[Web3] Real World Asset: The way to bridge TradFi and DeFi (Part 1)
The purpose of this piece is to provide an overview of RWA and explain its benefits. Additionally, we will delve into the current development of Treasury RWAs.
Special thanks to Bill Hsu from AppWorks for giving me feedback and suggestions!!!
RWA (Real World Assets) has received a lot of attention and discussion in the Web3 sector in 2023. Not only has it been one of the most rapidly growing areas of Web3 in the last year, but the traditional financial sector has also recognized the advantages of blockchain and decentralized technology. The RWA business is seeing an increase in resource investment.
According to DefiLlama, the Total Value Locked (TVL) in RWA has increased more than sixfold in less than a year, from $761 million at the start of 2023 to $5,582 million in 2024/01/15.
Source: DeFiLlama
If we look at the top 15 companies on the DeFiLlama based on TVL ranking, we can see that 8 of them work on the treasury and account for more than 90% of the TVL.
The goal of this article is to present a high-level overview of RWA, as well as to explain its benefits and current status of Treasury RWA.
Real World Assets involve tokenizing tangible assets from the physical world and bringing them onto the blockchain
RWAs in the crypto space involve tokenizing tangible assets from the physical world and moving them into the blockchain. This includes assets like treasuries, private credits, real estate, commodities, carbon credits, and others.
Source: Self made
According to the research from Citi, they have projected tokenized assets to reach $4 to $5 trillion by 2030, implying a potential growth of over 1,000 times from the current TVL. The numbers may seem astonishing, but what is the underlying reason for such bullishness?
Compare to traditional asset, RWAs provide the following advantages:
1. Efficiency and Cost Saving
Conventional transactions, such as bank loans, need a drawn-out process of paperwork submission, administrative tasks, credit analysis, background checks, and manual processes. It usually takes one to five days to finish, requiring various intermediary processes, and results in the signing of contracts.
By using smart contracts, blockchain technology, on the other hand, reduces the need for middlemen and streamlines the settlement and transfer procedures. This enables code-enforced lending terms and the immediate transmission of digital currency (e.g. stablecoins), all in a matter of seconds.
RWA has the potential to save costs associated with labors and administration in addition to time. DeFi platforms have roughly 2–5 times lower marginal costs than traditional banks and non-banks, according to IMF research.
Source: IMF Global Financial Stability Report
As a result, tokenization services are currently provided by numerous large banks
For instance, JPMorgan uses Onyx Digital Assets to tokenize US Treasury bonds, mortgage-backed securities, and cash in the form of JPM Coin. As of October 2023, its digital asset platform handles $1–2 billion in transactions on a daily basis.
Furthermore, in January 2023, Goldman Sachs Digital Asset Platform (GS DAP) launched on a private blockchain developed by Digital Asset. Digital bonds are their main focus at the moment, and it's anticipated that GS DAP will eventually expand to include other institutional products like structured finance, private equity funds, and commercial real estate opportunities.
2. Affordability and Fractional Ownership
Tokenization is comparable to asset securitization in that they both pool assets such as mortgages or personal loans and sell their cash flows to investors as standard units.
Take real estate as an example.
RealT is a tokenized real estate marketplace. After RealT has purchased the properties, investors can participate in the US real estate market by holding the "RealTokens" issued by RealT. This allows investors to benefit from rental income while maintaining completely compliant, fractional, tokenized ownership.
Source: Self made (RealT Website)
RealT also delivers the following benefits:
Lower entry barriers to investing in real estate: Individuals can invest without significant upfront capital because they do not need to own the entire property, as with *REITs.
Interoperability with DeFi Protocols: RealT RealTokens investors can pledge their tokens as collateral and arrange for a loan on their RMM platform, borrowing stablecoins to gain liquidity at any time without selling their RealTokens.
Direct ownership of real estate: In addition to receiving a return on investment and asset appreciation, RealToken holders have the power to vote on property decisions.
Note: A real estate investment trust (REIT) is a company that owns, operates, or finances income-generating real estate. REITs issue shares that are bought and sold like ordinary stocks.
In addition to the benefits listed above, RWA has other potential advantages that are still being developed. This includes the borderless nature of blockchain, which allows people from various countries to access cryptocurrencies and buy specific assets. Furthermore, all transactions will be securely recorded on the blockchain, increasing transparency and making data transmission more efficient.
If we look at the top 15 firms working on RWA on DeFiLlama, 8 of them focus on treasuries, accounting for more than 90% of the TVL ranking.
My thesis is that RWAs that are highly fungible — that is, replaceable by another identical item — will most likely be prioritized for tokenization and mass adoption.
For example, the distinctive qualities of each real estate unit reduce their interchangeability with other units. The ownership and pricing systems are more complex than those of U.S. Treasury securities, requiring extra steps for tokenization.
Therefore, the following article will primarily focus on Treasury RWAs, analyzing their current status and delving into the reasons behind their current success.
Flight-to-Quality is the main driver that boost the growth of treasury RWA in the last 12 month
In short, the past drivers of treasury RWAs could be flight-to-quality. The Luna crisis, the collapse of Celsius and Three Arrows Capital, and the swift demise of FTX, not only led to severe losses for many crypto investors, but have prompted people to shift their exposure to a more reliable asset.
Many people may invest their assets in stable coins like Tether USDT or Circle USDC. Despite high interest rates (~5%) in the real world, Circle and Tether do not offer further yields. Moreover, in the first half of 2023, existing alternatives, including DeFi lending protocols such as Aave and Compound, offer lower rates than the genuine risk-free rate (~2%). This means that crypto natives are paying an opportunity cost that they could have gained by investing in other TradFi risk-free products.
The Treasury RWA protocols may use US T-bills as collateral and convert them to tokens. This not only allows them to give a relatively steady, trustworthy asset to the crypto market, but also to bring the 5% risk-free return to the blockchain in a high-rate environment.
Source: Self Made (Aavescan, DefiLlama, CNBC)
The Treasury RWA is currently in its early stages, with crypto users entering the space driven by arbitrage opportunities. Over the past six months, as market sentiment has improved, the Aave USDC deposit rate has also increased. However, many people continue to invest in Treasury RWA since it can consistently provide a 5% interest rate with less volatility than DeFi Lending Protocols. Furthermore, its compatibility with DeFi is growing, opening up new use cases (which we will address in our next article).
In the following section, we will examine how one key player, MakerDAO, has benefited from this trend.
MakerDAO generates large revenue by shifting assets from stablecoin to TBills and indirectly distributing the income to stablecoin holders.
MakerDao, with a focus on its stablecoin Dai (where 1 Dai = 1 USD), plays a crucial role and is one of the biggest beneficiaries in the RWA sector.
MakerDAO adopted RWAs as a reserve asset in mid-2021, and by late 2022, its TBill holdings had grown significantly. Currently, TBills and RWAs account for over 50% of MakerDAO's assets, resulting in a threefold rise in revenue over the last 12 months. Unlike Tether and Circle, MakerDAO allows Dai holders to earn yield by increasing the Dai Savings Rate (DSR), essentially integrating real-world high-interest opportunities onto the blockchain.
Source: Dune
Currently, most of the value in Treasury RWAs comes from crypto native investors rather than tradFi, the entire industry is still in its early stages. In the long run, various remaining challenges must be addressed in order to fully realize the potential of blockchain and RWAs.
In addition to MakerDAO, the next articles will highlight 4 additional key players in the sector, giving a better knowledge of how to integrate the treasury into the blockchain and the obstacles of RWA development.