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Binance Research: Overview of RWA Development Landscape, Understanding the Technological Risks and Limitations of Asset Tokenization

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Binance Research: Overview of RWA Development Landscape, Understanding the Technological Risks and Limitations of Asset Tokenization

The tokenization of Real World Assets (RWAs) is accelerating, attracting attention from numerous Web3 entrepreneurs and traditional financial institutions. Recently, Binance Research released a research report titled "RWAs: A Safe Haven for Onchain Yields," highlighting the increasing participation of traditional financial institutions such as BlackRock, Franklin Templeton, and others in tokenizing government bond markets. Private debt, loans, commodities, stocks, real estate, and other non-US bonds are the primary areas of RWAs, with emerging categories including airspace rights, carbon credits, and art. Additionally, some startups are also establishing blockchains based on their own RWAs.

RWA market value exceeds 12 billion USD and is expected to surpass

RWA stands for Real World Assets, representing assets from the non-blockchain world such as real estate, national currencies, bonds, commodities, etc., tokenized using blockchain technology to become tradable assets on the chain, known as "tokenization of real assets."

This allows traditional finance (TradFi) to benefit from the efficiency, transparency, and speed of blockchain technology. It also enables Web3 to access traditional financial investment products and acts as a bridge between TradFi and DeFi, allowing traditional financial assets to operate in the DeFi world and inject significant liquidity.

As of September 12, 2024, the market value of on-chain RWAs has exceeded 12 billion USD, excluding the 175 billion USD stablecoin market. This marks a historic high, with tokenized products like U.S. government bonds holding a significant share in the market.

Explosive Growth in U.S. Bonds, Credit Remains Top

The main categories in the RWA field include tokenized U.S. government bonds, private credit, commodities, stocks, real estate, and other non-U.S. bonds. Here are the tokenized market values for each category as of September 2024:

U.S. Government Bonds

Valued at 2.2 billion USD, the Fed's interest rate cuts and frequency have become a market focus, currently represented by BlackRock's tokenized fund BUIDL.

Personal Credit - Small Business Financing

Valued at 9 billion USD, issuers represented by Figure. Since the 2008 financial crisis, banks have faced stricter lending standards, resulting in increased overall share of private credit in the macroeconomy, with active loans growing by 56% in the past year.

Gold - Representing Commodities

Valued at 990 million USD, represented by Paxos Gold PAXG, Tether Gold XAUT.

Non-U.S. Bonds, Corporate Bonds, and Stocks

Valued at 80 million USD, these markets are much smaller in scale and are still in the early stages of development.

Real Estate, Carbon Credits, and Air Rights Markets Stable, Art Market Emerging

The report shows that real estate, carbon credits, and air rights markets are gradually stabilizing and developing. Companies like Parcl pioneering real estate tokenization markets on the Solana blockchain, Toucan focusing on carbon credit tokenization integrated with regenerative finance ReFi, and startups like SkyTrade tokenizing air rights. Additionally, companies like Plume Network are developing modular L2 blockchain platforms aiming to tokenize assets such as watches, art, etc. with great potential.

Traditional Financial Institutions Enter RWA Market Successively

The report indicates that in recent years, traditional financial institutions and various TradFi entities have entered the RWA market, becoming an important driving force to be reckoned with. BlackRock's BUIDL tokenized fund leads the way with a market value exceeding 520 million USD. Their Bitcoin and Ethereum spot ETFs are currently the largest in market value. Franklin Templeton's FBOXX is the second-largest tokenized fund, and WisdomTree further expands its territory through its stock RWA and other "digital funds."

BlackRock's USD Institutional Digital Liquidity Fund BUIDL is the market leader in tokenized funds with a market value exceeding 520 million USD. Besides entering the tokenized fund market, BlackRock is also a significant player in the U.S. spot ETF market, currently holding the largest market value for Bitcoin and Ethereum spot ETFs.

Franklin Templeton

Franklin Templeton is gradually delving into the RWA market, with its OnChain US Government Money Fund FOBXX currently ranking as the second-largest tokenized fund in the market with a market value exceeding 440 million USD, valued at 430 million USD on the Stellar chain.

WisdomTree Investments

As a globally renowned ETF giant and asset management company, WisdomTree Investments has further launched multiple "digital funds," including tokenized treasuries, stocks, and other strategic funds. The total AUM of these digital funds has exceeded 23 million USD.

Oracle Worth Watching, Analyzing Six Different Projects

To build a strong foundation for RWAs, key technologies are essential. Oracles, responsible for the interoperability between smart contracts and real-world information, play a crucial role. They help initiate on-chain operations based on off-chain legal agreements, triggering smart contracts to address loan defaults. The report suggests that future development of oracles for RWAs is worth paying attention to.

The report also analyzes six different RWA projects, including Ondo for structural financing, Open Eden for national debt tokenization, Centrifuge for tokenization, structural credit, aggregation, Parcl for synthetic real estate, Toucan for carbon credit tokenization, and Jiritsu for zero-knowledge tokenization.

Ondo Structural Financing, Tokenized Fund for Commodities

Endorsed by short-term U.S. bonds and bank deposits, primarily investing in BlackRock's tokenized funds BUIDL and FedFund, supporting multiple blockchains like Ethereum, Solana, Sui, Arbitrum, etc.

OpenEden National Debt Tokenization, 24-Hour Short-Term U.S. Bond Tokenization Service

Offers 24-hour online U.S. short-term national bond investment services, becoming the largest national debt tokenization issuer in Asia since its establishment in 2023, supporting Ethereum, Arbitrum.

Centrifuge Invoice Proof Tokenization, RWA Cast as NFT

Centrifuge is a Substrate-based L1 blockchain focusing on tokenizing various assets such as invoices, bills, securities, real estate, royalties, etc., into real-world assets RWA and casting them as NFTs, then using them as collateral for lending on DeFi platforms.

Parcl Real Estate Tokenization, Easily Purchase Real Estate Indices

Parcl is a protocol for tokenizing real estate, allowing users to purchase and sell partial tokens of real estate indices, such as buying indices for cities like Los Angeles, New York, or other global cities, without the need to purchase physical properties, lowering the investment threshold.

Toucan Carbon Credit Tokenization, Addressing Global Warming and Energy Conservation

Due to global warming, many countries have joined efforts to mitigate and control carbon emissions. The Toucan protocol is a platform for carbon credit tokenization, using tokens to represent carbon offset amounts. This allows companies and individuals to decentralizedly purchase, trade, and destroy carbon credits to offset carbon emissions.

Jiritsu Combining Zero-Knowledge Proofs with Oracles, Verifying Compliance of Tokenized Assets

Jiritsu is an L1 blockchain based on Avalanche Subnet technology stack, using zero-knowledge proofs (ZKP) combined with multi-party computation (MPC) supported by oracles to verify asset compliance and the true market value of real assets, supporting various tokenizations including gold, real estate, and traditional financial assets.

Technical Risks and Prospects of RWA, Challenges of Building New Chains Remain

The report indicates several technical challenges in the RWA field, such as centralization risks relying on third-party intermediaries due to asset nature and compliance requirements, the complexity of system technology not necessarily proportional to returns, the need for more robust oracles to shorten information time differences and maintain accuracy, and ultimately, data security and compliance.

More and more RWA protocols choose to establish their own L1 or L2 blockchains, allowing better control over compliance, regulations, and easier KYC verification for users, accelerating protocol optimization. However, this also leads to issues like network security and insufficient liquidity. For new RWA protocols, running on L1 or L2 chains is simpler since these chains already have built-in compliance tools and KYC systems, eliminating the need to build from scratch. Yet, new chains often face the "cold start" problem, with higher entry barriers for users, such as setting up wallets and learning new usage processes.

Fed Rate Adjustments and Legal Regulatory Directions, Still Worthy of Attention

The report also mentions that from a macroeconomic perspective, the U.S. is entering a rate cut cycle. With the Fed starting rate cuts on September 18, 2024, leading to a weakening U.S. dollar, and since most RWA markets are backed by U.S. government bonds and cash assets, yields are expected to decrease. However, due to the diversification and transparency of RWAs, they may remain an attractive investment option in a low-interest rate environment.

Even though most RWAs operate on public chains, users still need to undergo KYC verification or other verification steps like general, professional investors, and other products may require minimum amounts to be imported. In other words, RWAs are currently not much different from traditional financial assets.

In conclusion, although RWA protocols use blockchain technology, there is still room for improvement in terms of legal and regulatory restrictions and user identity limitations, still a long way from truly decentralized, zero-knowledge financial products.

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