How RWAs Can Become The Force Behind Blockchain Adoption
Diving deep into one of the fastest-growing DeFi sectors
RWAs are poised to become one of the leading forces behind blockchain adoption in the upcoming years. This year alone, the total value locked (TVL) in RWAs has doubled, going from $1.25B to over $6B, turning it into one of the fastest-growing DeFi sectors.
This explosive growth is attributed mainly to the emergence of new sources of yield, including tokenized US treasuries, corporate bonds, ETFs, and the rise of on-chain credit in emerging markets. RWAs are also attracting a new wave of institutional capital to DeFi; according to Boston Consulting Group, 97% of institutional investors believe tokenization can revolutionize asset management and become a $16T business opportunity by 2030.
In this report, we’ll review these new sources of yield, the current market leaders, and the benefits of tokenization. We’ll also discuss the legal challenges ahead and the forecasted size of the tokenization market by the end of the decade.
Table of Contents
Current Growth - Where Are We Now?
Outlook: How Big Can The Tokenization Market Grow?
Why More Institutions Are Using RWAs
Who are the Main Users of RWA Protocols?
The Risks & Legal Challenges for RWAs
Current Growth: Where Are We Now?
This section will review the main RWA categories in terms of growth, including on-chain credit, tokenized treasuries and bonds, and real estate, as they have seen the most growth in dollar terms and user activity.
On-Chain Credit Resurfaces
On-chain credit has grown 84% this year, roughly $210M from January 1 to September 30. Centrifuge is responsible for 70% of that growth.
Several on-chain credit protocols that were market leaders a year ago have been practically wiped out in 2023, like Maple, which once boasted nearly $1B. Maple, however, was the second-largest contributor to the growth of on-chain credit, adding approximately $60M in active loan value by Q3.
But the competition is now tougher; the new market leaders are providing higher yields and a wider range of investment options for borrowers and lenders. Centrifuge’s TVL is now shy of $250M, a 60% increase from May this year.
In this example, a wide range of RWA pools in Centrifuge track real estate, carbon credits, treasuries, and emerging markets and provide between 7% and 10% in returns. Some are even targeting 15%. As stated, the median DeFi APY is below 4%, sometimes swimming below 3% and 4% in protocols like Aave.
Regarding private credit loan exposure, Africa and Asia are currently the most active borrowers of on-chain credit. Kenya has the largest loans in terms of dollar value, approximately $73 million, followed by Nigeria ($70), then The Philippines ($53), and India ($40).
Most of these countries are considered emerging economies where most citizens and small businesses are underbanked. Accessing traditional loans is difficult since the financial infrastructures in these countries are usually underdeveloped.
Protocols like Goldfinch and Credix incentivize users to deposit stablecoins like USDC and then lend them to businesses in emerging markets. For example, most deals from Goldfinch were made with Southeast Asian and African FinTech initiatives. All proceeds are used to provide additional backing to these startups, which seek funds to provide financial access to millions of underbanked citizens and businesses.
In these types of deals, the fixed APY is usually above 10%, much more than what most DeFi lenders can provide today. This is because yield comes from real-world assets and their investment portfolio is strategically collateralized off-chain.
Where are we now and what can we expect for the on-chain private credit sector?
The on-chain credit sector is somewhat similar to that of Lido and its dominance over the liquid staking sector. Protocols like Goldfinch have seen virtually no growth year-over-year, with the exception of Credix. Therefore, Centrifuge and Maple were the most significant contributors to that $210M growth and will most likely remain the leaders for the next 12 months.
However, on-chain private credit remains down 70% from its ATH last year. According to RWA.xyz, there are $561 million in active loans, far below the $1.54 billion from May 2022.
Most likely, the accelerated interest rate hikes in early 2023 affected the demand for on-chain loans, as private credit protocols rely on liquid and illiquid real-world assets.
That said, the following 12-24 months will be crucial for on-chain credit protocols. The Fed —despite taking a more dovish stance— could change its monetary policy should the US report a more robust economy and a tighter labor market, impacting the on-chain credit sector one way or another, as we saw last year.
Treasuries and Bonds
Treasury-bound RWAs and corporate bonds have seen the most explosive growth in value this year, adding nearly $700M year-to-date, distributed mainly between Ethereum ($339M), Stella ($323), and Polygon ($23), and the remaining in L1s like Solana.
Ondo Finance, Franklin Templeton, and Matrixdock are the market leaders, making up nearly 90% of all tokenized treasuries.
Why have Treasuries become so attractive to crypto users? Consider this:
The median DeFi APY has remained below 3% throughout 2023
The number of active developers in crypto projects and chains is at a 3-year low
Overall, the total value locked in DeFi is down 30% YoY
Crypto users are looking for higher yields. Liquid markets such as bonds and treasuries are providing higher returns, so it’s no surprise that the growth in RWAs is mostly thanks to protocols that tokenize and track US treasuries, corporate bonds, and indexes.
Let’s review some of the leading treasury issuers in the RWA sector:
Ondo Finance currently boasts approximately $160 market capitalization. Its flagship product is USDY, a tokenized US Dollar secured by US treasuries and on-demand deposits, allowing users to earn yield on US treasuries, money markets, ETFs, and high-yield corporate bonds.
Franklin Templeton is more of a traditional finance company turned crypto advocate when it started experimenting with tokenization, next to WisdomTree. In January, the issuer started with around $100M in issued assets. That number now equates to $310M.
stUSDT is also a prominent treasuries issuer. However, the amount of shady on-chain activity and the centralized control by Justin Sun flooded stUSDT with criticism and concerns over its long-term sustainability.
On-chain real estate added $90M this year, which is comparably less in dollar value in Q3.
RealT is currently the market leader, increasing its TVL from $62.5M to $89M year-to-date, representing a 30% surge.
RealT is an Ethereum-based protocol that provides fractional real estate investment and a wide variety of options for home buyers and investors. It now dominates over 50% of the market share.
However, Tangible used to hold the market leader title not so long ago, but the protocol saw its TVL drop from $60M to $39M after USDR depegged this October.
Tangible leveraged USDR, a stablecoin that latched onto the RWA narrative. Allegedly, it was primarily backed by real estate investments. These assets are known to be illiquid, making them ineffective in the case of a bank run. When it collapsed, it was too late to push it back up.
Outlook: How Big Can The Tokenization Market Grow?
Industry reports suggest that the tokenization market, even in the worst-case scenario (a prolonged bearish market), could reach around $3.5T and up to $9T in a bull market scenario, according to 21.co.
Data from 21.co
Meanwhile, Boston Consulting Group estimates that the tokenization of illiquid assets could become a $16T business opportunity, representing 10% of global GDP.
Source: Boston Consulting Group
The total global asset market as of October is estimated at around $900 trillion, led by industries like real estate ($330T), bonds ($300T), and equity ($120T). The total cryptocurrency market cap is currently valued at $1.20T as of October 20. If RWA protocols can grab at least 1% of that market share, the DeFi space would get flooded with roughly $9T worth of capital and liquidity for spare, nearly nine times more than the current crypto market capitalization.
That said, the tokenization market is merely a fraction of the global assets market. The recent growth in the tokenization market and RWA protocols can be perceived as proof of the potential large-scale applications of blockchain technology. We’re seeing more interest from high-level institutional investors and international financial entities. On October 13, members of the IMF, bankers, and FinTech executives discussed the legal challenges and potential use cases of tokenization.
Why Are TradFi Institutions So Keen on Tokenization?
Tokenization can lower barriers and tackle operational deficiencies that many industries face today. The main benefits of tokenization and blockchain technology are:
Higher accessibility and liquidity
Reduced transaction cost with fewer intermediaries
Programmability can provide new issuers with new investment features and operational options
As we stated, treasuries and real estate represent the largest blocks in the total capitalization of global assets. These yield-bearing assets don’t share the same liquidity benefits, as real estate is often considered a highly illiquid market primarily due to limited affordability, regulatory hurdles, lack of information, etc., and tokenization can be used to offset these setbacks:
Tokenization removes intermediaries, and bringing assets on-chain means they can be transferred 24/7
It is fully transparent, and all information is stored and viewable within the blockchain
It provides higher accessibility with better operational frameworks for fractional ownership
As proof of this continued institutional interest, DTCC, an American post-trade financial services company with over $40B in total assets, is collaborating with Chainlink on Swift’s Blockchain Interoperability Project.
Who are the Main Users of RWA Protocols?
One of the main forces behind the growth of RWAs is that crypto native users are looking for better yield-generating opportunities than just staking their governance tokens in a protocol. So, most of the demand for RWAs is driven by native crypto users.
Something to consider is that WisdomTree and Franklin Templeton have had considerable success in RWAs. Being both traditional finance veterans, we can expect the onboarding of new users, like institutional customers or the average person. A key thing here is that dividends in RWAs are easier to explain than those in traditional DeFi ecosystems, reaffirming trust and simplicity in users’ minds.
The Risks & Legal Challenges for RWAs
The investment opportunities in RWAs rely on the tokenization of assets and their distribution; platforms that will lead the RWA narrative are the ones that provide the infrastructure for RWAs, like compliance protocols —which will take a bigger role due to current laws across jurisdictions— and the asset providers. This brings a new set of challenges —but also opens an opportunity for a broader investor base.
However, there may be some nuances when we talk about adoption. The success of RWAs will depend heavily on how these protocols deal with/adapt to current regulatory laws as long as the law remains the same. So far, Switzerland is the only country with established crypto laws. That said, infrastructure and compliance protocols will become more critical than ever on the road to mass adoption.
Compliance protocols, auditors, custodians, and on-chain oracles will see more protagonism as RWAs take off. Auditors will become an essential piece of the puzzle as they can verify on-chain assets, reassuring trust for investors. Meanwhile, on-chain oracles are needed to feed off-chain data into protocols. Further, compliance protocols like Tokeny are providing the legal guidance and the infrastructure for seamless onboarding and asset management operations.
Another example is Quadrata, a platform that provides a technology called web3 Passport, allowing businesses and investors to connect their wallets to an identity passport.
Final Thoughts: The Role of RWAs Blockchain Adoption
We have analyzed how RWAs could bring billions (and even trillions in the best-case scenario) to the DeFi market, and how tokenization can enhance multiple industries, from housing, supply chain, finance and banking, and more.
RWAs are targeting big markets, and they need considerable liquidity for that. Liquidity can be obtained by seeking big institutions. But institutions won’t come to DeFi unless they’re certain that they’re working within the confines of the law. The other risk is smart contract vulnerabilities, which is why auditors and infrastructure protocols will have a bigger role in this ecosystem.
However, the fact that there’s so much open interest from investors and TradFi institutions tells us there’s a lot of potential in the RWA sector.
The main challenge for RWAs is dealing with current global regulations. Either regulatory laws become more friendly for crypto assets, or protocols will have no choice but to adapt to the current rules and try to play around with them. So far, Switzerland is one of the few countries that successfully established a well-structured environment for crypto assets.