RWA Industry Report: The Integration of TradFi and Decentralized Finance

Introduction

In recent years, the total market value of cryptocurrencies has surpassed one trillion USD, but it is still far below the market value of mainstream asset classes and commodities. Against this backdrop, the concept of "RWA"(Real World Asset, real-world assets) has become popular in the crypto space. RWA refers to the tokenization of real-world assets and their introduction to the blockchain, such as commercial real estate, bonds, cars, and almost any asset that can store value. This allows for asset storage and transfer without central intermediaries, enabling trading and circulation on the blockchain.

Although RWA has great imaginative potential for expanding the total market value of cryptocurrencies, its definition, advantages, and development trends still need to be explored. This article will share perspectives on RWA and provide an in-depth analysis of its current status and future.

The core viewpoints are as follows:

• The future development direction of RWA is the bidirectional integration of the real world and the virtual world: to build a new financial system based on permissioned blockchain DLT technology under multiple different jurisdictions and regulatory frameworks.

• Rationally view RWAization: Not all assets are suitable for RWAization, and one must calm down from the current hype.

• Many countries around the world are actively promoting legal and regulatory frameworks related to blockchain. At the same time, blockchain infrastructure such as cross-chain protocols and oracles is also rapidly improving.

• Different asset RWA projects share similar principles and challenges, but their specific operating mechanisms each have their own focus. For example, bond tokens typically do not require the same high liquidity as stock tokens.

1. Background of Asset Tokenization

Asset tokenization is the process of recording ownership of a specific asset onto a digital token that can be held and traded on the blockchain. The resulting tokens represent ownership shares of the underlying asset. In theory, any asset can be digitized, including tangible assets like real estate and intangible assets like stocks. Converting assets into digital tokens allows for easy divisibility, enabling fractional ownership, encouraging more people to participate in investments, and enhancing asset liquidity. Asset digitization also allows traditional assets to be traded directly on peer-to-peer platforms without intermediaries, increasing market security and transparency.

Basic Principles of Asset Tokenization:

1. Acquire real-world assets
2. Asset Tokenization on the Chain
3. Distributing RWA to on-chain users

RWA is not a new concept. The current market size of asset tokenization is approximately $600 billion, and it is expected to grow at a compound annual growth rate of 40.5% from 2024 to 2032. RWA tokens are the fastest-growing asset class among DeFi tokens.

As of November 2024, DefiLlama data shows that the total locked value (TVL) of RWA token assets ( has reached 6.512 billion USD. TVL reflects the recognition and liquidity of token assets in the Web3 world to some extent.

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Currently, there are two different perspectives on RWA tokenization: the Crypto perspective and the TradFi perspective. This article focuses on RWA from the TradFi perspective.

) 1. RWA from a Crypto Perspective

The traditional DeFi sector strives to achieve yield generation, but the underlying yield mechanisms of DeFi only work effectively when prices are rising. Against the backdrop of a crypto winter, the shrinkage of on-chain activities has led to a decline in yields. The total value locked (TVL) in DeFi protocols has dropped from a market peak of $180 billion to $50 billion, reflecting an unsustainable yield model. With yields plummeting, the pursuit of "real yield" has intensified, prompting DeFi protocols to integrate RWA tokens as a more stable source of income. This explains why on-chain U.S. Treasury bonds have become the hottest track recently.

Therefore, the RWA from the Crypto perspective can be summarized as the unilateral demand from the Crypto world for the yield of real-world financial assets. The background is the increase in US Treasury yields due to the Fed's interest rate hikes and balance sheet reduction, while the yield in the DeFi market is declining. Among the most popular is MakerDAO's plan to invest $1 billion of reserves in tokenized US Treasury products.

The significance of MakerDAO purchasing U.S. Treasury bonds lies in: DAI can leverage external credit to diversify the underlying supporting assets, the long-term yield of U.S. Treasury bonds can help stabilize DAI's exchange rate, increase the elasticity of issuance, and reduce dependence on USDC. By investing in tokenized U.S. Treasury bonds, MakerDAO secures a stable source of income, and recently has shared part of the U.S. Treasury bond earnings, raising the DAI interest rate to 8% to boost demand.

2. RWA from the TradFi perspective

From the perspective of TradFi, RWA is a bidirectional integration between traditional finance and DeFi, which not only brings value to the cryptocurrency market but also empowers real assets with the advantages of cryptocurrency.

For traditional finance, DeFi services that are automatically executed based on smart contracts are innovative financial technology tools. The RWA in the TradFi sector focuses more on how to combine DeFi technology to achieve asset tokenization, empowering the traditional financial system.

• Improve trading efficiency: Transfer multiple steps of traditional IPOs to the blockchain, complete transactions in one go, avoid cumbersome processes, and not be restricted by exchange time limits.

• Reduce financing costs: Provide financing for low-heat industries through STOs, lower investment bank fees, and attract projects that banks are not interested in.

• Simplified investment threshold: Users only need one account to invest in global assets, solving the problem of needing multiple accounts for cross-platform purchases, thereby reducing investment barriers and complexity.

It is necessary to distinguish the RWA logic, as the underlying logic and implementation paths of RWA vary greatly from different perspectives. In choosing the type of blockchain, the RWA of TradFi is based on permissioned chains, while the RWA of Crypto is based on public chains.

Due to the characteristics of public chains such as no admission requirements, Decentralization, and anonymity, Crypto's RWA projects face significant compliance obstacles. Vulnerabilities in public chain technology or defects in smart contracts may also lead to asset loss, making public chains potentially unsuitable for the issuance and trading of large-scale tokenized real assets. Permissioned chains, on the other hand, only allow authorized participants to access the network, ensuring that only compliant financial institutions, regulatory bodies, and other relevant parties can participate in transactions and data access, providing the basic premise for legal compliance in different regions.

In summary, the future development direction of RWA should be the two-way integration of the real world and the virtual world: under the permissioned chain pattern of multiple different jurisdictions and regulatory systems, build a new financial system using DLT technology.

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2. How RWA Disrupts Traditional Finance

In the traditional financial system, assets such as stocks and bonds usually exist in paper certificates, which are later converted into digital records held by centralized financial institutions. These records encompass ownership, liabilities, conditions, etc., scattered across independently operating different systems. The financial system requires a substantial amount of post-coordination to reconcile and settle transactions, ensuring data consistency. This traditional system faces multiple challenges:

• Multiple intermediaries lead to high transaction costs
• Settlement time is long, cross-border transactions usually take several days to complete
• Investment opportunities are limited, and certain asset classes are only open to high net worth individuals and institutions.

Blockchain, as a distributed ledger technology, shows great potential in solving the efficiency problems of traditional finance. It provides a unified shared ledger that directly addresses the information fragmentation caused by multiple independent ledgers, greatly enhancing information transparency, consistency, and real-time updating capabilities. The application of smart contracts further strengthens this advantage, allowing transaction conditions to be executed automatically, significantly improving efficiency and reducing settlement time and costs.

For TradFi, RWA means creating digital representations of real-world assets through blockchain, extending the advantages of distributed ledger technology to a wide range of asset classes. A 2022 study by Bank of New York Mellon showed that over 90% of surveyed institutional investors are interested in investing in tokenized products, and 97% agree that "tokenization will fundamentally change asset management."

The transformative power of RWA on TradFi is mainly reflected in:

) 1. Market accessibility facilitates diversification of investment strategies.

Tokenization divides high-value assets ### such as real estate and artworks ( into tradable tokens, enabling fractional ownership, allowing small investors to participate in markets that were previously inaccessible due to high costs, thereby democratizing investment opportunities.

For example, traditionally illiquid real estate can be fragmented and sold, allowing investors from other countries to participate. These assets can be actively traded in the market, enabling investors to convert assets into cash more quickly. The tokenization process turns assets into commodities that can be bought and sold at any time, greatly enhancing trading efficiency.

In addition, unlike the specific trading hours of the TradFi market, tokenized RWA can be traded on blockchain platforms around the clock, providing more cross-time zone trading opportunities and increasing liquidity.

) 2. Improve liquidity and price discovery capabilities

Tokenization reduces the friction associated with the sale, transfer, and record-keeping of assets, enabling previously illiquid assets to be traded seamlessly at almost zero cost. In traditional financial markets, asset transfers often involve multiple intermediaries, leading to a complex and time-consuming process. Take rare gems or private equity as an example; in the past, investors found it extremely difficult to trade these asset classes, spending a lot of time and effort searching for buyers and sellers. Tokenization simplifies this process by leveraging the decentralization characteristics of blockchain, allowing buyers and sellers to trade directly and reducing costs. Investors no longer have to wait months or even years to find the right buyer, and can quickly transfer assets to other investors, providing secondary market liquidity in a safe and compliant manner.

At the same time, buyers and sellers can trade more easily and price based on new information. This transparency and real-time nature enable market participants to better assess asset values and make more informed investment decisions.

3. Improve market efficiency and reduce costs

In various aspects of human daily life, financial activities, and trade activities, clearing and settlement are ubiquitous. For users, it is simply a matter of making a payment and the money is transferred, but there are many clearing and settlement processes involved behind the scenes.

In the traditional financial system, clearing and settlement are "computational" accounting and confirmation processes. Parties reach consensus through continuous verification and validation, and on this basis, asset transfers are conducted. This requires collaboration among multiple financial sectors and a significant amount of manpower costs, and it may face operational error risks and credit risks.

Blockchain eliminates many intermediaries through distributed ledgers and automated smart contracts, enabling round-the-clock payments, instant receipts, and easy withdrawals, meeting the convenient needs of cross-border e-commerce payment settlement services. Assets can be autonomously transferred among parties via smart contracts and stored in an immutable ledger, creating a global integrated cross-border payment trust platform at a lower cost, reducing the financial risks brought by cross-border payment fraud.

4. Traceability and programmability

The 2008 financial crisis is a classic case of a global financial disaster triggered by financial derivatives. Financial institutions packaged subprime mortgages into securities ### such as MBS and CDOs ( and sold them to investors, creating complex financial products that people could not trace back to the underlying real assets. These layered and packaged derivatives were sold to various brokerages and investors, leading to a rapid increase in the leverage of the entire financial system, ultimately triggering a financial tsunami.

If RWA technology had been applied in 2008, investors would have been able to trace the underlying assets of these financial instruments and trade based on a full understanding of asset risks. This transparency would fundamentally change the way asset management and trading are conducted. Through blockchain technology, each transaction is recorded on an immutable ledger, providing clear and auditable ownership and transfer records. This not only significantly reduces the risks of fraud and mismanagement but also makes it easier for regulators to track activities and ensure trust between financial institutions and their clients.

Another case that demonstrates the benefits of programmability and traceability is Unizon's "Digital Invoice Tokenization" project. Small and medium-sized enterprises often find themselves in a dilemma when faced with the issue of invoice verification: they struggle to secure orders from large enterprises without accepting delayed payment terms; however, accepting orders may lead to cash flow constraints. Unizon creates payment accounts and accounts receivable accounts through ERC-3525, forming a payment channel similar to quantum entanglement, where funds are automatically distributed to the accounts receivable account as long as the buyer remits to the payment account.

By converting invoices into digital tokens, Unizon enables the rapid transfer and trading of invoices. This transforms invoices from mere paper documents into digital assets that can be managed on the blockchain. All transaction records are recorded on the blockchain, ensuring transparency and immutability of information.

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3. RWA Project Classification and Representative Project Operating Mechanism

RWA projects mainly involve infrastructure