By Jake Coleman
2023 will be remembered as the year when real-world assets (RWAs) finally took center stage, receiving the recognition they have long been due.
RWAs Are Setting New Trends in the Industry
In a year filled with various emotions, changing market conditions, and increasing off-chain yields, tokenized RWAs rose to the occasion to address the imminent liquidity crisis in the industry. Through the integration of the “risk-free rate” into the blockchain, developers collaborating on tokenized T-bills and real estate have successfully established a crucial safeguard to mitigate the possibility of significant capital outflow from the cryptocurrency market during the bearish period.
Ever since the beginning of DeFi Summer, it has been widely recognized that the yields in the decentralized finance sector are higher than those in traditional finance. However, it is essential to note that this comes with increased risks when it comes to investing and lending capital on-chain.
However, 2023 brought about an unforeseen change. After the market crash in 2022, the need for borrowing against cryptocurrencies on the blockchain decreased suddenly, resulting in a significant decrease in annual percentage rates (APRs) for stablecoins on lending platforms. This coincided with the Federal Reserve’s assertive increases in interest rates.
Out of nowhere, the “risk-free rate” surpassed the USDC pool on Aave.
Shrinking Supply of Stablecoins
How can a conscientious individual navigate such a perplexing situation? It’s a question that crossed the minds of many in 2023, as we witnessed a significant drop in stablecoin TVL due to the outflow of capital from off-chain sources. Between May ’22 and August ’23, there was a substantial decrease in stablecoin supply, dropping by almost 35% from $181 billion to $123 billion.
For most individuals deeply involved in the world of cryptocurrency and decentralized finance, the obstacles of both financial and emotional nature when it comes to transferring funds off-chain are almost impossible to overcome. If the returns from off-chain sources are currently surpassing the returns from on-chain activities, the builder must integrate those higher yields into the realm of DeFi seamlessly.
And that concluded the tale of 2023. Protocols started to tokenize off-chain yields obtained from various assets such as T-bills, corporate debt, and real estate. And a fresh storyline emerged: RWAs.
RWA Tokenization Is in Full Swing
This paved the way for a surge in RWA tokenization, enhancing the availability and ease of access to top-notch digital assets for individuals who typically lack the means to invest in them. For instance, Martin Carrica devised the Mountain Protocol to address this precise problem, offering customers in inflation-prone countries a means to safeguard the value of their money and earn yields without any risk. As traditional financial institutions also ramp up their tokenization initiatives, the surge in RWA liquidity was well underway.
Despite initial skepticism from critics regarding RWA tokenization, concerns about centralization and regulation persist. Adam Levi, one of the co-founders of Backed, succinctly captures the essence of the situation by stating that the market requires consistent and reliable returns. During a downturn in the market, fixed-income products offer this benefit.
The RWA returns were too enticing to overlook and ultimately proved to be a crucial tool in the category’s resilience during the challenging period for cryptocurrencies. Transferring off-chain returns to the blockchain helped mitigate a more significant decline in TVL during the ongoing bear market.
Consequently, the RWA category experienced a significant increase. A recent report by Galaxy Digital reveals that the on-chain value of non-stablecoin RWAs experienced a considerable increase of $1.05 billion in 2023. The majority of this growth, amounting to $855.7 million or 82%, can be attributed to yield-bearing assets such as Treasuries, real estate, and private credit.
At DefiLlama, the category exhibits a comparable trajectory of expansion, starting at $763 million at the beginning of the year and reaching $5.5 billion at the present moment. This incorporates inputs from recently developed tokenization protocols such as Ondo, MatrixDock, Tangible, and Mountain Protocol, along with MakerDAO, a prominent player in the DeFi space.
MakerDAO has adopted off-chain yield to solidify its position as the leading platform in terms of total value locked (TVL) for real-world assets. The development of DAI, previously only supported by ETH – the most reliable cryptocurrency collateral – to now encompass RWAs is a clear indication of the revolutionary year that was 2023. Nevertheless, the true metamorphosis is only just beginning.
Bringing off-chain yields onto the blockchain is an impressive feat. However, the year 2024 will bring a wave of fresh ideas for developers to explore. They will have the opportunity to fully unleash the potential of integrating these new sources of yield into the decentralized finance (DeFi) ecosystem, thanks to the inherent flexibility and compatibility of the space.
Investors are eager for fresh and enhanced solutions to current services such as immediate leverage, self-replaying loans, liquidity strategies, and other flywheels enabled by this uncorrelated flow of yield.
The rapid ascent of Resident Welfare Associations (RWAs) is just getting started, but the spark was ignited in 2023. RWAs are set to become the dominant category in DeFi, surpassing even the esteemed liquid staking derivative category by a significant margin.
