Real World Asset (RWA), or real world assets. Simply put, these are tangible assets from the real world, transferred to the chain of blocks.
However, before we move on to discuss RWA, we need to delve a little further into the topic of decentralised finance (DeFi). Over the past few years, the topic of DeFi has been at the forefront of financial innovation. With stablecoins, swaps, loans or other derivatives, users have been given a whole new, fully decentralised access to their assets.
Unfortunately, the stigma of a bear market has also affected the sector. The profitability of some DeFi services has taken a sharp dive, causing losses. Indeed, it has not been known for a long time that the entire decentralised finance industry is also struggling to scale. It only works and is only profitable when we have price growth. It is worth noting that the total blocked value (TVL) in the DeFi protocols has fallen from around $180 billion to just 50 at sensitive times bessy.
As a result of the decline in TVL, there was an urgent need to balance income development in the protocols of decentralised finance. This is how real world assets (RWAs) emerged.
Admittedly, at the time of writing, there are not many protocols that tokenise RWA, but those that do are providing DeFi and TradFi investors with quite substantial returns. They are tapping into some of the world’s largest financial credit markets in their operation. They are also solving the unsustainability problem in DeFi.
With this lengthy introduction, we move on to the main topic of today’s lesson. Get to work!
Real World Asset (RWA) – definition
RWA are all physical assets or financial primitives that serve as collateral in the DeFi industry. This group includes metals, real estate, corporate debt, insurance, commodities, invoices or even credit notes.
As you will have noticed in time, some of the products included in the RWA group are so-called risk-weighted assets. Interestingly, they account for the majority of global financial value and are already the backbone of the lending business. Since they generate returns in the traditional world of finance, why not use them in the world of decentralised finance (DeFi)? The combination of risk-weighted assets and blockchain technology is the key to a sustainable DeFi profit model. And without the huge volatility!
The incorporation of real world assets (RWAs) into the decentralised finance industry offers users a whole new asset class to use for investment returns. With the growth of RWA, the issuance of capital market products in the chain has also increased. So you have already noticed that the main feature of real world asset (RWA)is tokenisation.
What are the uses of RWAs?
They are integral to traditional investment strategies. For many people, investing in property or commodities is a way to diversify their portfolio. Real estate can provide us with additional rental income, while commodities can serve as a hedge against inflation.
A second important use of RWA is their utility as collateral. Particularly in the area of loans, where RWA are their collateral, reducing the potential risk to the lender. In the event that the borrower defaults, the lender can seize those RWAs that serve as collateral.
The third and final application of RWA in DeFi is the sustainability issue thatreal world assets resolve. Moving RWAinto the DeFi ecosystem results in many opportunities for hedging and investment.
How is RWA used in decentralised finance (DeFi)?
Blockchain technology, when combined with RWA, has unlocked new possibilities. In practice, developers are using intelligent contracts that create tokens representing RWA. But how else can assets be used in the real world?
- This is a perfect example of the successful use of RWA in DeFi. Stable issuing companies maintain a controlled reserve of USD assets and mint USDC tokens for use in decentralised finance protocols.
- Synthetic tokens. They are such a bridge between RWA and DeFi. They enable trading in derivative chains that are linked to currencies, equities and commodities.
- Loan protocols. This is another application of RWA in DeFi protocols. How. By serving borrowers with actual finances. Such a model provides a relatively stable return on investment, insulated from the volatility of cryptocurrencies.
Advantages of Real World Asset (RWA)
First and foremost – diversification. Investing in real world assets is a great way to diversify a portfolio, as their value is very often not linked to the performance of financial markets. This allows investors to potentially hedge against market volatility.
The second point is stability. Real estate or commodities can act as a store of value and grow with age. This is a kind of buffer against inflation, especially in times of economic uncertainty.
A final advantage of RWA is their income potential. Rental properties or investments in infrastructure projects can generate an increasing income stream over time, while increasing the value of the capital.
What are the challenges behind real world assets (RWAs)?
Mainly liquidity, which is now in short supply. Risk-weighted assets can be difficult to convert into quick cash without incurring costs. This lack of liquidity may be an insurmountable barrier for some investors.
Increased maintenance costs for some RWAs. A good example of this – once again – is properties that require maintenance. Machinery may require regular servicing, which increases the cost of ownership of RWA.
And finally, our favourite aspect – RWA regulatory challenges. The subject of RWAs and their integration with DeFi is itself quite complex. The tokenisation itself is not yet legally regulated in some countries. And the ever-changing regulatory framework and ideas in some countries may make the process even longer.
Web3 protocols dealing with RWA tokenisation
- Polymesh (Polyx). Blockchain focusing on security tokens. It is such an “Ethereum for security tokens”. A user who holds this type of token can be a shareholder in a company. The token also entitles him to dividends. Any company can independently develop such a security token on the Polymesh blockchain. This type of token is fully regulated, as it otherwise has no legal value.
- A fully decentralised financial lending protocol (DeFi) that wants to increase the availability of credit for small businesses. At the same time, it provides a stable return for investors. Connected to this protocol is the well-known Tinlake app.
- DeFi credit protocol. It is used for lending and capital management. TrueFi is fully built on Ethereum and Optimism. The capital markets in this protocol bring together investors, borrowers and capital managers to make unsecured loans in both cryptocurrencies and traditional finance.
- Cryptocurrency lender, pioneer of decentralised finance (DeFi). Provides loans based on DAI (native protocol token).
- Maple, which is a decentralised corporate lending market. Borrowers get access to loans secured through loan pools, which are managed by accredited pool delegates.
Summary
Real world asset (RWA), or real world asset, is an element of the global economy with which we are familiar. Combining this type of asset with blockchain technology will positively impact the investment industry, paving the way for new ways to invest and generate wealth.
The industry itself is interesting-it has huge potential. However, we must wait patiently for it to develop. In addition to the credit or real estate market, there are still many aspects of the real world that we will be able to connect to the blockchain in the future.
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