Author: AYLO FLOW
Translated by: Deep Tide TechFlow
We are at a crucial moment in the history of cryptocurrency. Over the past few weeks, we have witnessed a 180-degree shift in the United States’ attitude towards cryptocurrency. Surprisingly, all eight Ethereum ETFs have received approval from the SEC. In addition, the U.S. House of Representatives not only passed the cryptocurrency FIT 21 bill but also legislation to prevent the creation of central bank digital currencies. However, what is even more noteworthy is seeing cryptocurrency becoming an important issue in the upcoming U.S. presidential elections.
Therefore, if you are a large financial institution, the message is clear: cryptocurrency is not going away, so you better familiarize yourself with it and start exploring its different use cases to avoid being left behind. From this perspective, it seems obvious that tokenization of real-world assets has enormous growth potential.
But what is this trend, why is it causing such a buzz, and how can it be maximized? These are the topics we will explore in this article.
Examples of Real-World Asset Tokenization
If software is eating the world, then tokenization of real-world assets is devouring the capital markets. In recent years, the realm of Real-World Assets (RWA) has emerged as one of the most promising use cases for blockchain technology by bringing real-world assets onto the chain. The case for RWA is simple: bridging the stability and value propositions of real-world assets with the innovative features and potential efficiency of blockchain technology and decentralized finance (DeFi).
In fact, many view this field as the new hotspot in the financial industry. Recently, we have even seen major names in finance, such as BlackRock and Franklin Templeton, showing strong interest in this field and launching their tokenized funds.
Theoretically, any easily tradable real-world asset can be tokenized and put on the chain. This includes tangible and intangible assets, as well as fungible or non-fungible assets. Here is a non-exhaustive list of some of these assets.
Why Tokenization is Important
Without clear advantages for putting assets on the chain, RWA would not receive such attention. The table below explains the main advantages of tokenization.
The core theory of DeFi is that blockchain can create a better standard for seamless exchange of different assets. In this sense, RWA is all about recognizing the value propositions of DeFi and extending it to every tradable asset to build the next generation market – a more transparent, secure, fair, and open market.
Understanding the Trend of RWA
We are entering the tokenization era of the market. Gradually, all assets will be put on the chain, challenging the status quo of global capital markets over the past 30 years. Especially when considering that the trend of RWA is at the intersection of two trends shaping the world today: financialization and digitization.
Financialization: Today, finance knows no boundaries, the economy becomes increasingly borderless, and individuals transfer ownership of assets globally. Everything has a market, everything has a price, and everything becomes tradable. Therefore, establishing more efficient, transparent, fair, and open market mechanisms becomes increasingly meaningful.
Digitization: The world is becoming more and more digital. We have connected phones, watches, and soon, connected brains. In this sense, it seems logical for asset ownership proofs to migrate to blockchain networks.
In this sense, RWA is fully capable of seizing these two trends.
Main Challenges
Undoubtedly, putting real-world assets on the chain offers very interesting characteristics. But it also brings many challenges. The main challenges revolve around:
Regulation: Currently, there is no clear answer on where to establish a market for tokenized assets without encountering a complex regulatory environment. However, as people’s understanding of cryptocurrency evolves, this situation may change.
Liquidity: Providing the right market structure for real-world assets to achieve liquidity and market making may be a challenge, especially for highly illiquid markets that trade 24/7.
Education: It will take a long time for everyone to understand the true value proposition of putting real-world assets on the chain, as blockchain technology and its trade-offs may be difficult to understand in the early stages.
Development of RWA
Stablecoins Pegged to the Dollar
Stablecoins backed by fiat currency are the first killer use case for tokenizing real-world assets. This market has seen significant growth in recent years. Today, the total market value of the two largest fiat-backed stablecoins (Circle’s USDC and Tether’s USDT) exceeds $130 billion, compared to around $50 billion in early 2020.
Tokenization of Commodities
Tokenization of precious metals has also become another popular application of RWA. Some examples include Tether Gold (XAUT) or PAX Gold (PAXG), which are tokens backed by physical gold. Although this is a relatively new market, it is growing rapidly, with the total market value of XAUT and PAXG at around $8.4 billion.
Tokenization of Government Bonds
The latest major trend in RWA is the tokenization of U.S. government bonds. According to 21co data, we have noticed rapid growth in the market value of this field, exceeding $13 billion. But what is more interesting is that traditional financial institutions are entering this market. For example, the BENJI token represented by Franklin Templeton has accumulated around $3.7 billion in deposits, while BlackRock’s BUIDL token has received over $3.8 billion in deposits.
Beginning of the Next Chapter
This trend of tokenization has just begun and is expected to continue growing rapidly. According to forecasts by the Boston Consulting Group, the tokenization market of global financial assets is estimated to reach $160 trillion by 2030, potentially becoming the bridge we have been waiting for to connect traditional finance and DeFi, building the next generation market.
Looking to the future, we can envision a future where almost all assets that are easily monetizable, from luxury watches to artworks to real estate, will be tokenized on the blockchain. This is the future of finance.
Seizing the Opportunity
After reading all this, I believe you are now asking yourself, “Alright, I understand, but how can my investment portfolio leverage this new trend?” Don’t worry, I have prepared a list of RWA watchlists (+ a BONUS) for you.
But before delving into it, a reminder. Currently, the cryptocurrency market is characterized by significant speculation, so caution is necessary. Therefore, the following content is not a prediction, just some thoughts. And with increasing availability of data and time, ideas may change significantly.
This is not an exhaustive list but rather some projects that I have extensively researched and believe are worth watching. There are many other projects in this category that I have obviously missed.
RWA Projects
Are you ready? Let’s now explore some projects you may want to add to your watchlist:
Chainlink ($LINK)
In short: Chainlink recently updated their description of the network, calling it a “universal platform that paves the way for the future of global markets on-chain.” By bridging the gap between real-world data and blockchain, Chainlink is crucial for realizing the tokenization of real-world assets.
Ondo Finance ($ONDO)
In short: Ondo is building the next generation financial infrastructure to enhance market efficiency, transparency, and accessibility. It allows retail and accredited investors to enter the bond market on-chain through products like USDY (tokenized notes backed by U.S. government debt) and OUSG (short-term U.S. government debt).
Pendle Finance ($PENDLE)
In short: Pendle is a decentralized finance protocol that allows users to tokenize and sell future revenues. It is an innovative tokenization model solution that provides users with flexible and dynamic revenue management options.
TrueFi ($TRU)
Mantra Network ($OM)
Polymesh Network ($POLYX)
Centrifuge ($CFG)
Dusk Network ($DUSK)
Clearpool ($CPOOL)
Polytrade ($TRADE)
This concludes the rewritten article.