Real-world asset (RWA) protocols have become increasingly popular in decentralized finance (DeFi) circles. These protocols allow entities to tokenize and trade a variety of real-world assets, including stocks, government bonds, real estate, and commodities. Referred to as asset tokenization protocols, they offer certain advantages over traditional finance (TradFi) by making smart contracts transparent and enabling a wide degree of financialization of assets by making them divisible, transferable, and tradable on decentralized platforms.

According to recent data, the top uncollateralized lending protocols for institutions, TrueFi and Maple, have increased by 26.6% and 117.8%, respectively, in 2023. Centrifuge, a real-world asset tokenization platform, has also surged by 32% year-to-date. In comparison, the gains recorded by the DeFi pulse index in the same period were 13%. Glassnode’s index of DeFi blue-chip tokens, on the other hand, has lost 7% since the year’s start.

Increased Tokenization of Real-World Assets

Previously, experts had suggested that many DeFi veterans were already implementing RWA-based strategies, but the lack of sufficient RWA on-chain was hindering the ecosystem’s development. However, this is changing due to the increased tokenization of real-world assets. Recent data from Nansen found that the governance tokens of RWA protocols surged significantly in January and April, thanks to the rising interest in them.

The top RWA protocol by total locked value, Ondo Finance, is a DeFi platform that enables stablecoin holders to directly invest in exchange-traded funds managed by top-tier asset managers like BlackRock and Pimco. United States bonds of more than $100 million have been issued via Ondo, per DefiLlama data. Goldman Sachs, Microsoft, and Deloitte have also eyed digital asset tokenization by partnering with the blockchain startup Digital Asset. In February 2023, German technology giant Siemens issued a digital bond on a public blockchain worth $64 million.

The RWA assets account for 25% of the largest decentralized stablecoin Dai’s (DAI) collateral, having increased from zero before the start of the year. MakerDAO, the community-led decentralized autonomous organization, has approved the conversion of centralized stablecoins like USD Coin (USDC) to U.S. Treasury bonds. The DAO accepts tokenized government and corporate bonds and commodities as collateral for minting DAI.

The Risk of Debt Default and Falling Yields

So far, debt market protocols like Maple Finance, TrueFi, Goldfinch, and Clearpool have led the price action and activity among RWA protocols. These protocols enable non-collateralized lending for institutions. However, non-collateralized lending protocols carry the risk of debt default. FTX’s collapse led to a significant decline in Maple Finance’s price and pushed the protocol to the brink of insolvency.

Furthermore, the yields of the U.S. Treasury bonds are set to fall once the Fed starts cutting its benchmark interest rate, which could make these assets less attractive. Despite this, it is encouraging to see the increasing tokenization of real-world assets and their financialization through DeFi finally catching positive momentum as they gain institutional support.

Real-world asset protocols have become a hot trend in DeFi, offering certain advantages over TradFi by making smart contracts transparent and enabling a wide degree of financialization of assets. Increased tokenization of real-world assets has led to the rising interest in RWA protocols, with the governance tokens of these protocols surging significantly in recent months. While non-collateralized lending protocols carry the risk of debt default, the increasing tokenization of real-world assets is a positive trend in DeFi, gaining institutional support.

Analysis

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