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Will Real-World Assets (RWAs) Continue to Expand Use Cases?

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Real-World Assets (RWAs) have over the past year emerged as one of the fastest-growing asset classes within the larger crypto economy. As of writing, the total market capitalization of RWA native tokens stands at $7.13 billion while over $6.3 billion is locked across RWA DeFi protocols, according to DeFi Llama.

So, why are RWAs gaining a lot of traction? Before going into the adoption trends and the underlying potential, let’s first define two fundamental terms.

RWAs: Simply put, RWAs comprise a wide range of traditional assets that have been tokenized to interact with DeFi protocols. Examples of real-world assets that can be tokenized include physical commodities such as gold, real estate, traditional financial instruments (stocks and bonds), fiat currencies, and licensed software property such as IP or music rights.

Asset tokenization: This is the process by which real-world assets (RWAs) are integrated with on-chain economies (DeFi market). In doing so, real-world assets that were previously illiquid are exposed to borderless markets through DeFi and also fractionalized, making it possible for potential investors to digitally acquire a smaller exposure (fraction).

What particularly stands out about RWAs is that unlike traditional assets where the different market participants have to go through a central player such as the Nasdaq exchange, RWAs leverage smart contracts to introduce decentralized and borderless asset markets. More importantly, the base infrastructure on which this ecosystem is built i.e. public blockchain networks such as Ethereum are also immutable, and transparent. 

The Next Generation of Digital Assets 

Although still a drop in the ocean compared to established traditional markets, RWAs have the potential to shape the future of investing in the digital era. A report by consulting firm BCG estimates that the total addressable illiquid global market is well over $16 trillion.

What this means is that investors and portfolio managers are constantly stuck with a significant percentage of assets they cannot liquidate immediately, including real estate, art, and commodities, among others.

On the brighter side, however, RWAs are changing this narrative; traditional juggernauts in the investment space such as Blackrock and Franklin Templeton are already embracing the trend. Both companies have launched tokenized U.S. treasuries. The former, which launched more recently, currently enjoys a market cap of $382 million in its ‘$BUIDL’ fund, while Templeton’s $FOBXX has over 400 holders (investors). 

“This is the latest progression of our digital assets strategy. We are focused on developing solutions in the digital assets space that help solve real problems for our clients” noted Blackrock’s Head of Digital Assets, Robert Mitchnick."

This issuance of tokenized U.S. treasuries will democratize the access to financial instruments that were previously limited to centralized third-party channels like OTC desks. Instead, it will now be possible for investors interested in traditional assets to trade them on the blockchain, deriving benefits such as transparency, faster settlement times and seamless access to the bond market.

Besides treasuries, it is also worth highlighting that stablecoins fall under tokenized assets. This is because they are designed as digital tokens that represent the U.S. dollar or any other fiat currency on a 1:1 basis. Currently, the total value of tokenized stablecoins is at $156 billion, which is by far larger than tokenized U.S. treasuries ($1.2 billion) and private credit which is still below the $1 billion mark.

While it is likely this gap will reduce over time, the tokenization of fiat currencies is perhaps one of the most revolutionary milestones.

Today, it is not only possible for a prospective investor in an inflation-plagued economy to hedge against currency devaluation by acquiring a U.S.-backed stablecoin like USDT or USDC, but also access opportunities in the larger digital asset market through niche crypto trading platforms like Multibank.io, which recently unveiled a crypto derivatives trading platform with up to 100x leverage.

It’s Just the Beginning… 

As mentioned earlier, the RWA market is still in its inception stages; most of the products that have been launched are yet to attract significant funding. However, looking beyond, there is a huge untapped potential for this nascent ecosystem.

Most of the focus at the moment is on mainstream traditional financial instruments, with real estate and gold slowly catching on. But what about the software IP and digital rights market? For context, the global IP management market had a valuation of $8.6 billion in 2022, with projections showing it could surpass $37.7 billion by 2032.

This is another potential area where the integration of RWAs could further open up the available opportunities for both IP owners and investors interested in the software property space. Imagine being able to buy a fraction of the music rights of your favorite album; if it happens to go mainstream, then you would be entitled to some of the revenue which initially would have been only limited to the artist and producers.

As for the creatives, RWAs will allow them to raise funding for their projects by tokenizing the art and selling it in fractions as digital tokens through on-chain economies. This way, one will not be limited to allocating their resources or capital to other projects simply because the funds are tied up in the production of a single piece or album. A win-win for both investors and the artists.

Overall, it will be interesting to observe how RWAs will be integrated with traditional assets in the next few years, not only in the financial space but other facets of the economy, including art and entertainment.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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