What is RWA? Analyzing how real-world assets are reshaping the DeFi ecosystem

When it comes to what RWA is, simply put, it is the tokenization of real-world assets via blockchain. These real-world assets (Real World Assets) include dollars, gold, silver, and other precious metals, as well as real estate, bonds, insurance, and credit notes. In contrast, while crypto-native assets are impressive, their scale remains negligible compared to the real financial world.

How much of the $127 trillion pie can crypto take?

Data speaks the loudest. The global fixed income bond market is approximately $127 trillion, the total value of global real estate is around $362 trillion, and the market value of gold alone is $11 trillion. Currently, the total market value of all crypto-native assets is only $1.1 trillion, which is equivalent to one-tenth of the market value of gold.

What does this mean? It means that if only the tip of the iceberg of these massive RWA markets is brought into DeFi, the entire decentralized finance ecosystem could experience exponential growth. This is not simple addition; it is a bridge for DeFi to traditional finance.

Three main applications of RWA in DeFi

To bring RWA into DeFi, the core technology involves using smart contracts to create tokens representing real assets while providing off-chain guarantees to ensure that issued tokens can always be redeemed for the corresponding underlying assets. Currently, RWA is mainly applied in DeFi in three ways.

First: Stablecoins

Mainstream stablecoins like USDT, USDC, and BUSD are all practices of RWA. Issuers like Tether, Circle, and Paxos mint stablecoins for blockchain use by maintaining audited dollar reserves. This is the most mature and widespread form of RWA application.

Second: Synthetic Assets

Synthetic assets allow for on-chain trading of stocks, commodities, etc., in the form of derivatives. Synthetix stands out in this field, having locked over $3 billion in asset value at the peak of the bull market in 2021. Synthetic assets break down the barriers between traditional assets and the crypto world.

Third: Lending Protocols

Borrowers can use RWA as collateral to borrow on DeFi platforms, and there is even reputation-based credit lending, where borrowers do not need to provide collateral but rely solely on brand reputation. This method is crucial for the sustainable development of DeFi lending protocols.

MakerDAO’s RWA practice: Looking to the future from the income structure

In the RWA space, MakerDAO is undoubtedly the leader. The scale of this project’s RWA business has exceeded $680 million, and more importantly, this segment contributes over 58% of the protocol’s revenue.

Why has MakerDAO been so successful in the RWA field? The answer lies in its recognition of a key opportunity: traditional financial systems generally offer higher yields than DeFi. The yield on U.S. Treasury bonds is about 3.5%, while leading DeFi lending protocols offer yields of only 2%. This yield spread creates opportunities for sustainable income for DeFi protocols.

How does MakerDAO operate specifically? The protocol established the RWA Foundation to manage these businesses. Depending on different types of collateral, different Foundations may be established, and each special purpose vehicle (SPV) can choose the most suitable jurisdiction and legal structure based on business needs.

MakerDAO divides its $680 million in RWA into three specific cases:

The first is U.S. Treasury bonds. About $500 million in RWA exists in the form of U.S. Treasury bonds managed by Monetalis, providing MakerDAO with a source of income from idle USDC.

The second is commercial bank cooperation. MakerDAO partnered with Huntingdon Valley Bank (HVB) in Philadelphia to launch a $100 million loan-backed vault. This became the first case of commercial loans between U.S. regulatory financial institutions and decentralized digital currencies.

The third is bond collateral. Société Générale borrowed $7 million from MakerDAO, with its position backed by AAA-rated bonds worth €40 million as OFH tokens.

To handle the liquidation of off-chain assets, MakerDAO developed a specialized smart contract system. RwaLiquidationOracle acts as a liquidation beacon for off-chain executors, RwaFlipper serves as a virtual liquidation module in case of cancellation, RwaUrn helps borrow DAI, and RwaOutputConduit and RwaInputConduit manage fund payments and repayments. The entire system manages the liquidation process through governance functions like tell(), cure(), good(), and cull().

Centrifuge’s NFT solution: Connecting reality with tokenization

If MakerDAO follows a path of cooperation with traditional financial institutions, then Centrifuge has pioneered a unique path of NFT tokenization. This protocol brings real-world assets into the crypto ecosystem in the form of NFTs, with its TVL exceeding $170 million.

Centrifuge’s core product is Tinlake, an asset tokenization platform. The operating logic is as follows: asset originators first use Tinlake to bridge real-world assets, which are converted into NFTs containing relevant legal documents. Subsequently, asset originators can use these tokenized NFTs as the underlying collateral to create asset pools.

When creating a pool, two types of tokens are generated—DROP Token and TIN Token. Investors choose based on risk preference: DROP Token holders receive fixed returns determined by a fee function, compounding every second, but with lower risk. TIN Token holders receive variable returns based on pool investment returns, with higher risk but greater potential rewards; they also bear the first loss in case of borrower default.

This design cleverly meets the diverse needs of investors while ensuring effective capital allocation.

Opportunities and challenges in the RWA space

The opportunities for RWA are evident. Completely permissionless DeFi protocols, while more decentralized, struggle to support RWA. This makes RWA projects involving centralized participants the best entry point for traditional finance to enter crypto.

Historically, STOs (Security Token Offerings) have been regarded as a limited implementation of RWA. Many STOs are only available on permissioned platforms and have not yet reached the level of public chain RWA. However, because STOs have been recognized by regulators, they provide a regulatory-compliant asset tokenization reference for RWA. RWA projects can learn from the regulatory-friendly development path of STOs.

However, RWA also presents key risks. The biggest risk stems from trust assumptions. Since tokenized RWAs exist as off-chain assets, they cannot be enforced through smart contracts for liquidation and instead rely on the backing of traditional financial institutions. This means that the trust attributes of these RWAs may never be able to reach the same level as crypto-native assets.

Nevertheless, the value of RWA has been proven by the market. As the boundaries between traditional finance and DeFi become increasingly blurred, the tokenization of real-world assets will become an inevitable trend in industry development. Whether it is MakerDAO’s institutional cooperation model or Centrifuge’s NFT solution, both are exploring this path to the future.