Author: Yash Agarwal
Compiled by: Felix, PANews
In 2023, RWA gained widespread attention and was called the "TradFi killer app" by J.P. Morgan. According to DeFiLlama data, RWA is already the eighth largest track in DeFi, with a TVL of $2.4 billion. This article will delve into the Solana RWA market, study the various RWA categories, the top projects in each category, and explore the future prospects of RWA on Solana.
Why Solana?
Solana is similar to other public chains in that it offers high transparency, automated payment calculations, self-custody of assets, and global 24/7 settlement for tokenized assets. However, Solana also offers the following advantages:
Low gas fees and fast speed: For high-frequency transactions such as tokenized foreign exchange and stocks, Solana has lower transaction fees, faster settlement speed, and higher TPS.
Standards and Ecosystem: The market-tested DEX ecosystem, as well as standards such as cNFT (compressed NFT), pNFT (programmable NFT), Token 2022, etc., provide RWA with the basic building blocks to create and launch its products.
RWA Project on Solana:
Despite the large market for tokenized assets, Solana’s RWA is often overlooked. Unlike other DeFi categories, RWA adoption may take 5-10 years. But this is an exponential market, and TAM has no upper limit. (Note: TAM stands for total addressable market, which refers to the available market for a product or service)
Pathways and categories of RWA adoption
Stablecoins:
While stablecoins are not typically classified as RWAs, they have the highest market fit for stablecoins whose underlying reserves are USD and Treasuries. Solana has the following stablecoins:
In USD:
USDC: Backed by U.S. dollars and U.S. Treasuries held by U.S. banks and managed by BlackRock.
USDT: Supposedly backed by U.S. dollars, treasury bills, and other assets.
UXD: Partially secured by RWA (such as Private Credit)
Bridged Wormhole DAI, backed by DAI, which is in turn partially backed by RWA.
Non-USD denominated:
QCAD: A CAD stablecoin backed by the Canadian dollar.
EUROE: A Euro stablecoin backed by the Euro.
ISC: Backed by a basket of RWAs.
real estate
Two major real estate companies on Solana, Parcl and Homebase, are already live and performing well. Although the two look similar, they are very different. Homebase represents on-chain real estate, and Parcl focuses on the tokenization of real estate price indices.
Homebase: Tokenizing American Real Estate
Homebase allows anyone to invest in real estate for as little as $100 and is currently tokenizing real estate in the United States. Two tokenized properties worth more than $400,000 have been sold, but it is still in the early stages. Homebase is fully compliant, its tokens are registered with the US SEC, and a process has been established to recover tokens when user wallets are hacked. However, it is currently only available to US residents.
Parcl: Long/Short on Real Estate Index
Parcl allows users to invest in real estate for as little as $1, providing exposure to real estate markets in cities around the world through REIT-like indices. Parcl can be thought of as a company that creates real estate indices and provides price feedback services. Parcl has also developed a perpetual AMM platform to assist users in trading these indices, whether they want to go long or short. The TVL currently exceeds $1 million. The service is already available in cities such as Brooklyn, Las Vegas, and Paris, and cities such as London, Jakarta, and Hong Kong are also coming online soon.
Liquidprop is another emerging player in the real estate space following the Homebase type model, but it is not live yet.
The real estate market is not a winner-takes-all situation. There can be more than 100 real estate tokenized markets on Solana because different regions can be served and share a huge market valued at over $330 trillion.
Private credit
In the TradFi space, loans made by non-bank sectors are referred to as "private credit". These loans are typically short-term (30-90 days) with floating interest rates and involve direct lending between investment funds and corporate borrowers (usually small and medium-sized enterprises). Private credit has grown into a significant industry, managing more than $800 billion in traditional financial assets.
On-chain private credit is very similar to TradFi. However, the difference is that it allows anyone to invest using stablecoins. To illustrate the concept of on-chain private credit, take Credix Finance as an example:
Credix Finance: A Major Player in Private Lending on Solana
Credix is a lending program that connects investors with fintech companies in emerging markets. Here’s how it works:
Investors: Invest stablecoins like USDC in a liquidity pool or a specific portion of a specific trade in the market.
Borrowers: Credix primarily works with fintech borrowers in emerging markets who borrow USDC and convert it into local currency. The local currency (e.g. Brazilian Real) is then loaned out to various types of businesses. The types of credit provided through fintechs are quite diverse:
- Trade receivables (via Clave).
- Asset-backed auto loans (through Atria).
- Income-based financing (through Brazil and Mexico).
Credix Finance has been growing rapidly, having issued over $40 million in private credit and generating over $4.9 million in interest. The current 90-day trailing APY is approximately 12.9%. To enhance its appeal to investors, part of its portfolio is also insured and reinsured.
Challenges and opportunities of private credit:
Although private credit tokenization is a huge market opportunity that solves some loan problems and reduces operating and funding costs, it also faces challenges:
Bad Debts: Recently, Goldfinch, a platform similar to Credix on Ethereum, had a pool of funds from a fintech company called “Tugende” that provided loans to motorcycle taxi operators in Kenya. They borrowed funds under the name of “Tugende Kenya” and transferred the funds to its subsidiary “Tugende Uganda” to solve business problems. This violation of the loan agreement was discovered through quarterly reports, exposing the problems in private credit that RWA has not yet been able to solve. In addition, there are some obstacles to law enforcement in emerging market jurisdictions such as Kenya, making it difficult to recover bad debts.
Tracking off-chain data: In emerging markets, the lack of on-chain credit risk data or means to verify off-chain data and the lack of a strong credit underwriting infrastructure force the RWA protocol to rely entirely on borrower-provided data, which can be easily manipulated. After the loan is issued, there is no way to track the financial status of the loan and the borrower.
Solving these problems requires innovations in credit structure, including:
More proactive risk tracking, such as more decentralized underwriting, involving multiple professional parties (stakeholders) in risk assessment. Coordination can also be done on-chain.
Post-loan tracking through integrations like open banking APIs. Insurance/reinsurance (like Credix does).
U.S. Treasury Bills:
US Treasury bonds are the most popular RWA on the chain, with over $660 million issued across all chains, and many participants are still actively developing. This is mainly due to the high interest rate environment, as US dollar-denominated Treasury bonds offer a risk-free rate of return of 4-5%.
Solana is still in the early stages of Treasury tokenization and has only one player, Maple.
Maple Finance: The First Tokenized Treasury Note on Solana
Maple Finance, one of the crypto institutional capital markets, announced that it will return to Solana with a cash management product. In just a few days after Solana launched its cash management product, it attracted more than $4.2 million and is expected to continue to grow.
Here’s how Maple’s cash management product works:
Lenders provide USDC-SPL to the pool and receive LP tokens.
The pool issues USDC-SPL loans to Room40 Capital’s Solana wallet, and the USDC is converted to USD via Circle.
Room40 is the borrower and is responsible for managing the Treasury securities.
Maple Finance thus acts as a bridge between lenders on Solana and borrowers like Room40 Capital.
With players like Ondo, Open Eden, and MatrixDock exploding on Ethereum, we should see many players expanding to Solana in the coming months.
Physical Goods:
Any physical commodity, from art, trading cards, and sneakers, can be tokenized and put on the blockchain. The process of tokenizing physical commodities is as follows:
Vault: Physical commodities are authenticated, securely stored in a vault, and represented on-chain as NFTs or tokens.
Marketplace: Users can buy, sell and transfer tokens on the marketplace.
DeFi: These on-chain assets can also be used as collateral for loans.
In addition, similar to stablecoins, physical commodities can be deposited to tokenize them, or tokenized physical commodities can be exchanged for physical commodities. However, unlike stablecoins, tokenization of physical commodities requires physical delivery.
There are two participants on Solana:
BAXUS: Founded by a whiskey trader and a software engineer, BAXUS is a secure marketplace for authenticating, storing, buying and selling wine and spirits. The wines are tokenized and securely stored in vaults in the United States.
CollectorCrypt: Collector is a unique tokenization service that brings real-world collectibles to Solana, just like Courtyard, but for Solana. Users can also deposit physical cards and tokenize them.
Blockride, another player on Solana, is tokenizing bus fleets, but it’s still in the early stages, allowing users to buy a small portion of a revenue-generating bus fleet for as little as $50 and receive a share of daily revenue directly in their wallet.
RWA Infrastructure on Solana:
While most DeFi infrastructure may not be oriented towards RWA, the infrastructure is currently being built, as follows:
Bridgesplit specific to RWAs: Bridgesplit is an infrastructure platform on Solana that allows asset custodians and marketplaces to offer financing products to businesses and individuals. It started out as a platform for tokenizing off-chain assets as NFTs and later shifted its focus to RWAs. However, the Bridgesplit team has not released any major updates or versions recently.
Another key infrastructure related to RWA’s financial management is multi-signatures such as Squads, which help protect its on-chain collateral assets.
DEX (AMM and Order Book): While it may not be immediately apparent, the ultimate goal of RWA is to trade on a DEX. DEXs are not only designed for trading Meme coins, but are undergoing rigorous testing to facilitate tokenized asset trading in the near future.
AMM: The main obstacle preventing RWAs from being freely traded is the lack of a “permissioned pool.” For example, an individual should be able to convert their tokenized credit positions into stablecoins through an AMM pool.
Order books: Order books are particularly well suited for RWAs that trade frequently, such as tokenized stocks and foreign exchange markets, because these assets already exist in traditional financial systems that use order books. In addition, in liquid markets, order books can allow spreads to be significantly narrower. Order books are the preferred choice of most market makers because they provide LPs with flexibility and more precise control over the prices at which traders buy and sell.
Oracle: Oracles are an important source of truth for off-chain asset data and ensure proof of reserves for real-world assets. The Solana ecosystem has two main oracles: Pyth (permissioned) and Switchboard (permissionless), which can be used to transmit off-chain data to the Solana blockchain.
Deposits and Withdrawals: Conversions between fiat and cryptocurrencies, especially between certain fiat currencies and stablecoins (like USDC), are critical to reducing the payment costs associated with RWA operations. Most providers support Solana; a full list can be found here.
Bridges: Going forward, bridges will play a key role in RWAs, as most RWAs will be multi-chain (natively executed on multiple chains) and some may even be cross-chain (deposits on multiple chains, but executed on a single chain). While Solana has various bridges powered by Wormhole and DeBridge, having more bridges and cross-chain token standards is critical.
Token Standards:
Token standards play a vital role as they enable “tokenization” in a secure and standardized manner:
SPL Token: The main token standard on Solana, representing redeemable tokens. Just like any stablecoin, any RWA player can issue their assets as SPL tokens, with features such as dynamic supply, minting, freezing, and destruction.
Token 2022: Expanding on the original standard, Token 2022 enables additional RWA-related features:
- Crypto Transfers: Allows private transfers of tokens; relevant for institutions seeking to conduct transactions privately.
- Transfer Fees: Issuers can configure transfer fees or taxes on transactions.
- Interest-earning tokens: Tokens that accumulate interest over time, like bonds.
-Non-transferable tokens: tokens cannot be transferred once issued
Metaplex Standards for NFTs: Metaplex has a set of NFT standards, such as compressed NFTs and programmable NFTs, which can also allow RWA players to represent unique assets.
While current standards cover a wide range of scenarios, the lack of RWA standards has hindered the adoption of RWAs on Solana.
Solana requires the RWA standard:
The Solana ecosystem lacks a unified, widely accepted RWA tokenization standard. Standardization of RWA can help improve Solana's RWA, and standardized RWA tokens can simplify the process of creating tokenized RWA.
Some considerations for creating RWA standards:
Tokenization at the asset level rather than the pool level: For example, instead of tokenizing a pool of loans issued by a fintech company, each loan issued by an Argentinian merchant will be tokenized as an individual asset, with each token representing a portion of the fund. Tokenization at the asset level allows for a more transparent representation of ownership, allowing the performance of all assets on the chain to be tracked in real time.
RWA standards on other chains: It is also necessary to pay attention to and learn from existing standards such as ERC-3643 (used by Tokeny), ERC-1400 (used by Matrixport), ERC-6065 (real estate), and ERC-4626 (used by TrueFi).
BD push: It is worth noting that the RWA token standard requires an initial BD push and re-iteration based on institutional needs to gain initial adoption.
Flexible and Upgradable: All contracts must be inherently upgradeable to accommodate the changing compliance needs of asset issuers.
It would be great if the Solana Foundation had an RFP (Request for Proposal) to apply for a grant (up to $250K) to build out the RWA standards program.
What does Solana lack compared to other ecosystems?
Although Solana’s RWA space is booming, it still falls short compared to other ecosystems. Here’s a comparison with other ecosystems:
Ethereum: Technology aside, RWA protocols crave one thing: capital. Ethereum has by far the most capital leverage, which is why nearly every RWA protocol uses Ethereum as one of its main chains. Attracting capital from Ethereum while retaining Solana as the execution layer could be a viable option for Solana RWA.
Avalanche: Ava Labs, the company behind the Avalanche blockchain, has a core mission to “digitize all the world’s assets.” They focus on RWAs, launching the $50 million Vista Fund, etc., to buy tokenized assets, and bringing in giants like KKR. The RWA fund set up by the Solana Foundation (like the $10 million AI fund) could play an important role in attracting RWAs to Solana.
Solana RWA Opportunities and Trend Predictions:
1. Explosive growth of tokenized treasuries: While Solana is lagging behind in the tokenized treasury trend, we may see a large amount of Solana capital locked up due to the high yield of treasury bonds. If tokenized treasuries really explode, it may also lead to higher DeFi interest rates, given the relatively small lending market on Solana. The author believes that this will be a healthy signal - the integration of TradFi and DeFi. Projects from other ecosystems are worth paying attention to because they "may" expand to Solana in the near future: such as Ondo, Matrixport, Backed.Fi, OpenEden, etc.
2. Stablecoins backed by tokenized treasuries: Despite a total market cap of $125 billion across all chains, with over $1.6 billion in stablecoins within the Solana ecosystem alone, they are currently returning 0% in this high-yield environment. One way to enhance stablecoins to better serve users is to use RWAs as a stable yield generator. Mountain Protocol, an emerging hot player in this category on Ethereum, is building a stablecoin that can generate yield.
3. Tokenized U.S. Stocks and Synthetic Stocks: While tokenized U.S. stocks may be legally challenging, projects like Swarm are tokenizing stocks on Polygon.
4. DEX specifically for RWA: Considering the demand for licensed DEX, a DEX specifically for RWA can enable licensed assets to interact in a compliant manner. For example, EVM-based DEX, Muave, a fork of uniswap v3, requires KYC through VioletID to use DEX. Meteora, one of Solana DEX, is also launching DLMM, focusing on use cases such as foreign exchange and RWA.
5. DeFi composability: The next step for RWA will involve DeFi combinations to increase the yield of the underlying assets. For example, holders may have the opportunity to earn higher yields by tokenizing U.S. Treasuries, providing them as collateral in the DeFi lending market, borrowing stablecoins, buying more Treasuries, and repeating the cycle.
6. Integration between DePIN and RWA: Thanks to projects such as Helium and Hivemapper, Solana is undoubtedly the leading chain for DePIN. These DePIN networks have assets such as sensors, drones, and wearable devices, which will provide real-time, reliable data when RWA solves financing problems for them.
7. Credit Protocol: Circle Research recently released the Perimeter Protocol. The protocol allows developers and builders to access an audited open source protocol, where visitors can freely build credit applications suitable for RWA using USDC, but only for EVM. This provides a huge opportunity for Solana.
8. More assets and more markets: The market needs more and more on-chain assets, such as solar farms (such as Plural Energy), precious metals (such as xMetals), carbon credits, corporate bonds, and possibly even uranium (Uranium308). In addition, tokenization-friendly jurisdictions such as Switzerland, the UAE, Singapore, Germany, and Hong Kong may be new development windows for RWA participants.
Tokenization is the end game
Tokenization of all assets will happen eventually, the question is, what will be the catalyst and when? Markets tend to be slow to shift, but if you ignore the signs, you will fall behind. Tomorrow’s standards and infrastructure are being built today. Also, the market needs a better term to describe “RWAs”, as TradFi refers to “RWAs” as “risk-weighted assets”, which may be confusing if you expect TradFi to enter the tokenization space.
