The Rise of Real World Assets: Insights and Future Outlook
The tokenization of real estate introduced the first wave of Real World Assets (RWA). Nowadays, RWAs present a growing market with a wide range of assets on-chain from U.S. treasuries to private credit.
Generally speaking, assets are an alloy of two elements: representation and ownership, both must be recorded on a ledger. The term Real World Assets (RWA) covers a wide range of asset classes (e.g., tangible and intangible assets) and thus its meaning heavily depends on the specific context. To some:
RWA is the ultimate solution to fill up the gap between the crypto market and traditional financial market. (Source)
Recent research proposed that tokenization classifications are not binary, but there is a spectrum of ways that these assets and underlying relationships can be digitized, offering varying courses and capacities in how both worlds interface with each other (c.f., Figure A)
As depicted in Figure A, the detailed classification of RWAs is required, with a focus on three key aspects: (i) representation, (ii) ownership, and (iii) value transfer and five distinct models. With this nuanced approach, the details of the financial relationship are omitted, and instead, there’s a focus on commonalities across tokenization models. For a full list of model descriptions, please refer to the Spectrum of Tokenization Report.
- Model 1 — the status quo where an investor purchases a stock directly from the listed company via a stock exchange. The ownership is held off-chain in stockholder brokerage and custody accounts. The value Transfer happens as the shareholder company sells stock and in exchange receives fiat from investors. Investors then become stockholders and receive dividend payments in fiat.
- Model 3 — As an example of on-chain integration, let us take an example investor depositing $USDC to the New Silver Series 2 “senior” ($NS2DRP) pool (the New Silver Pool) via the Centrifuge Decentralized App (dApp). On the other side of the transaction is the pool issuer (i.e., NS Pool LLC), which is owned and managed by New Silver Lending LLC, a real-estate bridge lender that pre-funds loan originations from its balance sheet and effectively reimburses itself through liquidity in the New Silver Pool to fund future loan originations. Although these assets are represented on-chain, their ownership enforcement is off-chain; and value transfer is exchanged between counterparties using both off- and on-chain methods.
- Model 5: Finally, as an example of fully on-chain, an example investor contributes to a Uniswap liquidity pool on the Unsiwap dApp, which a borrower uses to access liquidity. All assets’ ownership are digitally native and enforced and on-chain, congruent to the value transfers which are also on-chain.
With these granular models, a detailed assessment of RWAs is possible, and a more detailed classification is enabled.
RWA in Numbers — From Treasuries to Mortgages
The most prevalent RWA categories are Lending (e.g., Mortgages and Credit loans), and Tokenized Treasuries. Per November 8th, 2023, private credit in DeFi amounts to a total of approximately $4.5B total loan value (cumulative value of all loans across all protocols), and U.S. Treasuries amount to $750M total value (total value of all tokenized treasury product tokens in circulation).
Figures B and C below show aggregate total loan value and market caps respectively, split up by the individual protocols.
Benefits and Risks of RWAs on blockchains
The rise of RWAs is driven by potential benefits that arise through the use of a public permissionless system.
- Liquidity and Accessibility: First of all, liquidity issues can be addressed in a direct and permissionless manner, whereas traditional assets were previously inaccessible to investors. E.g., RWAs may have not been possible to access by investors, traditionally.
- Fractional Ownership: Another benefit of RWAs is the possibility of low-overhead fractional ownership, offering investors to diversify investments in a more granular way.
- Reducing intermediaries: Also, RWAs on blockchains heavily reduce the involvement of intermediaries, which reduces the cost overhead for involved parties. Processes are streamlined, diminishing the need for intermediaries.
- Decreased information asymmetries: Through the public and permissionless nature of blockchains, information asymmetries are addressed by design and allow market participants to have insights that were not possible beforehand in permissioned systems, partially eliminating information asymmetries.
- Novel Risks: While the efficiency of RWAs reduces costs that stem from intermediaries, novel risks can arise, e.g., smart contract risks, hacks, bugs, and the lack of regulatory clarity.
An Outlook into the Future of RWA
From a macro-perspective, the tokenized market as is expected to grow to at least 16 trillions of dollars by 2030 (c.f., Figure D).
A maturing industry brings forth standardization efforts and coalitions that strive for Education, Advocacy, and Adoption on RWAs, driving forward the adoption of public blockchains at large (e.g., the Tokenized Asset Coalition (TAC) with household names, such as AAVE, Centrifuge, Circle, Coinbase, CREDIX, Goldfinch and Base).
RWA and the Importance of Oracles
The oracle problem is considered to be the Achilles heel of public blockchains. As more complex and intricate systems are built on permissionless blockchains, the importance of Oracles grew as well since most complex economic interactions require some external data source.
The blockchain oracle problem refers to the inherent inability of blockchains to access external data. (Source)
With the rise of RWA, the dependency on verifiable and trustworthy Oracles is increasingly important as well. Acurast addresses these challenges with its Zero Trust approach to the Execution Layer.
Oracles with Acurast
As of today, Acurast is already used to implement Oracles for example in youves, a DeFi platform on Tezos. As an example, youves has a new synthetic token called uXAU, which is designed to track the value of gold. This token is not backed by physical gold but by the Tezos-based Tether (USDt), a stablecoin pegged to the US dollar. Users can mint uXAU by providing USDt as collateral at a relatively low collateral ratio due to gold’s stability. The uXAU token allows users to take positions on the future value of gold: by minting and trading uXAU, they can bet on the price of gold falling. If the price of gold decreases and the traded token’s value remains stable or increases.
Acurast is a general-purpose platform for building zero-trust applications. A key use-case are flexible, on-demand Oracles that are used by decentralized applications: If you want to bulletproof your Oracles with Acurast, reach out to us via Twitter, Discord, or Telegram.