonstrable.
Under the existing system, when you make an order with a bank, the purchase order appears on your screen along with the quantity of the appropriate financial asset in your portfolio. All you can do is presume that you are the rightful owner. Your ownership is not documented in the public domain. The proof should be visible on-chain, please.
The issuing procedure could operate more smoothly
For instance, there are currently numerous middlemen involved in the buying and selling of bonds, each of whom takes their time and keeps their piece. When seen in this light, blockchain technology is just another efficiency measure that has the potential to drive out of the market the existing settlement system. Additionally,with these efficiency gains, tokenization of things of small value could also become feasible.
The accessibility becomes better
Imagine living in an African country and having no bank account but a mobile phone. With tokenized real-world assets, investing becomes an option: you buy a tokenized and/or fractionalized Tesla stock.
State of Adoption of RWA in Crypto
A noteworthy illustration of a protocol that incorporates RWAs without being solely focused on them is MakerDAO, the DAO that powers stablecoin DAI. The conversion of centralized stablecoins, such as USDC, to US Treasury bonds has been permitted. Therefore, tokenized corporate and government bonds can be utilized as security when creating DAI.
Uncollateralized lending projects in the defi domain are a significant subset of RWA protocols. Here, the word “uncollateralized” is crucial. Collateral is used in the majority of defi loan transactions. One such is the DAI stablecoin that was previously described. Collateral must be provided in order to obtain a stablecoin. But most lending in the real world does not follow this “pawn-shop model of lending.” Collateral is rarely used in lending; instead, a bank grants you a loan based on your credit rating.
Numerous banks and other organizations have issued bonds on-chain in the last few years. Three private banks, including Banco Santander, assisted the European Investment Bank in issuing the first blockchain-based digital bond. On Ethereum, the €100 million bond was introduced in April 2021. On a public blockchain, Siemens, a German firm, has issued digital bonds worth $64 million. Private blockchains have been utilized by other organizations, nevertheless. For instance, despite the fact that it is compatible with the Ethereum Virtual Machine, the Israeli Ministry of Finance has been manipulating its own chain to issue bonds on.
Examples of RWA
A notable example is Maple Finance. It is an institutional on-chain capital market. Teams of credit experts run lending pools and offer loan possibilities to organizations. It is these credit experts who evaluate the borrower’s creditworthiness. Don’t be fooled by the similarity to traditional lending—the institution connects its cryptocurrency wallet! Moreover, Maple is Ethereum-based.
Another is Ondo Finance. It lets stablecoin holders directly invest in ETFs of for example BlackRock. United States bonds of more than $100 million have been issued via Ondo
Reasons for caution on RWA
The addition of real-world assets, such as homes and government bonds, to the blockchain carries dangers and complexity even while blockchain technology offers potential solutions for many applications. It is not the same as really owning the bond to own a symbol of, say, a government bond. To crypto natives, Byron Gilliam likened it to the distinction between holding Bitcoin on Ethereum and holding Bitcoin in cold storage. Even while a token can be more inexpensive and tradeable than an actual thing, it is still only a representation of the thing.
To conclude, a rapidly expanding category of financial instruments that combines blockchain technology and traditional finance is called RWAs on-chain. To be fair, though, these methods still have relatively little overall value locked. It is also unclear how much institutions would rely on privately owned blockchains like Ethereum or create their own network. Nonetheless, in the upcoming bull market, this is a development to closely monitor.
+++
