Introduction

DeFi protocols made rapid progress from 2020 to 2021, with the total value locked (TVL) in DeFi skyrocketing from hundreds of millions to hundreds of billions of dollars. The summer of that year was dubbed "DeFi Summer," and the growth rate only began to slow down as we entered 2022. During this period, a massive influx of capital poured into the DeFi space, leading to a plethora of innovative DeFi applications. The market was eager to participate in token airdrops and DeFi mining activities, creating numerous opportunities for early participants to quickly amass wealth. The total locked value in DeFi surged from $1.1 billion on June 1, 2020, to a peak of $184.75 billion on December 1, 2021, marking a staggering increase of 250 times. However, following a series of market fluctuations and panic, the DeFi market began to falter, and as of October 24, 2023, the TVL in DeFi has decreased by 80% from its peak, currently stabilizing at around $40 billion.

Source: https://defillama.com/

As the crypto market entered a "winter," regulatory issues and problems with some centralized exchanges (CEX) led to ongoing market turbulence. Additionally, as the U.S. dollar began its interest rate hike cycle, the previously attractive annual percentage rates (APRs) have diminished. In this context, the market began to seek low-risk investment opportunities to cope with the crypto winter. This period coincided with changes in the macroeconomic environment and rising U.S. Treasury yields, making the tokenization of real-world assets (RWA) a very important value capture channel in the current crypto market.

RWA is currently one of the hottest topics in the Web3 and cryptocurrency markets, regarded as the engine driving the next bull market. According to DeFillama data, there are over 20 projects in the RWA sector, with a total TVL exceeding $6 billion, ranking 6th in the DeFi market TVL leaderboard.

Source: https://defillama.com/categories

Overview of RWA

RWA, short for "Real World Assets," refers to tangible assets that can be tokenized, converted into digital assets, and traded on the blockchain. Bringing real-world assets into the DeFi space requires tokenization, which means converting assets of actual value, such as gold and real estate, into digital tokens to represent their value on the blockchain and utilize them in DeFi protocols. In other words, RWA represents the value of real-world assets that are used on the blockchain after tokenization.

Unlike traditional asset securitization, which builds a bridge between traditional capital markets and actual assets, RWA tokenization constructs a bridge between real assets and crypto finance. Its purpose is to bring real-world assets into DeFi, fully leveraging the global advantages of DeFi, thereby providing more liquidity to real assets. RWA encompasses a wide range of underlying asset types, including tangible assets like gold and real estate, as well as intangible assets like government bonds or carbon credits, along with cash (USD), precious metals (gold, silver, etc.), insurance, consumer goods, promissory notes, royalties, and more.

Currently, the stablecoin USDT, which ranks third in cryptocurrency market capitalization, can be seen as the most successful RWA token, as it maps the U.S. dollar onto the blockchain and has undergone tokenization.

Since the inception of blockchain technology, market participants have been exploring how to bring RWA on-chain. Traditional financial institutions, such as Goldman Sachs, Hamilton Lane, Siemens, and KKR, are actively working to bring their real-world assets onto the blockchain.

Citibank, in its research report "Money, Tokens, and Games," predicts that by 2030, up to $5 trillion could shift to new forms of digital currency, such as CBDCs and stablecoins, with about half potentially based on blockchain distributed ledger technology. The tokenization of real-world assets (RWA) will be a key driver for the blockchain industry to reach a scale of trillions of dollars.

Reasons for the Rise of RWA

Between 2017 and 2018, entrepreneurs in the crypto market were keen on mapping artworks, real estate, or securities onto the blockchain. At that time, the concept of DeFi had not yet been introduced, and the Security Token Offering (STO) concept was not mature. The industry was relatively sparse, focusing more on equity-type assets, such as company stocks or equity assets, with less emphasis on bond-type assets.

In the past, the main sources of cryptocurrency and DeFi yields were trading, leverage, and the issuance of new tokens. After DeFi Summer, the issuance of various governance tokens led to a temporary boom in the market, with DeFi yields during this period being quite substantial, generally above 20%. At that time, U.S. Treasury yields were close to zero, causing the market to show little interest in asset classes outside of cryptocurrencies.

1. Declining DeFi Asset Yields and Soaring U.S. Treasury Yields

As the crypto market entered a bear phase and the U.S. began its interest rate hike cycle, various asset yields began to invert. For example, the APY of Curve pools and lending platforms like Compound was less than 1% (referring to yields without additional subsidies). In contrast, U.S. Treasury yields had reached 5.5%, significantly higher than Ethereum's LSD yields. The bear market in DeFi could no longer meet the yield and stability demands of some institutions. Various factors led many funds to choose not to remain in DeFi but instead prefer to return to the dollar realm to purchase Treasury bonds.

Source: https://dune.com/lido/lido-morning-coffee-dashboard

2. Approval of Bitcoin Spot ETFs on the Horizon

If a Bitcoin spot ETF is approved, it will bring long-term benefits to the RWA sector. This would help major financial firms like BlackRock to promote the tokenization of real assets. After the bear market, the blockchain industry also urgently needs a new narrative to ignite market sentiment and explore the direction of the crypto market moving forward. Currently, the approval of Bitcoin spot ETFs seems imminent, leading some to believe that RWA combined with ETFs has the potential to trigger the next cryptocurrency bull market, positioning RWA as the next important development narrative in the DeFi space.

3. Major Players Accelerating RWA Sector Layout

For instance, Goldman Sachs launched GS Dap to tokenize traditional assets, and Siemens issued a $60 million bond leveraging RWA. Citibank further pointed out in its report "Money, Tokens, and Games" that RWA will be a killer application driving the blockchain industry into the tens of trillions of dollars scale, as almost any asset that can be represented in value can be tokenized. Optimistically, it is expected that by 2030, the scale of RWA will reach $4 trillion.

According to data from rwa.xyz, as of October 24, the total number of loans in RWA credit protocols is 1,771, with a total loan amount exceeding $4 billion.

Source: https://app.rwa.xyz/

What RWA Projects Currently Exist?

1. MakerDAO

MakerDAO is a decentralized collateralized lending platform on Ethereum, established in 2014. It achieves over-collateralized loans by locking up crypto assets like ETH in smart contracts and minting the stablecoin DAI, which is pegged to the U.S. dollar.

This year, MakerDAO has repeatedly raised the DSR (DAI Savings Rate), which has recently increased to 8%, far exceeding U.S. Treasury yields. Driven by high deposit rates, MakerDAO's deposit scale has significantly increased.

According to Dune data, as of October 24, 59% of MakerDAO's total assets are RWA, and over 65% of its revenue comes from RWA.

Source: https://dune.com/steakhouse/makerdao

Source: https://dune.com/steakhouse/makerdao

The on-chain U.S. Treasury bonds issued by MakerDAO (MKR) and its stablecoin DAI are among the common use cases of RWA.

2. Maple Finance

Maple Finance was created in 2020 and officially launched in May 2021. Maple Finance is an institutional capital network that launched a licensed KYC loan guarantee project in 2021, providing infrastructure for on-chain lending businesses for credit experts and connecting institutional borrowers and lenders. Maple Finance does not use the standard DeFi collateral model, which relies on the ability to liquidate collateral in case of insufficient payments, but instead allows users to provide low-collateral loans based on reputation to well-known companies.

As shown in the chart below, Maple Finance launched a cash management pool targeting U.S. Treasury bonds in May, after which the protocol's revenue gradually increased.

Source: https://dune.com/maple-finance/maple-finance

3. Ondo Finance

Founded in 2021, Ondo Finance is a company focused on blockchain services, with the primary mission of creating and managing institutional-grade financial products, such as U.S. Treasury bonds and money market funds, and building DeFi protocols based on these financial products. Ondo's goal is to develop protocols that are decentralized and composable, providing tailored services to meet the diverse needs of organizations, DAOs (Decentralized Autonomous Organizations), and high-net-worth individuals. The platform's vision is to bridge the gap between traditional finance and decentralized finance by introducing real-world assets (RWAs) into the DeFi space.

According to Dune data, as of October 24, Ondo Finance holds $176 million in short-term U.S. government bond funds.

Source: https://dune.com/steakhouse/ondo-finance

Conclusion

RWA has taken on the responsibility of revitalizing market confidence during the stagnation of the DeFi market. It is a compelling narrative that brings the value of various real assets into the DeFi ecosystem, eliminating barriers between traditional finance and the crypto world. Its rise is also a hallmark of innovation in the crypto space. However, it is important to note that it also carries multiple risks, such as regulatory risks, the cumbersome settlement processes of traditional financial systems, and security issues inherent in DeFi itself. Overall, RWA remains a trend in the future development of the financial sector, and with improved regulation, more international financial giants will likely participate in this trend as the market environment changes.

Author: Snow

Translator: Sonia

Article Reviewers: Edward, Wayne, Elisa, Ashley He, Joyce

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