RWA (Real-World Assets, real assets) is already called one of the main trends in the crypto world for 2024. But can tokenization of real estate, stocks and carbon credits really go mainstream? In this article, let’s examine it in further detail.
RWA: what is it and what are they?
In the context of the crypto industry, the term RWA (real-world assets) refers to any asset that initially “lives” off-chain (i.e., not on the blockchain). This includes both physical assets (oil, gold, apartments) and electronically issued ones (bonds, carbon credits, ETFs).
Thus, RWA protocols are projects that tokenize real assets, whether in the form of regular tokens or in the form of NFTs and SFTs.
Surprising fact: RWA is the largest niche in the crypto market with a capitalization of about $120 billion. Surprised? Stablecoins are essentially real world asset tokenization fiat currencies, nothing more. (This is not an algorithmic stablecoin; rather, it refers to real-backed stablecoins like USDT and USDC.) USDT was launched in 2014, so the RWA sector is already 10 years old, although it seems to be a fresh trend. However, in this article we will not talk about stablecoins, but will focus on other types of real assets. So:
- precious metals, which by capitalization made up the second-largest group of RWA assets as of September 2023 ($1.1 billion).
- real estate and land
- stock
- bonds (state and corporate)
- commodities – oil, diamonds, agricultural products, etc.
- carbon credits
- income from all listed assets (yes, you can tokenize income separately from the asset itself)
- ETFs and other traded derivatives
- private credit instruments – for example, loans
- intellectual property
- works of art, etc.
Advantages of RWA (according to RWA startups themselves)
Ask the CEO of any RWA project why tokenization of real assets is the future, and you will hear approximately the same set of arguments.
From an investor’s point of view
New sources of income: Web3 investors can earn money from real estate (rental income), rising share prices, etc. Tokenized assets are purchased primarily for income, and not for the purpose of long-term ownership;
Easy access to investments: the opportunity to buy a share in a property for $100; trade shares without reference to a broker; acquire assets that are not traded in your country of residence, etc.;
Minimization of costs: the investor only pays the blockchain commission and the platform commission – in total this can be less than $5;
Transparency: all blockchain transactions involving actual assets can be monitored owing to the implementation of smart contracts;
Liquidity during sale: for example, an NFT that symbolizes an ownership interest in a real estate property can be placed on the marketplace in a minute, but it will take months to sell a share of an apartment in the traditional way.
From a market perspective
More confidence in the crypto market due to an increase in the share of assets with real collateral;
influx of liquidity and reduction of costs in traditional markets with the arrival of investors from the cryptosphere;
Globalization of spot markets: an asset that was previously traded only on certain exchanges or was not traded at all becomes available to investors around the world;
Capitalization Growth: As real assets become more liquid, they will be purchased by those who value them most, and their price may rise as a result.
RWA tokenization procedure
The process of issuing tokenized assets is described in detail in our article . Here we will list only the main stages, which can vary greatly depending on the type of real asset.
Development of the business logic and regulatory part of the project – in particular, how the existence of the underlying asset will be audited, how income will be paid, who has the right to buy tokens, the minimum investment amount, whether there will be a DAO and the ability for users to make investment decisions, the process of obtaining licenses in the chosen jurisdiction, etc. For example, in order to tokenize real estate, you need to create a separate legal entity for each object (apartment, building), known as an SPV (Special Purpose Vehicle, special project company).
Purchasing a real asset – (rental home, debt obligations, ETF shares, bonds, etc.) or selecting a partner in the traditional market who owns the desired assets. A number of traditional companies (Franklin Templeton, WisdomTree) have also opened up tokenization.
Development of smart contracts – for the most tokenized asset (ERC-20, ERC-721, ERC-1155); for pools where funds will be received; and (usually) for a protocol utility token that will be traded on an exchange.
Launch and listing of a utility token – It is important not to get confused here: the platform can have either an investment token, which denotes ownership of the underlying asset (shares, shares in a business center), or a regular token traded on a crypto exchange. Let’s say, for Centrifuge it is $CFG, for Maple it is $MPL, etc. Many RWF protocols do not yet have their own token.
Launching pools for underlying assets – (where necessary) and starting the issuance of RWA tokens or NFT minting.
Dynamics of the RWA market
According to Galaxy estimates, TVL (Total Value Locked, the amount of deposited funds) on contracts of RWA platforms is $2.5 billion (not counting stablecoins), and this figure will grow by 82% in 2023.
Outlier Ventures estimates that the TAM (Total Addressable Market) size for RWA could reach $20 trillion by 2030 .
The main sub-segments of the market (according to the rwa.xyz portal ) are gold (TVL $920 million), US government bonds (US Treasuries, TVL $768 million as of December 10, 2023), private loans (TVL $580 million), tokenization of real estate income ( $178 million ).
Main problems of the RWA sector
Regulation
From a startup’s perspective
To date, only a small number of jurisdictions—most notably Switzerland, Abu Dhabi, Hong Kong, and Singapore—have explicit laws that may be applicable to tokenized real assets. At the same time, the systems in different countries are different, as are the approaches to regulating tokenized RWAs of different types. In most cases, tokenized assets are treated as security tokens and are regulated in much the same way as securities. This means that startups need to obtain appropriate licenses and comply with various restrictions – to whom they can provide services and to whom they cannot.
From an investor’s perspective
The purpose of regulation is primarily to protect investors. However, even with regulation in the country where the project is based, there are still many special cases that are not covered by the rules.
Example: you own a token that gives you the right to share ownership (or share of income) in a business center. Consider the following situations.
1) Suddenly it turns out that the business center was sold, and the new owner does not want to hear about any RWA token holders.
2) It turns out that the startup was selling tokens to investors from the United States, and now, at the request of the SEC, it was fined $10 million and faces bankruptcy.
3) The territory where you live is subject to international sanctions, and the startup can no longer provide services there.
In all of these cases, you as an investor will most likely lose money. Who and how should protect your rights if the startup is in Abu Dhabi and you are in Russia? It is still unknown.
Transparency
Everyone has heard that smart contracts supposedly guarantee transparency. However, the blockchain knows nothing about events and transactions that occur off-chain. For example, a smart contract cannot know whether a startup actually owns the underlying asset for which it sells tokens, and what state this asset is in. This requires a reliable system of oracles and external audit – and, of course, high-quality regulation at the state level.
Demand
So far, the demand for utility tokens of RWA protocols often exceeds the demand for their products. For example, the capitalization of $CFG (Centrifuge) was $222 million as of December 10, 2023, and the TVL of the protocol was $248 million, which is only slightly higher. Clearpool ($CPOOL) has a token capitalization ($30 million) higher than TVL ($27 million).
For comparison: the TVL of the Aave protocol ($6.5 billion) is 4.5 times higher than the capitalization of the $AAVE token; TVL MakerDAO exceeds MKR capitalization by almost seven times; for Compound – 6.6 times .
Startups in this space are thriving because venture capital funds are willing to invest in them, hoping to make big profits at the peak of a bull market. The main advantage of the RWA trend, as well as the AI narrative, is its novelty: during the previous bullish rally they had not yet been talked about, which means that the prospect of an increase in the price of tokens here is higher than in the already battered GameFi and the metaverse, for example.
Long-term growth will require sustainable demand growth and good monetization mechanisms. Here you can only count on institutional investors who may be interested in on-chain investments in bonds and other traditional assets that they understand. Whether retail will be attracted by the prospect of an income of 3-9% – time will tell.
Low liquidity when selling
Technically, selling a real asset on the blockchain is indeed much easier than on the traditional market, but… only if there is a buyer. While the RWA market is small, finding a buyer at a good price can be difficult, unless we are talking about standard assets with good trading volumes (like Treasuries).
What will the RWA industry look like in 2024 and beyond?
RWA is perhaps the strongest current narrative after AI. If the market begins to surge after the Bitcoin halving in April 2024 (as many expect), then RWA tokenization development protocols could indeed perform much better than narrative tokens of yesteryear, such as Metaverse and GameFi. (Of course, we do not provide any financial advice.)