Integration of traditional real-world assets (RWA) into blockchain technology is not a new topic. Tokenization is a major concern for institutional players, from Euroclear and Goldman Sachs, who want to reduce transaction costs, database management and execution times, as well as to simplify the provenance and ownership procedures.
In 2023, theory began to become reality. The private credit market was shattered in 2022 by the ripple effect of Terra-Luna’s collapse. recoveredby 60 %, and the main beneficiary base changed from crypto-native financial firms to the automotive industry (42% of tokenized credit in 2023). The industry’s most important development was the introduction of a new RWA product: tokenized Treasury. Tokenized Treasury products aim to displace stablecoins, which currently make up the majority of RWA. Treasuries, which are sought after by both retail and institutional investors and have seen a sevenfold increase in volume, bring to the blockchain an essential ingredient for maturity: stability. We are now approaching the biggest year for RWA tokenization yet.
A leap forward in technology
Blockchain technology has made significant advances in the past few years, focusing on various types of transaction optimization. This helps to increase efficiency, security and scalability. The development of layer-2 technologies like Zero-Knowledge Proofs and optimistic rollups, for example, helped increase the primary blockchains throughput. It also reduced the transaction execution times and stabilised the gas fees.
While L2 advanced the capabilities of each blockchain, cross-chain communications projects worked to create extra network value. The web3 ecosystem was made more usable by improving the interoperability.
New services have also been developed to improve the efficiency of RWA Tokenization. Maple, Centrifuge and Backed are just a few of the companies that have applied concepts such as defi and liquidity pools to traditional finance. Their users could invest in corporate bonds from different jurisdictions and get a piece of the private credit pie. They could also engage in tokenized lending with institutions.
Ondo Finance released Ondo Short Term US Government Bond Fund in early 2023. This fund offers investors a tokenized BlackRock iShares Short Treasury Bonds ETF (NASDAQ SHV). While OUSG raised just a little over $110 million in total value in a single year, it marked the beginning of a much less visible trend: tokenized US Treasury bonds.
Tokenized Treasury in 2023: The backbone of growth
The Fed’s research, and data from DeFi Llama show that the fraction of defi assets that are real-world assets has more than increased in the past year. This can partly be attributed to the release of institutionalized infrastructure such as Goldman Sachs’ Digital Asset Platform (GS DAP), and JPMorgan’s Tokenized Colllateral Network. However, tokenized private credits and digital bonds cannot explain the booming dynamics of the market. The issuance of US government short-term bonds should receive special attention.
A natural market trend could have led investors to seek out short-term debt that was risk-free, as a result of the Federal Funds Rate increases. The collapse of abnormal yields in the crypto space is also a factor. According to Coinchange’s yield benchmarks for defi, the minimum yields were around 4-5%. This squeezed the spread between Treasuries and defi, sometimes even pushing it into negative territory.
The Future of RWAs on Blockchain
While the tokenized asset market has shown signs of maturity in 2023 there are still several questions that need to be answered. This will hinder the development of the RWA sector. It is clear that regulation is the most important. Until there is a prescriptive framework with clear guidelines or bankruptcy precedents in major jurisdictions, we cannot be sure whether tokenized assets have the same legal claim as the underlying asset. The way in which infrastructure evolves to allow efficient access to tokenized assets markets is another degree of freedom.
Tokenized Treasury is the most likely to benefit from this renewed attention in 2024. This asset class is a great fit for defi investors who are risk-averse: unlike stablecoins tokenized treasuries do not suffer from the same kind of confidence issues, they are safe, as long as their smart contracts are audited diligently, and they generate yield. We have seen the start of the overhaul. By April 2024 the capital allocated to tokenized US Treasury had exceeded $1.009 billion, a nearly tenfold increase over the $114 million that was allocated at the start of 2023.
I believe that such a positive reception requires us to expand our scope beyond the obvious solution, especially since tokenized Treasuries do not fit all. Sukuk, the closest analogy of bonds in Islamic Finance, will be next to appear on chain. Islamic Law forbids the purchase of interest-bearing bonds, as it is considered usury – a haram act. Therefore, traditional bonds are unavailable to religious Muslim market participants. Sukuk allows for fractional ownership and claims to a portion of the cash flow generated. I believe that tokenization will provide the Muslim community an opportunity to invest in a transnational Halal On-chain, taking digital Islamic Finance into a whole new level. The gradual growth of regional crypto markets across MENA, and the continued involvement of corporates and governments in infrastructure investments makes me believe that a potential Sukuk on-chain would have a very well-matched audience.
Stablecoins are not yet extinct because we anticipate the rise of digital bonds. In fact, 2024 could bring competition and diversification into a market which, for so long, has been dominated by Tether and Circle. The stablecoin market, which has been a bit sleepy for a while, is experiencing some changes. From controversial concepts such as USDe and new entrants who have trusted versions like Ripple stablecoin. Gold-backed stablecoins are the opportunity that I think deserves the most attention, especially since gold has been in the spotlight after reaching an all-time price high. Although not a new concept, previous implementations were lacking in technical excellence and liquidity, as well as trying to enter a market that was out of sync. I believe that in a world where gold bars at Costco are being removed from the shelves it’s only a question of time until the idea is re-imagined.
Overall, tokenized real-world asset have made it through the early stages. I believe that 2024 will bring more widespread adoption, particularly of tokenized Treasuries. It will also breed innovation and competition, particularly in the Sukuk and fiat markets, as well as gold-backed stablecoins.
