The Rise of RWAs
2023 has been a pivotal year for the growth of tokenized securities, particularly short-term US Treasury assets. The market cap of these assets has surged by roughly 577%, hitting an all-time-high of $794M. This impressive growth is fueled by a positive market outlook, mostly driven by the positive sentiment around the potential launch of Bitcoin ETFs and the efforts to provide regulatory clarity for the DeFi industry. Together, these factors build a positive environment that should lead to a sustained demand for offerings in the RWA sector moving forward.
At its core, RWAs are on-chain representations of off-chain assets, where those are tokenized into digital tokens signifying a claim to the actual asset.
Using these physical assets as collateral, both individuals and financial institutions can get approval from DeFi protocols to obtain on-chain loans backed by these assets.
In 2022, the total debt from on-chain loans decreased by 55%, falling to $703M and reflecting the overall downturn in market conditions. However, in 2023, the sector rebounded significantly, with DeFi protocols facilitating $3.9B in loans, mainly through private credit loans backed by stablecoins.
This growth can be primarily explained by the speed and ease of obtaining loans, especially with illiquid assets, as capital can be quickly secured once a user or institution is verified. Furthermore, smart contracts efficiently match borrowers with lenders, and the immutable and transparent nature of blockchain transaction records streamlines the auditing process. These advantages promote broader participation, particularly from users with a lower investment threshold.
The growth in demand has also translated well to these RWA DeFi protocols; the native tokens of these protocols have shown 290% increase in returns for 2023, outperforming $ETH by more than 3 fold. If the trend continues to hold true, increasing demand for RWA offerings will bring greater returns to these DeFi protocols, with larger protocols such as MakerDAO, Maple Finance, Centrifuge, and Goldfinch poised to reap the lion’s share of the rewards.
The steady growth in on-chain loans backed by RWAs and the rising market cap of tokenized securities indicate growing demand from both retail and institutional investors for RWAs on-chain.
MakerDAO, the largest decentralized stablecoin protocol, has 52% of the total market cap of its $DAI stablecoin backed by RWAs, mainly US Treasury Bills, with the yields passed entirely on-chain to $sDAI holders. Additionally, the introduction of tokenized securities also enables retail users to directly access US T-Bills, which might otherwise be unavailable due to location or legal constraints.
With the increasing availability of on-chain services, there is significant room for growth in the on-chain loan market. Yet, it is crucial to make sure that as demand in the industry rises, barriers to adoption does not impede progress. As companies pursue technological advancements and expand their revenue sources to include blockchain offerings, developing regulated infrastructure and service providers is key. This will support individual investors on a large scale, ensuring a steady flow of liquidity in the RWA sector.