Tokenized real-world assets may be the next engine for DeFi.

what are real-world assets(RWAs)?

Here are the most popular examples of RWAs:Cash、Metal（gold, Silver, etc.)、Real estate、Bonds、Insurance、Consumer goods、Credit notes、Royalties, etc.

The RWA market has a larger asset scale than the crypto native assets market. For example, the fixed-income bond market has a size of approximately $127 trillion, the total global real estate value is approximately $362 trillion, and the market value of gold is approximately $11 trillion. Currently, the market value of Crypto Native Assets is $1.1 trillion, which is only 10% of the market value of gold.

If a small portion of these RWAs were to be incorporated into the DeFi space, the total size of DeFi would see a significant boost.

How are real-world assets used in DeFi?

Developers typically use smart contracts to create a token representing an RWA while providing an off-chain guarantee that the issued token is always redeemable for the underlying asset.

The following are common forms of applications for RWAs in DeFi:

1、Stablecoins: Popular stablecoins such as USDT, USDC, and BUSD are RWAs. Companies like Tether, Circle, and Paxos issue stablecoins by maintaining audited reserves of USD assets and minting stablecoin tokens for use in blockchain and DeFi protocols.

2、Synthetic assets: Synthetic assets also fall under the category of RWAs. By creating synthetic assets, stocks, commodities, and other assets can be traded on-chain in the form of derivatives. Synthetix is currently the most well-developed platform in the synthetic assets field, with over $3 billion in assets locked in its protocol at the peak of the 2021 bull market.

3、Lending protocols: Lending Protocols have seen significant development using RWAs. Borrowers can use RWAs as collateral, and DeFi platforms can provide collateral lending services to borrowers. There are also credit lending services that rely solely on brand reputation without collateral. The use of RWAs in DeFi lending protocols has played a crucial role in the sustainable development and revenue scale of DeFi lending protocols.

The current status of the development of RWA

Tokenization of Real-World Assets (RWA) can help expand the market size of DeFi and also enable traditional financial institutions to explore new business models.Leading DeFi Protocols are interested in RWA tokenization and so are some traditional financial institution.

MakerDAO: Its RWA business has a scale of over $680 million, contributing over 58% of its revenue.

Yields in the traditional financial system (e.g. ~3.5% from US treasuries) are now consistently higher than existing DeFi projects (~2% from DeFi collateralized lending). This gives DeFi protocols access to sustainable revenue opportunities.

In order to manage its RWA (Real World Assets) business, MakerDAO has established the RWA Foundation.While there could be one Foundation per collateral type, it can also be a SPV per collateral type (or any hybrid combination). This allows to select the right jurisdiction/legal structure for each SPV and define a set of rules (e.g., Articles of Association) for each. The basic framework is as follows:

Liquidations are not performed via on-chain public auctions, which are triggered by a continuously updated price feed. Instead, liquidation is manually triggered by MakerDAO governance and enforced off-chain by a thrid party. The smart contracts implementing the new functionality are as follows:

RwaLiquidationOracle: which acts as a liquidation beacon for an off-chain enforcer.

RwaFlipper: which acts as a dummy liquidation module in the event of write-offs.

RwaUrn: which facilitates borrowing of DAI, delivering to a designated account.

RwaOutputConduit and RwaInputConduit: which disburse and repay DAI.

RwaSpell: which deploys and activates a new collateral type.

RwaToken: which represents the RWA collateral in the system.

TellSpell: which allows MakerDAO governance to initiate liquidation proceedings.

CureSpell: which allows MakerDAO governance to dismiss liquidation proceedings.

CullSpell: which allows MakerDAO governance to write off a loan which was in liquidation.

Instead of performing liquidations via on-chain public auctions, triggered by a continuously updated price feed, liquidation is triggered manually by MakerDAO governance and is enforced off-chain by a third party. The standard oracle and auction infrastructure are replaced by a "liquidation oracle" contract. MakerDAO governance can initiate liquidation proceedings, when deemed necessary, by calling tell() on the RwaLiquidationOracle. This starts the countdown, and after the remediation period has passed the oracle will start to report that the position is under liquidation. If the cause for triggering liquidation has been remedied during the remediation period or after, or if the original liquidation trigger was illegitimate at any point, MakerDAO governance can dismiss the liquidation proceedings by calling cure().

An off-chain enforcer (such as a trustee, etc.) can periodically check the liquidation status of the position by calling good(). good() will report that the position is in liquidation if and only if MakerDAO governance has triggered liquidation with tell() and the remediation period has passed without cure() being called.If at the end of the liquidation process there is still debt remaining on the position, and MakerDAO governance believes that the debt will not be paid off, it can trigger a write-off by calling cull(). Write-off works by setting the system's collateral value to zero, which will cause the position to proceed to on-chain liquidation via bite(), etc. Unlike the liquidation modules for existing collateral types, the specialized liquidation module RwaFlipperdoes not attempt a sale of the underlying collateral and instead just marks the loss on the system's balance sheet by allowing system debt to be created.

MakerDAO has arguably made the most progress in terms of RWA adoption. Currently, the protocol has $680M+ worth of RWAs backing the decentralized stablecoin DAI.

1. The bulk of MakerDAO’s RWA collateral (~$500M) comes in the form of US treasury bonds managed by Monetalis (MIP65). These assets provide the protocol a source of yield on otherwise idle USDC collateral；

2. MakerDAO also launched a vault backed by $100M worth of loans originating from a community bank in Philadelphia called Huntingdon Valley Bank (HVB). HVB used MakerDAO to support the growth of its existing businesses and investments around real estate and other related verticals, and served as the first commercial loan participation between a US-regulated financial institution and a decentralized digital currency;

3. In a separate vault, Société Générale brrowed $7M from MakerDAO in a position backed by $40M worth of AAA-rated bonds tokenized as OFH tokens.

By introducing RWAs as collateral, MakerDAO was able to scale the amount of DAI issued into the market, Strengthen its peg stability, and significantly increase protocol revenue (~58% of its revenue came from RWAs).

Centrifuge: Bringing RWAs into the crypto ecosystem in the form of NFTs, with a TVL of over $170 million.

Centrifuge protocol brings real-world assets into the crypto ecosystem through the form of NFTs. The dApp of Centrifuge protocol is called Tinlake, and its product logic mainly consists of the following:

1. An asset originator bridges a real world asset using Tinlake. This asset is converted into an NFT, which includes relevant legal documentation.

2. Asset originators can now create asset pools using the tokenized real world asset NFT as underlying collateral.

3. Upon pool creation, two tokens are created: DROP tokens and TIN tokens.

4. Investors can decide which pool to provide capital into based on their individual risk profile, buying either DROP or TIN tokens.

5. DROP token holders have a guaranteed return, determined by a fee function that has a fixed interest per pool, compounded every second.

6. TIN token holders, on the other hand, do not have a guaranteed return. They receive a variable yield that is based on the investment returns from the pool, which could be higher than the returns from holding DROP tokens.

7. TIN token holders borne a higher risk as they take the first loss in the event a borrower defaults.

A number of other protocols have also made significant strides in terms of RWA adoption, including:

Opportunities and Risks of RWA.

The trust assumptions of RWA tokenization are based on the fact that, since these assets are still off-chain, they cannot be enforced with smart contracts for settlement and rely on endorsements from traditional financial institutions. As a result, the trust attributes of these RWA tokens may never reach the same level as crypto-native assets. Additionally, due to the trust assumptions inherent in RWA tokenization, it is difficult for fully permissionless DeFi protocols to support RWA assets. Therefore, current RWA tokenization projects generally involve a centralized entity in the handling of RWA assets.

The potential opportunities for RWA lie in the implementation of Security Token Offerings (STO), which have traditionally been seen as a limited implementation of RWA. Due to the fact that many STOs are typically niche securities only available on permissioned platforms, their adoption has not yet reached the same level as RWA on public blockchains. Currently, STOs are one of the few regulatory-approved asset tokenization solutions in the blockchain industry. The development path of STOs in embracing regulation may also be explored by RWA.