What is RWA (Real World Assets)
RWA (Real World Assets) refers to real-world assets. Currently, the most popular RWAs mainly include the following categories: cash (such as US dollars), precious metals (such as gold, silver, etc.), real estate, bonds (mainly US Treasury bonds), insurance, consumer goods, credit notes and royalties, etc.
RWA's asset size far exceeds crypto-native assets. For example, the size of the fixed income bond market is approximately $127 trillion, the total value of global real estate is approximately $362 trillion, the market capitalization of gold is approximately $11 trillion, and the current market capitalization of crypto-native assets is $1.1 trillion, which is only equivalent to One-tenth of the market value of gold.
If a small part of these RWAs are put into the DeFi field, the total scale of DeFi will be greatly increased.
How to bring RWA into DeFi?
Smart contracts are typically used to create tokens that represent RWA while providing off-chain guarantees that issued tokens are always redeemable for the underlying asset.
RWA has the following common application forms in DeFi:
1. Stablecoins: Top stablecoins such as USDT, USDC, BUSD, etc. all belong to RWA. Issuing companies such as Tether, Circle, and Paxos mint stablecoin tokens for use by blockchain and DeFi protocols by maintaining audited U.S. dollar asset reserves.
2. Synthetic assets: Synthetic assets also belong to RWA. Through the form of synthetic assets, stocks, commodities, etc. can be traded on the chain in the form of linked derivatives. Currently, Synthetix is one of the most outstanding projects in the field of synthetic assets. At the peak of the bull market in 2021, the protocol had more than $3 billion in asset value locked.
3. Lending Agreements: RWA has achieved significant development in lending agreements. Borrowers can use RWA as collateral to conduct mortgage lending business through the DeFi platform. In addition, there are some credit lending businesses based on reputation. Borrowers do not need to provide mortgage assets, but rely on their brand reputation to lend.
The application of RWA in DeFi lending protocols has played an important and positive role in promoting the sustainable development and revenue scale of DeFi lending protocols.
Development status and cases of RWA track
RWA Tokenization helps expand the market size of DeFi and also helps traditional financial institutions explore new business models. The leading DeFi protocols have active plans for RWA Tokenization, and some traditional financial institutions are also very interested in RWA Tokenization.
MakerDAO: The RWA business has exceeded $680 million, contributing more than 58% of revenue.
Currently, the yield of traditional financial systems is generally higher than that of DeFi protocols. For example, the yield of U.S. Treasury bonds is about 3.5%, while the yield of leading DeFi mortgage lending protocols is about 2%. However, this also provides opportunities for sustainable income for DeFi protocols.
In order to effectively manage the RWA business, MakerDAO established the RWA Foundation. Depending on the type of collateral, different Foundations may be set up, and each Special Purpose Vehicle (SPV) can also choose the most appropriate management jurisdiction and legal structure based on business needs. Its basic structure is as follows:
MakerDAO has made some adjustments to the business logic of mortgage lending for RWA’s off-chain assets. The main reason is that the liquidation part is not performed through a public auction on the chain, but is enforced off-chain by a third party. Smart contracts that implement new functions mainly include:
RwaLiquidationOracle: liquidation beacon that acts as an off-chain executor;
RwaFlipper: Acts as a virtual clearing module in case of logout;
RwaUrn: This helps to borrow DAI and deliver it to the designated account;
RwaOutputConduit and RwaInputConduit: pay and repay DAI;
RwaSpell: Deploy and activate new collateral types;
RwaToken: represents the RWA collateral in the system;
TellSpell: Allows MakerDAO governance to initiate liquidation proceedings;
CureSpell: Allows MakerDAO governance to cancel the liquidation process;
CullSpell: Allows MakerDAO governance to cancel loans that are being liquidated.
MakerDAO triggers RwaLiquidationOracle by calling tell() when necessary. This will start a countdown, and after the repair period is over, the oracle will start reporting that the position is being liquidated. If the cause that triggered the liquidation is fixed, MakerDAO governance can return to normal state by calling cure(). If MakerDAO governance has triggered liquidation and the cure period has expired without being called, off-chain executors (such as trustees, etc.) can report that the position is in liquidation status by calling good(). If there is still debt remaining on the position at the end of the liquidation process, and MakerDAO believes that the debt will not be liquidated, it can trigger a cancellation operation by calling cull(). The write-off occurs by setting the system collateral value to zero, which results in the position being disposed of via on-chain liquidation operations such as bite(). Unlike liquidation modules for existing collateral types, the specialized liquidation module RwaFlipper does not attempt to sell the underlying collateral, but simply marks losses by allowing the creation of system debt on the system balance sheet.
MakerDAO is making great progress in adopting RWA. Currently, MakerDAO has over $680 million worth of RWA-backed decentralized stablecoin DAI.
In terms of RWA, MakerDAO dismantled and analyzed its $680 million RWA, with three specific cases:
1. The majority of MakerDAO’s RWA collateral (approximately $500 million) exists in the form of U.S. Treasury bonds (MIP65) managed by Monetalis. These assets provide the MakerDAO protocol with a source of revenue from idle USDC collateral.
2. MakerDAO also launched a vault backed by a $100 million loan from a commercial bank in Philadelphia called Huntingdon Walley Bank (HVB). HVB uses MakerDAO to support the growth of its existing business and make investments in real estate and other related areas, becoming the first commercial loan case between a U.S. regulated financial institution and a decentralized digital currency.
3. In a separate vault, Société Générale borrowed $7 million from MakerDAO, with its position backed by €40 million worth of AAA-rated bonds as OFH tokens.
By introducing RWA as collateral, MakerDAO is able to significantly increase its protocol revenue. As of now, more than 58% of MakerDAO’s revenue comes from RWA business.
Centrifuge: Bringing RWAs into the Crypto ecosystem in the form of NFT, with TVL exceeding US$170 million.
Centrifuge brings real-world assets into the Crypto ecosystem in the form of NFTs. The dApp of the Centrifuge protocol is called Tinlake. The product logic of Tinlake is mainly as follows:
1. Asset originators use Tinlake to bridge real-world assets. The asset is converted into an NFT, which includes the associated legal documentation;
2. Asset originators can use tokenized real-world assets NFT as basic collateral to create asset pools;
3. When creating a pool, two Tokens will be created - DROP Token and TIN Token;
4 Investors can decide which pool to provide funds to and purchase DROP or TIN Token based on their personal risk preferences;
5. DROP Token holders have guaranteed income, determined by the fee function. Each pool has fixed interest, compounded every second;
6. On the other hand, TIN Token holders have no guaranteed income. They receive a variable rate of return based on the return on the pool investment, which may be higher than the return on holding DROP Tokens;
7. TIN Token holders bear higher risks because they will bear the first loss if the borrower defaults.
In addition to MakerDAO and Centrifuge, there are also some DeFi protocols and traditional financial institutions that are also exploring RWA:
Opportunities and Risks of RWA
Trust assumptions of RWA: Since Tokenization’s RWA is off-chain after all, cannot enforce liquidation processing through smart contracts, and relies on the endorsement of traditional financial institutions, the trust attributes of these RWA may never reach the same level as Crypto Native Asset. At the same time, due to the existence of the trust assumption of RWA, it is difficult for a completely permissionless DeFi protocol to support RWA. Therefore, the current RWA Tokenization project generally still has the role and influence of centralized entities in the processing of RWA assets.
Potential opportunities for RWA: STO (Security Token Offerings) have historically been viewed as a limited implementation of RWA. Since many STOs are typically niche securities only available on permissioned platforms, their adoption has not yet reached the same level as RWAs on public chains. The current STO is one of the few asset tokenization solutions recognized by regulation in the blockchain industry. RWA may also try to explore the development path of STO in embracing regulation. #什么是RWA