Recently, a phenomenon worth paying attention to has emerged: the gates of traditional finance are slowly opening to DeFi, and RWA is the key.

What is RWA? Simply put, it is the digitization of real-world assets. You can think of USD, gold, real estate, bonds, insurance, and even licensing fees—all fall under the scope of RWA. It sounds broad, but that is precisely its power.

A data comparison makes it clear. The fixed income bond market size is about $127 trillion, the total global real estate value is approximately $362 trillion, and gold alone is worth $11 trillion. Meanwhile, the market capitalization of native crypto assets is only $1.1 trillion, which is about one-tenth of gold’s value. If just a small portion of these traditional assets were introduced into DeFi, what kind of market changes would occur? Just thinking about it is exciting.

So how does RWA enter DeFi? The core idea is straightforward: tokenize RWA using smart contracts, combined with off-chain collateral mechanisms to ensure that issued tokens can always be redeemed for the underlying assets. It sounds simple, but execution is quite complex.

Currently, RWA applications in DeFi mainly take a few forms. First is stablecoins—USDT, USDC, BUSD—these top stablecoins are essentially RWAs. Companies like Tether, Circle, and Paxos maintain audited dollar reserves to mint stablecoins for blockchain use, which is the most mature application.

Second are synthetic assets. Through projects like Synthetix, you can trade stocks, commodities, and other assets on-chain as derivatives. During the peak of the 2021 bull market, Synthetix locked over $3 billion in assets, showing the high demand for such products.

There are also lending protocols. Borrowers can use RWA as collateral to borrow on DeFi platforms, which is significant for the protocol’s sustainable development. There are even trust-based, unsecured lending models—something hard to imagine in traditional finance.

Regarding specific cases, MakerDAO is a benchmark in this track. Their RWA business has exceeded $680 million, contributing over 58% of the protocol’s revenue. That’s no small number. To professionally manage RWA, MakerDAO established the RWA Foundation, setting up different special purpose entities for various types of collateral.

MakerDAO’s liquidation mechanism is also quite interesting. Off-chain RWA assets cannot be liquidated directly via smart contracts, so they designed a complex off-chain execution system. This includes the RwaLiquidationOracle as a liquidation beacon, RwaFlipper as a virtual liquidation module, and RwaUrn for borrowing DAI, among other tools. When liquidation is needed, a tell() triggers a countdown; if the issue is resolved, cure() can be called to recover; if not, cull() is used to close the position. This mechanism is innovative within existing DeFi lending protocols.

Currently, MakerDAO’s $680 million in RWA is distributed across three main directions. About $500 million is in U.S. Treasury bonds managed by Monetalis, providing stable income for the protocol. There’s also a $100 million treasury supported by Huntingdon Walleye Bank, a loan from a regulated U.S. financial institution to a decentralized stablecoin, marking the first such case. Additionally, Société Générale borrowed $7 million from MakerDAO, backed by €40 million in AAA-rated bonds supporting OFH tokens.

Centrifuge takes a different approach. They introduce real-world assets into the crypto ecosystem via NFTs, with TVL exceeding $170 million. Their Tinlake product allows asset originators to convert real assets into NFTs containing legal documents, which are then used as collateral to create asset pools. Each pool produces DROP tokens and TIN tokens. DROP token holders earn fixed income with lower risk; TIN token holders have variable but potentially higher returns and bear higher risk. This layered design effectively caters to different investor risk preferences.

However, RWA also faces significant challenges. The biggest issue is the trust assumption. Since RWA tokens are based on off-chain assets, they cannot be forcibly liquidated via smart contracts and rely on traditional financial institutions’ backing. This means the trustworthiness of RWA may never reach the level of native crypto assets. For this reason, fully permissionless DeFi protocols find it difficult to support RWA, and most current RWA projects involve centralized entities in asset handling.

But opportunities are also clear. STO (Security Token Offerings) have traditionally been seen as a limited form of RWA implementation, but they are among the few asset tokenization solutions recognized by regulators in the blockchain industry. The development path of STOs embracing regulation might be exactly what RWA needs to explore. When traditional financial yields (e.g., around 3.5% for U.S. Treasuries) generally surpass DeFi protocol yields (around 2% for top lending protocols), this difference itself presents a sustainable revenue opportunity for DeFi.

In essence, what is RWA? It is the bridge between traditional finance and decentralized finance. This track has just begun, and the future potential may be much greater than what we see now.