RWA: The Cornerstone for Driving the Next Bull Market in the Crypto Space
Author: Shih Chun Chen, CFA, Founder of InVar Finance Marlboro Zhang, Researcher from 3WW3
Since the bear market began, the term Real World Assets (RWAs) has become increasingly common. The scope of RWAs is broad, ranging from the tokenization of physical assets to traditional financial instruments (TradFi), and even ESG-related assets. When intertwined with blockchain technology, traditional real-world assets can enhance efficiency, increase transparency, optimize liquidity management, and ultimately achieve a more inclusive society. By incorporating RWAs into the cryptocurrency space, the development of centralized finance will become more diversified.
The Total Value Locked (TVL) of RWAs rebounds to $750 million, reaching a 7-month high (Source: fortunafi)
By combining tokenization with the cryptocurrency ecosystem, RWAs leverage the advantages of blockchain to iterate on traditional financial tools (TradFi) for innovation, including credit loans, income-based financing, corporate lending, mortgages, and other assets. Compared to the market crash of DeFi or NFTs in 2022, the market demand for RWA tokenized products has become stronger.
Although tokenization is not a new concept, the development path of RWA tokenization has been steadily growing, providing channels for people to use cryptocurrencies in familiar scenarios. One of the most successful cases of RWA tokenization is stablecoins—currently with a market size of $127 billion. The innovation of stablecoins brings stability—helping to combat the volatility of cryptocurrencies while maintaining the efficiency of capital management—but in a new digital dollar form.
In addition to stablecoins, the tokenization of real estate and traditional financial instruments (TradFi) also represents a huge market. This vast market has attracted many participants, such as startups, governments, and financial institutions, all exploring the tokenization of real estate and traditional financial instruments (TradFi). Tokenization can provide greater flexibility in transaction scale, timeframes, and processes for real estate or traditional financial instruments (TradFi). Furthermore, native blockchain features such as programmability, immutability, and composability will endow RWA tokenization with a new paradigm.
By reviewing the history of RWA tokenization, we can see that when ICOs became chaotic, it was the moment when Security Token Offerings (STOs) entered the scene; and when DeFi and Layer 1 became more accessible to the public, tokens as mediums could offer partial ownership and returns to more investors. Additionally, when DeFi fell into niche markets due to weak scalability and high entry costs, we could derive traditional financial returns from tokenized short-term treasury bills or RWA mortgages. Therefore, while RWA is still in its early development stage, its value to cryptocurrencies has already become apparent.
Exploring Cutting-Edge RWA Applications
RWA tokenization is not limited to bringing hard assets and traditional financial businesses on-chain; there are many more areas worth exploring. For example, MakerDAO is increasing the application of RWAs, not only diversifying cash flows but also helping financial institutions leverage the high capital efficiency advantages of on-chain assets to release liquidity. This marks a groundbreaking milestone in promoting new scenarios for RWA tokenization.
Another representative example is the derivatives DEX ProsperEx, which is also an early use case in the RWA field. This DEX retains the inherent form of derivatives DEX, including on-chain perpetual contracts, on-chain options, and other major derivatives trading models, while introducing RWA assets such as stocks and bonds as trading targets, which can further be used for derivatives trading.
ProsperEx will provide unique opportunities and market efficiencies for derivatives traders, fully built on-chain, based on two mainstream trading methods: peer-to-pool and peer-to-peer (order book), and utilizing zero-knowledge proof technology to offer services to all traders in a permissionless and private manner, which is its advantage. It also possesses the characteristic of expanding more trading functionalities, such as supporting a wider range of asset types beyond trading FT assets, including NFTs. ProsperEx is expected to provide an early reference for the development of DEX in the RWA field.
RWA tokenization creates a means of communication and interaction between DeFi and traditional finance to meet different use cases. The market capitalization of RWAs far exceeds that of the cryptocurrency market because the tokenization of RWAs serves as a powerful catalyst for redirecting liquidity into cryptocurrencies and can counteract the weaknesses of decentralized economies. Using RWAs as collateral is a popular concept in tokenization, allowing asset originators to borrow capital in DeFi using tokenized RWAs. Moreover, users can also transfer ownership or related rights of the underlying assets through tokenization. In this application, the on-chain value and the potential for releasing liquidity fully reflect the potential of RWA tokenization.
As we see in the cryptocurrency market, RWAs have unlimited potential to become necessary tools for unlocking value and enhancing ecosystem sustainability. InVar Finance has taken the first step by developing a trust-minimized tokenization model, exploring the maximization of the flexibility of tokenizing RWAs and bridging solutions for Web2. By building a tokenization model based on ERC-3525, InVar Finance's trust-minimized tokenization model breaks through the limitations of ERC-721 and 1155 solutions while providing users with additional investment flexibility.
ERC-1155 vs. ERC-3525
Imagine a world where everyone can invest $100 in real estate, having the discretion to manage RWA NFTs and trade freely on a DEX like ProsperEx without worrying about security issues. This is the significant advantage of RWA NFTs compared to traditional investments. Larger data capacity and high visibility make NFTs the best medium for on-chain identity of RWAs. Therefore, the infrastructure of DeFi and NFTs is crucial for the new application expansion of RWA NFTs.
D3X, a new decentralized NFT exchange, aims to provide ultimate liquidity for NFTs through a complete trading infrastructure. In any case, enhancing liquidity is an essential task for NFTs. Thus, by supporting NFT projects to enter an integrated platform with customized liquidity pools, including NFT AMM, incentive distribution, NFT issuance, etc., D3X provides an instant trading channel for RWA NFTs, allowing new users to gain relevant rights while maintaining exposure to RWA risks, including token rewards offered by D3X.
RWA: Overcoming Challenges and Moving Forward
Despite the unlimited potential of RWA tokenization, a series of challenges still need to be overcome at this stage.
One major issue with RWA tokenization is the execution and coordination of on-chain and off-chain processes. Unlike DeFi lending protocols, where liquidation is fully automated and managed by code, the liquidation of RWA collateral (at least partially) must be handled off-chain, often through the legal system. This complexity can create legal disputes for protocols using RWA as collateral.
Additionally, the valuation and liquidity of RWA tokenization may be influenced by market dynamics and investor sentiment, which are not always directly related to the intrinsic value or performance of the assets. This can lead to volatility and uncertainty that differ from, or are even greater than, traditional assets.
Moreover, the legal and regulatory framework governing RWA tokenization may not seamlessly integrate with the digital realm. The market still needs to address issues related to jurisdiction, ownership, and enforceability to protect tokenized assets and ensure their legitimacy.
The potential of Real World Assets (RWAs) lies in emerging countries in Asia, Africa, and Latin America.
Marlboro, a researcher at 3WW3 (Asia-Africa-Latin America Web3 Research Institute), believes that the world is currently in a phase of lacking investment targets. As tensions between China and the U.S. escalate, many ordinary investors hope to invest in emerging market countries. However, this vision is often difficult to realize due to high entry barriers, lack of effective channels, and foreign exchange controls.
Currently, the stock and real estate markets in emerging countries such as Vietnam, Indonesia, and India are increasingly favored by investors. This is because the rapid economic growth and enormous market potential in these regions provide substantial returns for many multinational capital investors. However, due to the lack of direct investment channels, ordinary investors cannot benefit directly.
Blockchain can enable the tokenization of RWAs and bring them to the global investment market, enriching the investment targets in the cryptocurrency world and allowing more non-crypto native users to participate in the cryptocurrency trading market, thereby bringing more new users and funds to Web3 and mitigating the overall bull-bear fluctuations caused by Bitcoin's four-year cycle.
In summary, the scope of RWAs has expanded unprecedentedly. The tokenization of RWAs fundamentally surpasses traditional financial instruments because it can improve liquidity, cost-effectiveness, transparency, and many other aspects. Although the development path of RWA tokenization is rugged and complex, many practitioners are tirelessly working towards the goal of achieving a more inclusive society through RWA tokenization.
Backed by value outside of cryptocurrencies, RWAs allow for the introduction of new types of collateral in DeFi. Users can easily access on-chain investments in traditional financial instruments such as real estate or short-term treasury bills through cryptocurrencies and gain returns generated outside of blockchain, or mixed returns. However, the differences between cryptocurrencies and real currencies present certain challenges. If these challenges can be overcome, the prosperity of RWAs will ultimately arrive.
Overall, due to their inherent diversity and solid value foundation, RWA tokenization can become a new hope for the cryptocurrency industry. Beyond technology, the market needs to be educated with credible evidence that can prove the significance of RWA tokenization, while regulation, technology, tools, and consumer behavior must also keep pace with the advancement of RWA tokenization.
