Real-world assets (RWAs) have long captured the imagination of cryptocurrency investors and developers alike due to the sheer size of global markets and easy improvements made possible with tokenization. Moreover, the challenges presented by these traditional markets, such as entry barriers and clunky trading mechanisms, make them ripe for revolution.
RWAs refer to any assets not inherently part of the blockchain on which they are tokenized e.g. they exist “off-chain.” Generally, conversations about RWAs are centered around traditional financial assets like government bonds, private debt, real estate, and even other non-blockchain based holdings like art or collectibles. While fiat-collateralized stablecoins such as USDT and USDC technically fall under the category of RWAs, they are frequently considered separate and apart from other RWAs due to their relatively uncomplicated nature and use case as a stablecoin.
Yet, the narrative doesn't end with mere tokenization. Decentralized Finance (DeFi) brings another dimension to the table, broadening the financing avenues for RWAs. The combination of DeFi with RWAs can forge fresh investment yields, catering to participants keen on funding tangible assets.
In essence, the fusion of RWAs and crypto, spurred by tokenization and DeFi, has the potential not only to transform the landscape of asset trading but also to redefine our understanding of liquidity and inclusivity in the financial domain. The coming decade may well herald a paradigm shift, where tangible assets become seamlessly integrated into the digital world.
Why Put RWAs on a Blockchain?
Initially, blockchains found their primary application in the creation and transference of tokens, as seen with tokens like BTC. But, it's the advent of smart contract platforms and decentralized finance (DeFi), that truly underscored the expansive potential inherent in public blockchains.
One of the most transformative attributes of DeFi applications is near-instantaneous settlement. Blockchains combine cryptography with decentralized consensus to provide robust guarantees of finality in economic transactions without the need for middlemen. The removal of intermediaries and the reduction of settlement time from days to minutes/seconds are two critical advantages of DeFi over the TradFi system.
Moreover, the realm of DeFi is characterized by unparalleled transparency. Tools such as public block explorers and data dashboards offer in-depth, discerning insights into risk exposures and the overall collateralization that the TradFi system cannot offer: at least not in real time. Given that public blockchains are perpetually auditable, stakeholders gain a newfound ability to scrutinize asset collateral quality and gauge systemic risk exposure. This continuous oversight also curtails record-keeping disputes, especially when public dashboards elucidate on-chain activities, offering a transparent view of transactions.
In a move towards greater transparency, it's also noteworthy that the source code underpinning DeFi applications is open to the public, enabling any interested individual to scrutinize its architecture.
Cost efficiency is another hallmark of DeFi applications and another reason why some are experimenting with RWAs on a blockchain. DeFi platforms, by their very nature, streamline and automate operations, significantly curtailing the friction, middlemen, and costs incurred for a transaction. Such an operational model translates to diminished switching expenses when redirecting capital across varied applications. The end result is a marketplace that is adept at regulating application-level charges.
Liquidity, a critical aspect of financial markets, is also poised for transformation. By tokenizing assets that typically reside in private domains, such as pre-IPO shares, tangible real estate, and even carbon credits, previously inaccessible and illiquid markets come into the limelight. It's essential to grasp the magnitude of this shift, given that these markets encompass trillions of dollars in assets, previously ensconced beyond reach.
Yet, perhaps one of the most striking features of DeFi is its composability. A unified settlement layer, adept at executing autonomous code, paves the way for unfettered composability between a spectrum of DeFi applications, both nascent and established. This open and composable ecosystem enables any developer anywhere in the world to iterate and innovate on a global scale that they may not otherwise have been able to.
In sum, while blockchains initially burst onto the scene as conduits for token creation and movement, it's the DeFi revolution that truly magnifies their broader capabilities and potential for transformation in the financial landscape.
