Real-world assets (RWA) represent an emerging category of assets that have been increasingly gaining interest among developers of blockchain applications. Real-world assets refer to tangible assets that exist in the physical world. Examples of these assets include real estate, commodities, and stocks. Real-world assets are often held and managed by centralized entities, such as banks or financial institutions. However, with the advent of blockchain technology, developers have increasingly found ways to represent these assets on decentralized networks to enable more efficient trading and investment.
Role of Real-World Assets in Blockchain Technology and DeFi
DeFi has emerged as one of the most promising use cases for blockchain technology. DeFi platforms leverage smart contract technology to enable peer-to-peer financial transactions, without the need for intermediaries. One of the most significant challenges facing DeFi has been the lack of real-world asset integration. That is, most DeFi platforms only support trading of cryptocurrencies like Bitcoin or Ethereum, and not real-world assets. The integration of RWAs in DeFi unlocks a new world of possibilities.
Due to the yield generation mechanism only being effective during price upswings, the DeFi ecosystem has faced scalability difficulties. As evidenced by the decrease in cumulative total value locked (TVL) in DeFi protocols from almost $180 billion to about $50 billion since market peak, the yield model is unsustainable.
A solution to the pressing issue of sustainable income in DeFi has emerged in the form of protocols that enable yield generation from real-world assets (RWAs). Although many protocols were formed to tokenize RWAs, only a select few have incorporated this technology for providing investors access to some of the world’s largest financial credit markets across both DeFi and TradFi.
Examples of Real-World Assets
Real-world assets (RWAs) are financial instruments or physical assets that have the potential to be used as collateral in the DeFi industry. Examples of RWAs include cash, real estate, metal, corporate debt, insurance, consumer goods, credit notes, and royalties, among others.
Most of the world’s financial value is associated with RWAs. For instance, the fixed-income debt market is valued at roughly $127 trillion, the global real estate market is worth approximately $362 trillion, while gold has a market capitalization of approximately $11 trillion.
Although lending and yield generation activities in the traditional finance industry already rely on RWAs, their potential is largely untapped in DeFi. Unlocking the value of RWAs and the off-chain financial system is critical to the success of sustainable yield DeFi models.
Other decentralized crypto lending platforms require borrowers to commit more crypto assets than what they are borrowing. Consequently, only a marginal fraction of the world’s population can access such services. However, Goldfinch utilizes the concept of “consensus-based trust” for allowing borrowers to establish their “creditworthiness” through other participants’ evaluation, instead of entirely relying on their crypto assets. This strategy paves the way for lending opportunities for a broader group of people, irrespective of their crypto asset availability. At present, all loans processed on this protocol are secured through off-chain assets and income, reducing the need for borrowers to overcollateralize their loans with crypto assets.
Benefits of Real-World Assets on Blockchain
The use of RWAs on blockchain has several advantages. Firstly, it enables increased liquidity for real-world assets by making them more easily tradable. In turn, this can reduce the cost of capital for companies and allow retail investors to gain exposure to these assets. Furthermore, since these assets are represented on decentralized networks, ownership can be more transparent, eliminating any doubts of fraud. Finally, using RWAs in DeFi can significantly lower transaction costs and create new financial products, which can help increase the financial inclusivity of several communities.
Challenges of Real-World Assets on Blockchain
Despite the excitement around the use of RWAs in DeFi, there are still several challenges that need to be addressed. Firstly, integrating these assets onto blockchain networks requires the development of specialized infrastructure, including data oracles and legal frameworks. Additionally, some real-world assets might require specific regulatory approvals to be tokenized on blockchain, potentially adding complexity to the process. Finally, there are risks regarding the lack of mechanisms to enforce regulatory compliance, particularly in cases where multiple jurisdictions are involved.
Conclusion
Real-world assets represent a significant opportunity for blockchain-based technologies to unlock new use cases and enable more efficient trading and investment. While there are still some challenges standing in the way of the broader adoption of RWAs in DeFi, it is clear that this is an area of research and development that will continue to play a pivotal role in the future of finance.
This article is for educational purposes and should not be taken as investment advice. Always do your own research before investing in any cryptocurrencies or protocols.
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