The world of DeFi is still tethered to the traditional financial world, making it somehow interconnected with TradFi. Digital assets cannot exist without being tied to traditional "real" assets. Otherwise, they would be indistinguishable from the currencies of fantasy worlds like Tolkien's or George R. R. Martin's. Let’s figure out, what "Real World Assets" or RWA are.
What is RWA?
Real World Assets include tangible assets from the traditional economic system that have been tokenized and transferred into the digital space. In essence, these are the same assets from the "real" financial world, but they have been issued in tokenized form on blockchains.
Why were RWAs needed?
To avoid overhauling economic systems and reinventing the wheel, blockchain developers opted not to create entirely new payment instruments with unique operational rules. Instead, they adapted past experience by creating Real World Assets.
Real World Assets serve as a kind of "bridge" between two worlds: the real and the digital. The value of existing assets has been transferred into decentralized financial applications.
The RWA "bridge" enables the merging of tangible value from the real world with the core benefits of blockchain, such as accessibility, speed, and adaptability to a new currency.
What qualifies as RWA?
The RWA market is not fully formed yet, but several categories of tokenized real-world assets can be identified.
Real World Assets include:
- Centralized stablecoins
- Tokenized lending markets
- Tokenized securities
- Real estate (mortgage bonds as collateral for crypto loans)
- Artworks and collectibles (NFT market)
- Government bonds (USDT backed by short-term US Treasury bonds)
- Precious metals (Tether's XAUT)
Main issues with RWA
Despite RWA aiming to advance the global financial system by incorporating progressive technologies for enhanced usability and management, there are notable challenges.
- Regulatory challenges in the RWA market
Global financial regulators and traditional security entities are slow to adapt to innovations in digital markets. Since Real World Assets bring together two worlds, the rules for them should be doubly extensive. The problem lies in the fact that different jurisdictions have different laws, and some may contradict others. Unfortunately, some countries find it easier to ban the use of DeFi (or ignore its existence) than to revise their legislation for it.
- Security concerns
The concept of RWA involves transferring value from assets in one space to another. While ensuring the safety of resources in the real space is clear, as well as in the digital space, ensuring security during the transition between the two is not simple. There is a high probability of a disruption in the connection between the token and its physical counterpart due to technical failures or hacking attacks, leading to fund loss and undermining the reputation of RWA.
- Scalability issues
To handle all RWA data, platforms need to manage massive transaction volumes without compromising performance. Achieving this is extremely challenging in existing technological conditions, where either data processing speed or its cost often suffers.
The future of the RWA market
The main question on the minds of investors interested in Real World Assets is whether the new market is promising or just a short-lived trend. We need to take into account that the "real assets" sector is currently enormous. The value of the real estate market alone is projected to reach US$637.80tn in 2024. Such a big sector combined with the power of blockchain technology seems to make the RWA market a very promising and attractive segment.
If you want to learn more interesting facts about crypto then check out our blog! You might like our articles “Hyperbitcoinization Explained” and “The Impact of Crypto on Unbanked Populations”.
