What is a Real World Asset?
Real World Assets (RWAs) are tokenized forms of tangible assets that retain their monetary value such as gold, real estate, and carbon credits. These tokenized assets are tradeable on digital formats. RWAs have a significant utility in DeFi sector. The integration of DeFi and RWA is seen as a good example of TradeFi and DeFi hybrid.
How do RWAs Work?
RWAs investors need to ensure that they are legitimate and that are the backing assets that they represent. The process is divided into three main phases mentioned as under:
RWAs are usually integrated on a digital ledger. However, the issuer must determine its value, propriety, and legal standing first as a tangible asset. Therefore, the investors have to examine the market price, performance history, and physical condition of an RWA before investing in it.
Furthermore, the asset must have legally viable ownership documents and detailed record of deeds and invoices.
The next phase is about tokenization process. The information of the tangible asset is converted in a digitized token. The data is derived from the value of an asset and sent to the rightful owner which is inscribed in the metadata. Since the blockchain is public, therefore anyone can verify the authenticity from the records.
At the same time, when the tokenized assets are regulated they fall under the same legislative scope as securities. In this manner, the need for regulatory implementation for digital assets increases.
In this manner, the issuers are able to get license for security tokens and incorporate systems such as Know Your Customer and Know Your Business standards. At the same time, these RWAs may be listed on centralized security token exchanges.
RWA Demand and Supply
The final stage is all about demand and supply. The DeFi protocols that list RWAs have two main functions they contribute towards creation of new RWAs. Secondly, they also work on creating demand for tokenizes tangible assets.
Utility of RWAs in DeFi
TVL or total value locked is a metric that determines the total amount of capital locked in different protocols. The TVL in 2021 was around $180 billion that slumped to $49.87 billion in 2022 signifying a 72.8% drop within 7 months. Therefore, DeFi investors have opted to invest in more stable assets such as RWAs. RWAs on-chain was measured in $1.05 billion in 2023.
This number does not account for stablecoins. At the same time, 82% of RWAs or $855.7 million was generated from yield-backed assets such as treasuries, real estate, and private credit.
Between January and September 2023, active on-chain private credit loans were marked at $210.5 million. Additionally, treasuries and other bonds were incremented by $557 million for the same duration.
What is RWA Issuer?
RWAs were added to the blockchain sector based on three types of investment activities:
The acquisition of tangible assets from physical world. The conversion of these assets into digitized form using tokenization.
The distribution of these tokens to other investors within a given blockchain system. Some of the known RWA issuers are Centrifuge, Franklin Templeton, and Wisdom Tree.
Advantages of RWAs in DeFi
RWAs tokenize products such as real estate that are illiquid and slow-moving in real world. However, on a digital platform the liquidity and trading frequency for these assets increases naturally.
RWAs convert a massive tangible asset into fractional parts. In this manner, more investors are able to seek exposure in them and lower the entry barrier for a wider investment population. At the same time, a group of investors may also combine their budget to own a property or other types of RWAs.
RWAs bring more transparency to the asset classes that are intrinsically not open and share information with their investors. However, when these assets are converted into RWAs through tokenization they are added to a distributed ledger that increases their transparency.
On account of features such as tokenization and fractionalization, RWAs also increase financial inclusion. They allow investors to trade regardless of national jurisdiction; promote financial awareness, and lower entry barrier.
Risks Associated with RWAs in DeFi
Regulatory compliance for RWAs is limited and required specified legislative clarity to address issues that are specific to this sector.
RWAs can face issues with the declaration of assets in physical and digital assets and allow scammers to defraud investors.
RWAs can face scalability constraints on account of their global trading.
RWAs are still under development that can pave the way for institutional interest and lay the foundation for the creation of a legislative framework for digitized assets. However, RWAs first need to address the immediate issues for fairing as viable investment products in reality.