Is the tokenization of real-world assets going mainstream?

Following the launch of BlackRock’s tokenized money market fund BUIDL in March, the real-world asset (RWA) tokenization sector has been gaining significant traction. This renewed growth after a period of consolidation saw several RWA tokens break all-time highs, as well as a spike in active users and assets locked across RWA protocols. Now with many financial institutions and governments announcing their own tokenization initiatives, will this trend continue throughout 2024?

We have discussed the RWA tokenization topic often, but not without good reason. The growing hype around this trend now seems far beyond the point of speculation. Not long ago, Proof of Concepts were investigating the potential benefits of tokenization, but these benefits now seem to be well-founded given the number of protocols and traditional institutions now actively tokenizing financial instruments.

Research from BCG, McKinsey, Roland Berger and Bain & Company  all suggest that the asset tokenization sector has the potential to reach anywhere between USD 4-16 trillion in the coming years, but even some analysts believe this to be a conservative estimate. This is due to the sheer size of traditional markets and should the tokenization sector capture just a small fraction of its market share, we are looking at potential numbers that go beyond the crypto market’s USD 2.5 trillion market cap.

For this piece, we want to dive a little deeper into a few key sectors of interest, outlining new products and developments that are enabling users to actively engage with tokenized RWAs and on-chain capital markets.

Real-world asset protocols are ramping up

But just as a quick reminder, RWA protocols provide users with exposure to tokenized RWAs, creating a platform and marketplace to trade them. They provide either off-chain interest-bearing yields (government treasuries, private credit and corporate bonds) or track the price movements of non-interest-bearing assets (commodities and stocks). However, consumer trends show a strong preference for direct returns, given that yield-bearing assets now account for over 90 percent of the sector’s total value locked.

The evidence of growing interest can be supported by a couple of critical factors. For one, the strong performance of several protocols in comparison to the rest of the market, with some RWA tokens clearly outperforming major assets like Bitcoin and Ethereum (see chart below). Two, the increase in active users and transactions has risen substantially. And three, the launch of tokenized financial products from protocols and TradFi heavyweights which have gathered significant assets in a short period of time.

Chart: Price performance of RWA tokens vs. Bitcoin and Ethereum (%)

Source: CoinMarketCap (RWA tokens: Ondo, SMT, Mantra, CFG, Polyx, Propy)

The growing popularity of tokenized RWAs in DeFi began when fiat assets started to compete with DeFi yields during the bear market. Since the Federal Reserve’s aggressive interest rate hikes and ongoing inflation concerns, US treasury yields have become more attractive, leading to the increased demand from both TradFi and DeFi users. A number of RWA protocols and stablecoin issuers capitalised on this by offering exposure to tokenized US treasuries, while some even offer ways to leverage or “stack” these yields, although with higher risk (rising US government debt can increase treasury yields short-term but may also introduce long-term sustainability risks.). Meanwhile, tokenized private loans offering low double-digit yields have also made these RWA models more lucrative.

With these new yield opportunities on the table, we could argue that many now view tokenized RWAs as a more attractive path, simply due to their familiarity with TradFi products. But perhaps an even bigger catalysts is the increasing involvement of TradFi heavyweights actively pushing the RWA narrative.

For instance, in March, the launch of BlackRock’s tokenized treasury fund BUIDL sparked renewed interest in the sector, causing a spike in the total value locked across many RWA protocols and an increase in several RWA token prices.

Chart: Total value locked (TVL) across real-world asset protocols

Source: DeFiLlama

Tokenized treasuries

One of the hottest RWAs in the sector is tokenized US treasuries, which are basically digital representations of these government bonds, allowing them to be traded as tokens on the blockchain. As treasury bill (T-Bill) rates started to exceed DeFi yields and stablecoin yields weakened in late 2022, the demand for these tokenized assets began to increase substantially.

Ever since, tokenized treasuries have shown little signs of slowing down (despite DeFi yields having recovered strongly in recent months). The market is now worth nearly USD 1.3 billion and spread across several blockchains including Ethereum, Stellar, Polygon and Solana. In fact, the market value has risen by more than tenfold since 2023, and even spiked 20 percent after BlackRock’s BUIDL launch in March this year.

So why is BUIDL so important exactly? BUIDL was launched on the public Ethereum blockchain and is the world’s leading asset manager’s first tokenized money market fund backed by US Treasury bills and repurchased agreements. Launching on a public blockchain is a big deal as it demonstrates the endorsement from TradFi institutions of decentralised blockchain technologies, rather than private, centralised adaptations that many TradFi participants are known to use. Today, the fund became the world’s largest tokenized fund attracting over USD 380 million just several weeks after its launch (surpassing Franklin Templeton’s FOBXX fund).

DeFi protocols are also benefiting from TradFi’s involvement. Ondo Finance, a leading RWA protocol which launched its own token and fund allowing stablecoin holders to invest in bonds and US treasuries, recently moved USD 95 million of its assets to BUIDL. It was the first crypto protocol to fully leverage BlackRock’s fund for its own retail offerings, and likely played a role in causing Ondo Finance’s governance token ONDO to rise almost eightfold since January.

Chart: Tokenized treasury product market caps

Source: Dune, 21shares

Other noticeable growth spikes in tokenized treasuries were also driven by new products launched on the Ethereum and Solana blockchains. These include Ondo Finance’s USDY, Open Eden’s TBILL Vault, and OpenTrade’s Fixed Term US Treasury Bill Vaults, the latter offering secured lending against treasury bills using Circle’s USDC stablecoin.

The adoption of tokenized treasuries has also extended to the crypto exchange sector. Woo X became the first exchange to offer a retail-focused product, RWA Earn Vaults, allowing users to access an interest-bearing account backed by US treasury bills.

Private credit

Another RWA category is tokenized private credit, which saw a steady recovery after the 2022 defaults following the collapse of Terra and Three Arrows Capital (3AC).

Unlike over-collateralised DeFi loans, private credit protocols allow businesses to obtain unsecured loans based on credit history. These loans cover a range of industries, though primarily led by consumer, automative and FinTech firms.

Centrifuge pioneered this model back in 2020, followed by TrueFi and Maple Finance who account for roughly 80 percent of today’s current market share. RWA.xyz however, recently reported Figure’s tokenized active loans to be USD 7.6 billion on the Province blockchain, although this number warrants further examination given the limited information on whether these are private credit or other secured loans (hence why it has been omitted from the first chart).

Tokenization efforts are in full force in 2024

Beyond treasuries and private credit, 2024 has seen a number of other exciting tokenization efforts, and too many to cover comprehensively. These also include segments such as tokenized “cash on ledger”, tokenized real estate and private equity, luxury art, carbon offsets and reinsurance. Here are a few noteworthy mentions.

• Hamilton Lane introduced a DLT-registered share class for its USD 3.8 billion GPA Fund together with Sygnum Bank on the Polygon blockchain to increase accessibility and efficiency in private market investing.
• RWA platform Re debuted its tokenized reinsurance fund on the Avalanche blockchain with a USD 15 million commitment from Nexus Mutual and raised USD 7 million led by Electric Capital.
• Ondo Finance plans to launch a payment network leveraging tokenized RWAs for real-time payroll payments, while also partnering with asset issuer chain, Noble, to bring its treasury offerings to the Cosmos ecosystem.
• E Money Network launched its testnet, pioneering a modular RWA framework for DeFi using zero-knowledge proofs for identity verification.
• El Salvador and Bitfinex Securities tokenized a USD 6.4 million hotel debt issue for the construction of a new hotel at El Salvador International Airport on the Liquid Network, a Bitcoin sidechain.
• Mantra Chain, a new Layer 1 protocol focused on RWA tokenization, raised USD 11 million led by Shorooq Partners to provide crypto-native users access to tokenized RWAs on the Cosmos network.
• Citibank tested the tokenization of private equity funds on the Avalanche blockchain.
• Hong Kong’s HKMA announced Project Esemble together with major financial institutions to support Hong Kong’s tokenization market, with HBSC exploring tokenization for client investment opportunities.
• Untangled Finance announced its first on-chain private credit pool on the Celo blockchain, collateralised by French working capital assets from FinTech firm Karmen.
• Sygnum Bank tokenized USD 50 million of Matter Lab’s treasury reserves in Fidelity International’s money market fund.
• PropyKeys, a new real estate focused platform that allows minting digital addresses corresponding to real-world properties as NFTs, launched on Coinbase’s Base Layer 2 network.

And the list goes on…

Risks and challenges

As promising as RWA tokenization is, we must also acknowledge the very real challenges still facing the sector. Here’s a few to consider:

• The lack of standardisation means regulatory compliance, investor trust, and interoperability remain major bottlenecks, while the decentralised nature of blockchains makes establishing a universal standard a pretty difficult task. Fragmented liquidity across blockchains is another issue, as many networks struggle to communicate effectively with one another.
• Security is another concern. RWA protocols may lack the robust investor protections of traditional finance, increasing the risks if collateral is lost or if vulnerabilities in smart contracts are exploited.
• Liquidity remains limited, although this is improving. Like crypto assets, some tokenized RWAs may be subject to volatility, especially if they are tied to a protocol’s underlying token.
• Lastly, representing RWAs on the blockchain is another critical requirement, where the data input of the token needs to accurately reflect the state of the RWA at all times. Many solutions are addressing this challenge, like decentralised oracles and AI solutions, given the accuracy of data and scalability requirements needed.

Looking ahead

So, what can we take away from this? As we can see from the initiatives above, the RWA tokenization sector encompasses a diverse range of tokenizable assets and exciting opportunities. Activity is ramping up, with new niche segments emerging, market values and RWA protocols growing as well as reputable institutions actively pushing the tokenization trend forward.

Of course, it remains to be seen whether the tokenization sector will exceed the high expectations set by BCG and McKinsey’s research, but the trend is there, and if current initiatives continue to mature, we can assume this trajectory will likely continue.

What we can say with certainty, however, is that real-world asset tokenization is a global trend, and the potential is enormous.

ENDS