Crypto space has evolved in fits and spurts, propelled by new use cases and momentous adoptions.

From a novel form of money at the dawn of the crypto industry to the ICOs in 2017, the rise of stablecoins in 2019, the rapid development of DeFi in 2020, and the NFT boom of 2021, each turn of the wheel expanded the crypto world.

In this long bear market, there’s a pressing need for a new compelling use case to reignite enthusiasm within the crypto community. It is possible that RWA, or real world assets, can fulfil this role. What’s particularly interesting this time is the potential scale of impact, as RWA hold the promise of bringing trillions of dollars’ worth to the blockchain.

Let’s see why the RWA attract so much attention now, and what protocols stand out from the crowd.

What is RWA?

At its core, the notion of RWA is not new. Converting real world assets into tokens, allowing them to circulate freely on the blockchain, has been a popular practice since the emergence of stablecoins, which are basically dollars and euros on-chain. Other popular use cases include tokenized real estate, art, stocks etc.

All these assets are technically RWA, but the acronym itself has been recently used to describe lending protocols based on them. These protocols generate yield by investing users’ funds in off-chain assets, often bonds and other low-risk securities. In return, users receive not only passive revenue but also a receipt token, which they can use across a variety of DeFi protocols.

Bringing RWA on the blockchain democratizes investment, enhances asset liquidity, and unlocks various new use cases across DeFi protocols.

Trillion-dollar possibilities

The potential impact of RWA on crypto finance is huge.

Gold market cap is $13 trillion, US debt has now reached a record $33 trillion, and global real estate is estimated at some $325 trillion.

The total crypto market cap is just above $1.1 trillion, composed mostly of on-chain value. If even a tiny part of RWA traded within traditional finance channels gets converted into blockchain tokens, this number could skyrocket.

In fact, Citi has already estimated the potential impact of RWA tokenization on the crypto space. In a study released in March, the bank’s analysts predicted that $1.9 trillion of non-financial debt, $1.5 trillion of real estate funds, $0.7 trillion of private equity, $1 trillion of securities financing, and $1 trillion of trade finance volumes would be tokenized by 2030.

This means potentially over $6 trillion of value introduced to the blockchain within 6 years.

Major RWA protocols

RWA-specific protocols are growing steadily, reaching a TVL (total value locked) of over $2.3 billion, according to DeFiLlama, which has recently created a separate category for this sector. However, this number is much higher in reality, as already existing DeFi protocols are increasingly investing in RWA.

One such protocol is MakerDAO, a decentralized lending protocol and the issuer of $DAI stablecoin.

As of now, MakerDAO boasts a $2.3 billion RWA portfolio, which makes up almost half of its funds. It includes over $1.1 billion of T-bills and $500 million of Coinbase Prime yield.

Among the RWA-specific protocols, Ondo Finance is probably the most notorious one, with almost $200 million TVL.

Launched in January, Ondo Finance invests in “multi-billion dollar, highly liquid exchange-traded funds, managed by the world’s preeminent bond managers”, mentioning notably BlackRock and Pimco. The firm also discloses its third-party custodians and auditors.

Built on Ethereum and Polygon chains, Ondo Finance invests users’ stablecoins in low-risk funds. In return, users receive tokens that serve as proof of their investment in real world assets and that can be then used in any DeFi protocol willing to list them. While the initial investors of Ondo Finance are limited to accredited investors (and non-US citizens for one fund), these IOU tokens can circulate freely.  This is the main difference from traditional finance funds, and it is making investments liquid, borderless, and accessible to all.

RWA lending is a relatively new trend, and the regulators haven’t yet focused their attention on it. Surely, centralized companies like Ondo Finance have prepared a good team of lawyers to fight off any attack, and DeFi protocols like Maker can always play the decentralization card.

However, the regulatory threat exists, and it may be an obstacle to the rise of the next big thing in crypto.

Written by D.Center