Real World Assets (RWA) - Bridging the Friendship Between Traditional Finance and DeFi

The representation of Real-World Assets (RWA) through tokenization has recently gained significant attention from major financial and cryptocurrency institutions. Citigroup released a report titled "MONEY, TOKENS, AND GAMES─Blockchain’s Next Billion Users and Trillions in Value", which mentions that almost anything of value can be tokenized, and the tokenization of financial and real-world assets RWA could be a "killer application." Binance also published a report titled "Real World Assets: The Bridge Between TradFi and DeFi", providing detailed insights into what RWAs are, how they connect with DeFi, and future trends.

What Are RWA Real World Assets?

Real World Assets (RWA) refer to tangible assets that exist in the physical world, such as real estate, automobiles, art, and so on. These assets typically have stable value and income potential, and can be used as collateral for loans or as investment instruments.

In the blockchain world, RWA specifically refers to assets that exist off-chain, are tokenized on-chain, and are used and traded in DeFi. Assets like real estate, gold, traditional financial instruments like stocks, bonds, and even trending assets like carbon credits can be tokenized and brought into the blockchain space.

Curious about how gold is tokenized? See: Tokenized Gold Market Value Exceeds $1 Billion, What Is Gold Stablecoin PAXG?

Why Introduce RWA to DeFi?

The traditional financial system relies on numerous intermediaries, including brokers, background check providers, and regulatory bodies, to maintain a certain level of security and control in transactions. However, these roles come with high costs. Binance cited data from the International Monetary Fund (IMF) in its 2022 Global Financial Stability Report, as shown in the image below: DeFi operates with almost zero operating costs and labor costs, significantly saving costs compared to traditional financial markets.

Previously, we also introduced the collaboration between the Bank for International Settlements (BIS) and central banks from France, Switzerland, and the Monetary Authority of Singapore, exploring the use of DeFi protocols for cross-border CBDC transactions and settlements through the Mariana project, adopting automated market maker (AMM) smart contract models to achieve the vision of atomic transactions. As shown in the image below, intermediaries can be eliminated through smart contracts, significantly reducing costs and time.

For more insights into AMM applications, see Learning from AMM: BIS Mariana Project to Support Multi-CBDC Cross-Border Forex Transactions

Currently, many protocols and platforms are developing tokenization solutions for RWA. Platforms like MakerDAO, Centrifuge, Goldfinch, and Maple offer services to convert real-world assets into digital tokens. Traditional financial institutions like Goldman Sachs, Siemens, and private equity firms Hamilton Lane and KKR have also announced their entry into this market.

RWA Market Types and Case Studies

In its report, Binance categorizes RWA into several types based on asset categories, including equities, physical assets, and fixed income.

The market for equities and physical assets is relatively small in DeFi. One reason may be that equities or physical assets are usually traded on public markets and are subject to strict regulations; in most jurisdictions, publicly traded equities and physical assets can only be offered through registered exchanges. Another reason is that equity and physical asset instruments typically require ownership of the underlying asset off-chain, which adds complexity as equity/physical asset agreements not only facilitate financial contracts on paper but also require the actual storage and transfer of ownership of equity/physical assets in the event of redemption.

Backed Finance, registered in Zurich, Switzerland, is one of the few protocols that offer equity tokenization. It is based on Swiss Distributed Ledger Technology (DLT) laws and regulations, and requires full ownership of the underlying stocks to support each RWA asset. In the event of redemption, Backed Finance must sell the stocks held by users and coordinate whether they wish to be reimbursed in cash or cryptocurrency.

For more insights into Switzerland's crypto-friendly industry, see: Will Switzerland Become the Next Crypto Haven? Distributed Ledger Bill Supports Tokenized Assets, Swiss Franc Stablecoin

In contrast, there is a wide range of DeFi products based on private credit RWA. According to Binance's statistics, there are 1,560 DeFi products in private credit with a total loan value exceeding $40 billion. The ability to easily fractionate and diversify RWA in DeFi has attracted non-traditional borrowers and investors. Borrowers benefit from private credit-based DeFi products as they can enter new lending markets through decentralization and reduced liquidity thresholds, while DeFi investors can access the private credit market in a more approachable manner. In traditional finance, these markets are essentially reserved for credit funds and other institutions with significant capital and private relationships.

The most popular categories of RWA segmented by asset classes are real estate, followed by climate-related assets such as carbon credits, and tokenized bonds/stocks on public markets.

Curious about how real estate is tokenized? See: Homebase Issues Real Estate NFTs, Allowing Everyone to Become a Landlord on the Blockchain

You can also buy US Treasury bonds on-chain, see: Tokenizing RWA Unleashes Killer Applications, OpenEden Launches Tokenized Treasury Bond Vault

Future Trends of RWA

The future development of RWA will be influenced by various factors such as regulations, technological innovation, and market demand. However, it can be expected that RWA will continue to serve as a vital bridge between DeFi and traditional finance, bringing valuable real-world assets into the blockchain world, providing investors and users with more choices and opportunities. With ongoing technological advancements and increasing market demands.

Over time, native DeFi protocols and traditional financial institutions will continue to build the RWA ecosystem. While RWA offers numerous benefits such as tokenization, ease of distribution, and transparency, it must also be understood that:

Seamless alignment between physical and digital realms—including legal, operational, and structural coordination—is essential to make this bridge feasible. As blockchain demonstrates its value as a transformative technology with increasing real-world use cases.