1. Tracing the Origins of RWA

RWA – Real World Assets

RWA, short for Real World Assets, refers to the digital and tokenized representation and trading of real-world assets within blockchain or Web3 ecosystems. These assets include, but are not limited to, real estate, commodities, bonds, stocks, artworks, precious metals, and intellectual property. The core idea behind RWA is to leverage blockchain technology to bring traditional financial assets into the decentralized finance (DeFi) ecosystem, thus enabling more efficient, transparent, and secure asset management and trading.

The significance of RWA lies in its ability to enhance the liquidity of traditionally illiquid assets through blockchain technology. This allows these assets to participate in the DeFi ecosystem for activities such as lending, staking, and trading. This approach, which connects real-world assets with the blockchain world, is emerging as a key development direction in the Web3 ecosystem.

RWA - special asset status

RWA involves tokenizing real-world assets to create digital assets with utility on the blockchain. Essentially, it serves as a bridge between native crypto assets and traditional assets. Native crypto assets are typically managed through smart contracts, with all business logic and asset operations occurring on-chain, adhering to the principle of “Code is Law.” In contrast, traditional assets such as bonds, stocks, and real estate operate within the legal framework of the real world and are protected by government laws.

RWA introduces a set of tokenization rules that require both on-chain support through smart contracts and legal protection for underlying assets like stocks and real estate. Tokenization under the RWA framework is not just about issuing a token on the blockchain; it involves a complex process that addresses real-world asset relationships off-chain. This process usually includes purchasing and custodial management of the underlying assets, establishing a legal framework linking tokens to these assets, and finally issuing the tokens. Through this tokenization process, off-chain legal regulations and operational procedures are integrated, ensuring that token holders have legal claims to the underlying assets.

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RWA—Historical Origins

The development of RWA (Real World Assets) can be divided into three stages: early exploration, initial development, and rapid expansion.

Early Exploration (2017-2019)

2017: Exploration Begins

As the concept of decentralized finance (DeFi) matured, the idea of RWA started to emerge. Pioneer projects like Polymath and Harbor began exploring the feasibility of tokenizing securities. Polymath focused on creating a platform for security token issuance, addressing legal compliance issues, while Harbor worked on a compliance framework for trading securities on the blockchain.

2018: Beginning of Commodity Tokenization

Pilot projects in real estate and commodity tokenization began to appear. For instance, RealT started in the U.S., attempting to tokenize real estate and allowing global investors to gain partial ownership and rental income from U.S. properties.

2019: Formation of TAC Alliance

The TAC (Tokenized Asset Coalition) Alliance was formed to promote the standardization and cross-platform interoperability of RWA, fostering collaboration and development among different projects. During this period, platforms like Securitize and OpenFinance were launched, focusing on providing compliance solutions for tokenized assets.

Initial Development (2020-2022)

2020: Introduction of RWA by Multiple Projects

Centrifuge gained significant attention for tokenizing real-world receivables and invoices, enabling small and medium-sized enterprises to access financing on the blockchain. Additionally, prominent DeFi projects such as Aave and Compound began experimenting with RWA as collateral to expand their lending services.

2021: MakerDAO Joins the RWA Market

Centrifuge integrated RWA as collateral on the MakerDAO lending platform, allowing users to obtain the stablecoin DAI by holding RWA.

2022: Traditional Finance Enters RWA

Major financial institutions like JPMorgan and Goldman Sachs began researching and piloting RWA projects to explore the digitalization of traditional assets via blockchain. The RWA Alliance was established to advance standardization and global promotion of RWA.

Rapid Expansion (2023 - Present)

2023: Government Involvement in RWA Regulation

Large asset management companies like BlackRock and Fidelity began experimenting with tokenization to manage parts of their asset portfolios, enhancing liquidity and transparency. The U.S. Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA) also started to intervene, working on regulatory frameworks for RWA.

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2. RWA track direction

Given the diversity of traditional asset forms, the RWA sector is flourishing across various fields. From tangible assets like real estate, commodities, precious metals, artworks, and luxury goods, to intangible assets such as bonds and securities, intellectual property, carbon credits, insurance, non-performing assets, and fiat currencies, RWA (Real-World Assets) is demonstrating its potential for application across a wide range of domains.

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Real estate industry

In traditional finance, real estate is often considered a relatively stable asset for long-term investment, with strong capital appreciation potential under normal market conditions. However, the low liquidity and high leverage characteristics of real estate raise the barriers to entry and increase the investment risk for individual investors. In real estate-related RWA projects, tokenization can significantly improve asset liquidity and reduce the risk borne by individuals.

1. Tangible: Focuses on the tokenization of physical assets like real estate and precious metals, enabling these traditionally hard-to-trade assets to achieve liquidity on the blockchain.
2. Landshare: Through tokenization, Landshare allows small investors to participate in the real estate market, especially through its blockchain-based real estate fund model.
3. PropChain: Offers a blockchain-based global real estate investment platform, allowing investors to gain exposure to the global real estate market without the need to purchase physical property.
4. RealT and RealtyX: Enable investors to gain partial ownership of U.S. real estate and receive rental income through token purchases.

Fiat currency to stablecoin

In the stablecoin sector, notable examples include USDT (Tether), FDUSD, USDC, and USDE. These stablecoins are pegged to the value of fiat currencies, offering a low-volatility asset within the crypto market, with USDT (Tether) being the most prominent. Tether holds the largest market share among stablecoins, with its value pegged 1:1 to the US dollar, meaning each USDT corresponds to one dollar.

In traditional financial markets, fiat currency is itself a real-world asset (RWA), maintaining its value through reserve and regulatory mechanisms. When fiat currency is introduced into the blockchain as a stablecoin, it is repackaged as a programmable digital asset, capable of participating in various operations within the decentralized finance (DeFi) ecosystem, such as lending, payments, and cross-border transfers. Tether links the value of USDT directly to real-world assets denominated in US dollars, which significantly enhances USDT’s stability while providing a relatively secure environment for the introduction and use of RWAs.

The Mechanism of USDT

Tether supports the value of USDT by holding a basket of reserve assets. These reserves include cash, cash equivalents, short-term government bonds, commercial paper, secured loans, and a small amount of precious metals. When users deposit fiat currency (e.g., USD) into Tether’s account, the company issues an equivalent amount of USDT to the user, thereby maintaining the 1:1 peg between USDT and the dollar.

Stability and Risks of USDT

Systemic Risk:Since USDT’s value is directly pegged to the US dollar, users bear systemic risks and market fluctuations related to the dollar. For example, if the dollar significantly devalues in global markets, USDT’s purchasing power would also decrease.

Regulatory Risk: If regulators question or take action against Tether’s operational model, it could affect the issuance and use of USDT.

Collateral Risk: Although Tether claims that USDT is fully backed by reserve assets, there have been ongoing concerns about the transparency and sufficiency of these reserves. If Tether cannot maintain adequate reserves or if the quality of these reserves declines, USDT could lose its peg, meaning it would no longer maintain a 1:1 value with the dollar.

Liquidity Risk: Under extreme market conditions, Tether may face liquidity shortages. If a large number of users simultaneously request to redeem USDT for dollars, Tether may struggle to fulfill these requests promptly, leading to market panic and price volatility.

The challenges and issues faced by Tether are not unique to the stablecoin market but are indicative of the broader RWA market. The security of RWAs is closely tied to the quality of their underlying assets and is highly susceptible to the laws and regulations of different countries and regions.

Loan market

The integration of Real World Assets (RWA) with the credit lending market can offer more collateral options and higher loan amounts. In DeFi protocols like Maker and AAVE, borrowers are typically required to provide collateral in the form of crypto assets that exceed the loan amount to ensure loan security. With the inclusion of RWA, traditional assets such as real estate, accounts receivable, and others can be used as collateral, broadening the range of acceptable assets. This means that not only crypto assets but also tangible assets from the real economy can participate in this system.

This initiative can provide small and micro-enterprises with more access to public funding, offer large companies additional loan channels, and allow ordinary investors to invest in businesses and reap the benefits of future growth.

Bonds and Securities

In traditional financial markets, bonds and securities are among the most widely accepted investment methods, often backed by comprehensive financial regulatory frameworks. Therefore, aligning with real-world legal and regulatory requirements is a crucial step in bond and securities-related RWA projects.

1. Maple Finance: Provides a way for businesses and lenders to create and manage loan pools on-chain, making the issuance and trading of bonds more efficient and transparent.
2. Securitize: Offers services for the issuance, management, and trading of tokenized securities. The platform allows companies to issue bonds, stocks, and other securities on the blockchain and provides a comprehensive set of compliance tools to ensure these tokenized securities adhere to the legal and regulatory requirements of various countries.
3. Ondo Finance: Offers products including tokenized short-term treasury funds that provide stable returns, further blurring the lines between DeFi and traditional finance.

3. RWA market size

Since May 2023, RWA has experienced explosive growth. As of the time of writing, the Total Value Locked (TVL) in RWA-related projects remains as high as $6.3 billion, representing a year-on-year increase of 6000%, according to data from DeFiLlama.

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According to data from the RWA.xyz official website, there are 62,487 holders of RWA-related assets, with 99 asset issuers. The total value of stablecoins associated with these assets is $169 billion.

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Multiple well-known Web3 companies, including Binance, are optimistic about the future market value of RWA. Some estimates suggest that by 2030, the total market value of RWA could reach $16 trillion.

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As an emerging sector, RWA is making an unprecedented impact on the DeFi market, with its vast potential warranting investor attention. However, the development of RWA projects is closely tied to real-world regulations, and the varying legal frameworks across different countries and regions could easily become a constraint on its growth.

4. RWA ecological development

With the entry of traditional capital from firms like Goldman Sachs and SoftBank, as well as Web3 giants such as Binance and OKX, strong projects in the RWA sector are beginning to emerge. Projects both new and established, including Centrifuge, Maple Finance, Ondo Finance, and MakerDAO, are starting to stand out in this burgeoning field, establishing themselves as leaders in terms of technology and ecosystem development.

Centrifuge: real asset on-chain protocol

concept

Centrifuge is a platform for tokenizing real-world assets on-chain, offering a decentralized asset financing protocol. It collaborates with well-known DeFi lending protocols like MakerDAO and Aave, and connects with borrowers in the real world (typically startups) who have pledgeable assets, facilitating the flow between DeFi assets and real-world assets.

Financing development

Since its inception, Centrifuge has garnered significant attention from investors. Between 2018 and 2024, it raised a total of $30.8 million across five funding rounds, with notable VCs such as ParaFi Capital and IOSG Ventures backing the project. Centrifuge’s performance has also been impressive, having tokenized 1,514 assets with a total financing amount of $636 million, reflecting a 23% year-on-year increase in Total Value Locked (TVL).

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Technical architecture

Centrifuge’s core architecture consists of Centrifuge Chain, Tinlake, on-chain Net Asset Value (NAV) calculation, and a tiered investment structure. Centrifuge Chain is an independent blockchain built on Substrate (part of the Polkadot parachain ecosystem), designed specifically for asset tokenization and privacy protection. Tinlake is a decentralized asset financing protocol that allows issuers to tokenize assets by generating NFTs and using these NFTs as collateral to obtain liquidity.

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In a complete lending process, real-world assets are tokenized into NFTs via the Tinlake protocol. These NFTs are used as collateral, allowing issuers to obtain liquidity from the pool, while investors provide funds to the pool. The on-chain NAV calculation model ensures transparency in asset pricing and status for both investors and issuers. The tiered investment structure allows for different lending levels: the junior tranche (high-risk, high-return), the mezzanine tranche, and the senior tranche (low-risk, low-return).

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development issues

Although Centrifuge ranks first in RootData’s RWA project attention, key metrics like TVL have declined due to factors such as the impact of the 2022 bear market and unmet expectations for 2024. As of now, the TVL stands at only $497,944.

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ONDO Finance: Leader in U.S. Debt Tokenization

concept

In contrast to Centrifuge’s focus on creating a platform for the flow of DeFi funds and real-world assets, Ondo Finance is a decentralized institutional-grade financial protocol. It aims to provide institutional-grade financial products and services, building an open, permissionless, and decentralized investment bank. Currently, Ondo Finance is focused on creating stable asset options beyond stablecoins, bringing low-risk or risk-free, steadily appreciating, and scalable fund products (such as U.S. Treasuries and money market funds) onto the blockchain. This allows holders to benefit from most of the underlying asset’s returns while maintaining relatively stable assets.

Financing development

ONDO Finance has raised a total of $34 million in three rounds of funding from prominent investors such as Pantera Capital, Coinbase Ventures, Tiger Global, and Wintermute, among others. Additionally, ONDO Finance has established partnerships with up to 82 organizations across four key areas: chain support, asset custody, liquidity support, and service facilities.

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ONDO Finance has also shown impressive market performance. The current price of the project token ONDO is $0.6979. Compared to the A-round funding price of $0.0285, ICO funding price of $0.055, and the opening price of $0.089, this represents increases of 2448%, 1270%, and 784%, respectively, demonstrating the market’s strong enthusiasm for the project.

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Since April of this year, ONDO Finance has experienced significant growth in key metrics such as TVL, which currently stands at $538.97 million, ranking third in the RWA sector.

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Product Architecture

ONDO Finance’s current primary assets are USDY and OUSG.

USDY (U.S. Dollar Yield Token) is a new financial instrument issued by Ondo USDY LLC, combining the accessibility of stablecoins with the yield advantages of U.S. Treasury securities. Unlike many blockchain yield tools, USDY’s structure is designed to comply with U.S. laws and regulations and is backed by short-term U.S. Treasury securities and bank demand deposits.

USDY is available in two types:

USDY (Accumulating): The token price increases with the yield of the underlying assets, suitable for long-term holders and cash management needs.

rUSDY (Rebase): Maintains a $1.00 token price, with yields realized by increasing the number of tokens, ideal for settlement or exchange purposes.

OUSG (Ondo Short-Term U.S. Government Treasury) is an investment tool issued by Ondo Finance that provides liquidity exposure through tokenization, aiming to offer investors ultra-low-risk and highly liquid investment opportunities. OUSG tokens are pegged to short-term U.S. Treasury securities, and holders can gain liquidity benefits through instant minting and redemption.

Tokenization Structure: The underlying assets of OUSG are primarily held in BlackRock’s U.S. Institutional Digital Liquidity Fund (BUIDL), with other portions in BlackRock’s Federal Fund (TFDXX), bank deposits, and USDC to ensure liquidity. Through blockchain technology, OUSG shares have been tokenized, enabling 24/7 transfers and trading.

Minting and Redemption Mechanism: Investors can obtain OUSG tokens instantly with USDC or redeem OUSG tokens for USDC.

Token Versions: Similar to USDY, OUSG also has two versions: OUSG (Accumulating) and rOUSG (Rebase).

Both OUSG and USDY require KYC support from users. Therefore, Ondo has partnered with the backend DeFi protocol Flux Finance to provide stablecoin collateralized lending services for OUSG and other permissioned tokens, enabling permissionless participation at the protocol backend.

BlackRock BUIDL: The First Tokenized Fund on Ethereum

Concept

BlackRock BUIDL is an ETF (Exchange-Traded Fund) launched jointly by the global asset management company BlackRock and Securitize. Its full name is “iShares U.S. Infrastructure ETF,” with the ticker symbol BUIDL. Similar to USDY, BUIDL is essentially a security. When users invest $100 in BUIDL, they receive a token valued at $1 while also benefiting from the investment returns on the $100.

Regulatory Compliance

Unlike many RWA sector projects, BUIDL is relatively robust in terms of compliance. The BUIDL fund is operated by a Special Purpose Vehicle (SPV) established by BlackRock in the British Virgin Islands (BVI). An SPV is an independent legal entity used to isolate the fund’s assets and liabilities. The BUIDL fund has applied for a Reg D exemption under U.S. securities law and is open only to accredited investors.

Underlying Assets

BlackRock Financial is responsible for managing the fund’s assets. The fund invests in cash equivalents, such as short-term U.S. government securities and overnight repurchase agreements, to ensure that each BUIDL token maintains a stable value of $1. Securitize LLC handles the tokenization process for the BUIDL fund, including converting the fund’s shares into on-chain tokens. On-chain yields are generated automatically through smart contracts.

Market Response

With the backing of BlackRock’s substantial reputation and strength, the BUIDL fund has performed well in terms of market recognition and TVL (Total Value Locked), maintaining a TVL of $502.41 million, ranking 4th in the RWA TVL rankings.

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In terms of technical architecture, BUIDL may not be as innovative as other projects. However, BlackRock’s longstanding reputation in the crypto market is significant enough to secure its place in the RWA sector.

In the RWA ecosystem, besides Centrifuge, which integrates traditional lending with DeFi, ONDO Finance, which combines securities with DeFi, and BlackRock BUIDL, there have been breakthroughs in integrating real estate with DeFi. For example, Propbase directly tokenizes real estate assets for circulation, and PARCL allows for investment in neighborhoods or districts through tokens.

5. Summary

RWA (Real World Assets) essentially refers to real-world assets. The fundamental goal of this sector is to facilitate the interaction between real-world assets and on-chain assets, allowing more real-world capital to flow into the blockchain while gradually blurring the boundaries between DeFi and traditional finance.

The RWA sector includes both tangible and intangible assets, currently focusing on three main areas: securities, real estate, credit lending, and stablecoins.

Compared to other sectors, RWA is subject to more stringent regulatory oversight and compliance requirements, which can give some well-known companies a competitive advantage.

Despite the strong narrative and potential of the RWA sector, the uncertainty around its compliance means that caution is necessary when investing in related projects, with a readiness to manage potential risks.

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