Binance Research Report Overview of the RWA Ecosystem
Binance Research Report on RWA Ecosystem
Author: Binance Research; Translator: LianGuai0xxz
1. Key Points
The tokenization of real-world assets (RWAs) continues to gain traction as user adoption increases and large institutions enter the space.
Combined with lower decentralized finance (DeFi) yields, rising interest rates have sparked interest in tokenized government bonds.
Currently, the total funds invested in tokenized government bonds exceed $600 million, with an annualized return of approximately 4.2%.
By 2030, the tokenized asset market is expected to reach $16 trillion, with significant growth potential surpassing $310 billion in 2022.
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Many protocols have integrated RWAs or participated in their growth. This article provides a brief overview of MakerDAO, Maple Finance, and Ondo Finance, among others.
It has been over four months since Binance first released a report on real-world assets. What changes have occurred in the market landscape and what are the latest developments? This report will explore all of this.
2.1 Introduction to Real-World Assets
Before delving into charts and the latest market data, we summarize several key points about real-world assets (RWAs) in this section. This covers the basic concepts of RWAs and serves as a quick introduction to the field.
What are Real-World Assets?
As the name suggests, real-world assets represent tangible and intangible assets in the physical world (e.g., real estate, bonds, commodities, etc.). The tokenization of RWAs allows us to bring these off-chain assets onto the blockchain, opening up new possibilities in terms of composability and potential use cases.
Figure 1: Examples of Real-World Assets
By tokenizing RWAs, market participants can enjoy greater efficiency, transparency, and reduced human errors, as these assets can be stored and tracked on-chain.
How does the tokenization process work?
To bring RWAs onto the blockchain, ownership and representation of the assets must be recorded on the blockchain. While the specific mechanisms may vary, the typical process involves tokenizing the assets on-chain after formulating the transaction terms.
Figure 2: Example of On-Chain Tokenization Process
2.2 RWA Ecosystem
The RWA ecosystem is diverse and steadily expanding as more projects enter the market. Some projects provide support in areas such as regulation, technology, and operations to bring real-world assets into the crypto space. We broadly refer to these projects as “RWA infrastructure.” Additionally, there are “asset providers” that focus on proposing and creating various categories of RWAs, including real estate, fixed income, stocks, etc.
Figure 3: RWA Ecosystem Map
Blockchain: A permissioned and permissionless blockchain specifically tailored for RWAs.
Securitization/Tokenization: Bringing RWAs onto the blockchain.
Compliance: Ensuring compliance services for investors and issuers.
Real Estate: Proposing and creating RWAs supported by real estate.
Climate Products: Proposing and creating RWAs supported by climate assets.
Private Credit: Proposing and creating RWAs supported by private fixed income.
Public Credit/Equities: Proposing and creating RWAs supported by public fixed income and equities.
Emerging Markets: Proposing and creating RWAs from emerging markets.
Trade Financing: Proposing and creating RWAs supported by trade financing.
3. RWA Growth and Prospects
The RWA market is in its early stages of development, but there are already signs of growth, with Total Value Locked (TVL) increasing. Currently, according to protocols tracked by DeFi Llama, as of the end of June 2023, RWAs rank as the 10th largest sector in DeFi, up from 13th a few weeks ago. One significant contributor is the stUSDT protocol launched in July, which allows USDT holders to earn returns based on RWAs.
Figure 4: RWAs ranked 10th on DeFi Llama
It should be noted that the above data may be underestimated, as not all protocols are captured, and data may be less accessible when tokenizing on private blockchains. Nevertheless, the rising ranking of RWAs as a category demonstrates increasing adoption of RWA protocols.
By using the number of RWA token holders in Figure 5 as a proxy for RWA adoption, we observe a steady growth in this data point. Currently, there are over 413,000 RWA token holders on the Ethereum blockchain. While this may not be a large number, the number of RWA token holders has significantly increased compared to a year ago, more than doubling from 179,000 to the current 413,000.
Figure 5: Steady growth in the number of RWA token holders
3.1 Rise of US Treasury Bonds
One highlight in the RWA space in recent months has been the tokenization of US Treasury bonds. US Treasury bonds are sovereign debts issued by the US government and are widely regarded as risk-free assets in traditional financial markets. With rising interest rates, US Treasury bond yields have been steadily climbing and now significantly exceed DeFi yields.
Figure 6: US Treasury Yield Exceeds DeFi Stablecoins
Intuitively speaking, assuming other factors remain constant, capital will flow to the most competitive yield places, and US Treasury bonds are very prominent in this regard. Investors can now invest in tokenized US Treasury bonds today without leaving the blockchain, realizing the use of real-world returns. This fully demonstrates the practicality of RWAs.
In fact, the tokenized US Treasury bond market is currently valued at approximately $60.3 billion, which means that investors are actually lending this amount to the US government with an annualized yield of approximately 4.2%.
Figure 7: Tokenized US Treasury bond market value is $60.3 billion
The protocols and companies participating in the US Treasury bond market include Franklin Templeton, Ondo Finance, Matrixdock, etc. Compound’s founder Robert Leshner recently announced the launch of his new venture “Superstate” and submitted documents to the US Securities and Exchange Commission to create a short-term government bond fund that uses the Ethereum blockchain as a secondary accounting tool.
It should be noted that investing in tokenized US bonds is not without risks. For example, investors holding US bond positions are exposed to term risks associated with such investments, i.e., interest rate fluctuations may cause price fluctuations (although the term risk of short-term notes is relatively low). Other key considerations include tokenization structure, fees, and KYC processes.
3.2 Prospects of RWAs
According to a report by Boston Consulting Group, the market size of tokenized assets is expected to reach $16 trillion by 2030. This will account for 10% of the global GDP at the end of the 2030s, a significant increase compared to $310 billion in 2022. This estimate includes on-chain asset tokenization (more relevant to the blockchain industry) and the fragmentation of traditional assets (such as exchange-traded funds (ETFs) and real estate investment trust funds). Considering the potential market size, even capturing a small portion of this market will have a huge impact on the blockchain industry.
Figure 8: Market size of tokenized non-liquid assets estimated to reach $16 trillion by 2030
Even at $16 trillion, tokenized assets are still only a small fraction of the current total global asset value, estimated at $900 trillion (less than 1.8%, and not considering the growth of future total global asset value). It can even be considered that the real potential market is the entire global asset market, as anything that can be tokenized can be represented as RWAs on the chain.
Figure 9: RWAs have tremendous growth potential
4. RWA Protocols
In order to demonstrate how some protocols integrate RWAs, this section focuses on some market participants. In addition to the following protocols, our previous reports have covered Centrifuge and Goldfinch, among others.
Note: Mentioning specific projects does not constitute endorsement or recommendation of those projects. The mentioned projects are only used to illustrate the adoption of RWAs. Additional due diligence should be conducted to better understand these projects and the associated risks.
Maple Finance is an institutional capital network that provides infrastructure for on-chain lending businesses to credit experts, connecting institutional borrowers and lenders. Maple Finance has three main stakeholders: borrowers, lenders, and pool delegates.
Institutional borrowers can access financing options on Maple Finance.
Lenders can earn returns by lending assets to borrowers.
Pool delegates are credit professionals who evaluate, manage, and underwrite loans.
While Maple Protocol previously focused on unsecured cryptocurrency loans, it has recently ventured more into RWA-based loans. Previously, unsecured cryptocurrency loans left Maple with over $50 million in bad debt. These losses stemmed from the collapse of centralized exchanges last year, spreading to Maple’s native cryptocurrency borrowers.
Currently, Maple Finance is one of the market leaders in the private credit space, with over $332 million in outstanding loans.
Figure 10: Outstanding loans of private credit companies
Capitalizing on the increasing demand for US Treasuries, Maple launched a US Treasury pool in April, allowing non-US accredited investors and entities direct access to US Treasuries. This pool is backed by US Treasuries and repurchase agreements, with a target net annualized yield of the current one-month US Treasury rate minus 1.0% annual fees and expenses. This essentially provides cash management solutions for stablecoin holders to earn returns.
Overall, products like RWAs offered by Maple Finance demonstrate the potential to address today’s challenges while providing another way for crypto users to earn returns on their held assets.
Figure 11: Maple’s cash management solution addresses current challenges.
As the protocol behind the DAI stablecoin and the third-largest DeFi protocol, MakerDAO is undoubtedly a familiar name to many in the crypto space. Borrowers deposit collateral into MakerDAO’s vaults and can withdraw debt priced in DAI accordingly.
MakerDAO’s attempts to integrate RWAs can be traced back as early as 2020 when MakerDAO voted to allow borrowers to collateralize RWA-based assets in the vaults. Since then, MakerDAO’s RWA vault has grown to $2.3 billion. It is worth noting that its RWA growth has primarily occurred in the past year or so, coinciding with the rise of real-world revenues.
Figure 12: MakerDAO currently holds over $2.3 billion in RWA positions.
Considering that RWAs account for 49.2% of MakerDAO’s total assets, it is also a contributor to the protocol’s income on a year-on-year basis. Specifically, since the end of 2022, the share of RWAs in protocol revenue has significantly increased and currently accounts for 50.8% of protocol revenue.
Figure 13: Significant increase in the contribution of RWAs to MakerDAO’s revenue over the past year.
Figure 14: RWAs account for over half of MakerDAO’s annualized revenue.
RWAs, especially U.S. Treasury bonds, may continue to play an important role on MakerDAO’s balance sheet in the foreseeable future. Recently, MakerDAO purchased $7 billion worth of U.S. Treasury bonds in June, increasing its holdings to $12 billion. Having a diversified collateral base, including RWAs, allows MakerDAO to take advantage of the current yield environment and spread risks.
Ondo Finance provides institutional-level investment products and services on the blockchain. The company is led by former Goldman Sachs employee Nathan Allman and has received support from notable investors such as Peter Thiel’s Founders Fund, Coinbase Ventures, and Tiger Global.
Ondo offers four RWA products, providing investors with access to a range of cash management products and bond funds. During the process, investors can deposit USDC and convert it to USD to purchase assets such as ETFs or funds. In return, new liquidity providers receive a custody certificate that can be further used in other protocols.
Figure 15: Ondo Finance’s products.
Ondo Finance is currently one of the market leaders in the tokenized U.S. Treasury bond space, second only to traditional financial asset management company Franklin Templeton.
Figure 16: Ondo Finance holds a 25.9% market share in the tokenized U.S. Treasury bond market.
It is worth noting that Ondo Finance has recently expanded its operations to the Polygon network. As part of a “strategic alliance,” it has launched its OUSG token on the Polygon network, which represents the tokenization of Blackrock’s iShares Short Treasury Bond ETF. This is Ondo Finance’s first expansion outside of the Ethereum network, and we will pay attention to the impact of this move on adoption.
5. Notable Developments to Watch
In 2023, tokenization was referred to as the “killer app of traditional finance” by JPMorgan Chase and called the “future market” by Larry Fink, CEO of BlackRock.
Interestingly, we have noticed that in addition to DeFi protocols, traditional financial institutions are also showing increasing acceptance of tokenized RWAs. For example, global asset management company Franklin Templeton has launched its own fund on the public chain. In addition, some institutions are starting to explore building their own private blockchains for asset tokenization.
Looking ahead, it is foreseeable that traditional exchanges may play a role in the secondary trading of tokenized RWAs, especially as adoption rates increase. It has been reported that the Australian Securities Exchange may consider listing tokenized RWAs on its platform in the future. As this field continues to mature, regulatory development will be a driving force for mainstream adoption.
Figure 17: Timeline of institutional adoption and market development
January 10, 2023: Goldman Sachs launched its new digital asset platform, GS DAP, developed using the Daml smart contract language and its privacy-enabled blockchain, Canton. Its goal is to achieve digital representation of assets and automate workflows within the ecosystem, including “tokenized assets, digital currencies, and other financial instruments.”
January 31, 2023: Intain launched its IntainMARKETS solution on Avalanche, providing a tokenized market for structured financial products.
February 15, 2023: Siemens, the largest industrial manufacturer in Europe, issued a one-year $64 million digital bond on Polygon, with investors including Dresden Bank and Union Investment, aiming to streamline processes and eliminate the need for central clearinghouses.
April 26, 2023: Franklin Templeton announced the on-chain integration of its U.S. government money market fund on the Polygon blockchain. This $272 million fund primarily invests in government bonds, cash, and repurchase agreements.
May 9, 2023: Canton Network launched a consortium of financial institutions on its blockchain, including BNP Paribas, Chicago Mercantile Exchange, Goldman Sachs, and Microsoft. It will provide a decentralized infrastructure for tokenization and blockchain interoperability.
June 2, 2023: MakerDAO has approved multiple proposals to open up RWA vaults to generate yield for its USDC and DAI assets. In April, the protocol opened a vault for Coinbase custody and approved up to $500 million USDC stablecoin for a 2.6% yield. Subsequently, on June 2, the community voted to approve a partnership with BlockTower to open a new vault for short-term U.S. government bonds with an investment limit of up to $1.28 billion.
June 7, 2023: Centrifuge launched its new product, Centrifuge Prime, providing technical and legal frameworks for DAO investments in RWAs. Previous partners include Aave and MakerDAO, both of which have utilized the Centrifuge platform.
June 21, 2023: The Monetary Authority of Singapore collaborated with the Bank for International Settlements to propose a framework for designing tokenized digital asset open and interoperable networks. Tokenization experiments, known as “Project Guardian,” have been conducted in wealth management, fixed income, and foreign exchange, with participating banks including Standard Chartered, HSBC, DBS, and Citigroup.
June 23, 2023: Mitsubishi UFJ, Japan’s largest bank, is in discussions with institutions to use its Progmat blockchain platform to issue stablecoins pegged to foreign currencies, including the US dollar, for global use. The bank also plans to leverage the platform to facilitate the issuance of securitized tokens by third parties.
June 28, 2023: The founder of Compound has applied to launch “Superstate”, a project that will create a short-term government bond fund on the Ethereum blockchain. It will invest in “ultra-short-term government bonds,” including U.S. Treasury bonds and government agency bonds.
June 29, 2023: Maple Finance’s new lending division, Maple Direct, will issue overcollateralized loans to Web3 businesses. These loans will be backed by BTC, ETH, and collateralized ETH.
June 29, 2023: The European Central Bank outlined its exploration of wholesale central bank digital currencies, while also exploring other options to support DLT transactions. This will include experiments with central bank fiat currencies starting from 2024.
June 29, 2023: Mastercard is testing an experimental project called “Multi-Token Network”, initially exploring tokenized bank deposits. The future plans include central bank digital currencies and regulated stablecoins.
July 2, 2023: The first Tron-based RWA product, “Collateralized USDT” (stUSDT), is officially launched on JustLend. Users who collateralize USDT on this platform will receive stUSDT. The collateralized assets will be invested in RWAs to generate returns.
July 17, 2023: The Financial Stability Board has published a work plan to explore asset tokenization projects and assess their vulnerabilities and policy implications for the financial system. This is in line with the Payments and Market Infrastructures Committee’s exploration of “the benefits, risks, and challenges of a tokenized financial ecosystem for central banks.”
For blockchain technology, tokenizing real-world assets provides a compelling use case that has the potential to onboard the next wave of users into cryptocurrencies. By offering greater transparency and efficiency, tokenization can be an attractive alternative to existing mechanisms. We have already seen traditional institutions exploring this technology, which may solve the inefficiency problems in current solutions.
The diffusion of tokenized RWAs is also a positive development for cryptocurrency investors, as they now have access to opportunities beyond the crypto ecosystem. In addition to being able to leverage higher government bond yields, the introduction of RWAs brings more stable assets to DeFi and increases collateral diversity in the field. Looking ahead, we anticipate continuous innovation and development in the RWA space, bringing forth more use cases and driving the adoption of cryptocurrencies.