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Integrating real-world traditional assets, or RWA, into blockchain is not a new topic of discussion. Major institutional players, from Euroclear to Goldman Sachs, have looked to tokenization to reduce transaction fees, execution time, and database management costs and to make attestation and proof-of-stake procedures much less tedious.
2023 became the year that theory finally began to turn into practice. The private credit market, shattered by the fallout from the Terra Luna collapse in 2022, Recover By 60%, the main beneficiary base has shifted from the original crypto finance companies to the automotive sector (42% of private credit tokenized in 2023). However, even more significant for the industry was the emergence of an entirely new type of RWA product – tokenized Treasuries. Tokenized Treasuries aim to eliminate what currently makes up the largest share of RWA – stablecoins. Treasuries, which are sought after by retail and institutional investors alike and are seeing a seven-fold growth in volume, bring to the blockchain an essential element of maturity and stability. It looks like we are approaching the most important year yet for RWA tokens.
Leading blockchain technological developments in the past few years have addressed various types of transaction optimization, helping to achieve greater efficiency, security, and scalability. For example, the development of layer 2 solutions such as zero-knowledge proofs or optimistic sets has helped increase initial blockchain throughput, reduce transaction execution time, and significantly reduce network gas fees and stability.
While L2 pushed forward the capabilities of individual blockchains, cross-chain communications projects created additional value for the network. Enhancing the ease and security of interoperability has increased the usability of the web3 ecosystem as a whole.
On top of these developments, new services have emerged, improving the efficiency of RWA encoding. Maple, Centrifuge, Backed, and many others have taken well-researched concepts around challenge, liquidity pools, and collateralized lending and applied them to traditional finance. This allowed its users to invest in real corporate bonds in different jurisdictions, get a share of the private credit pie, and engage in token borrowing with institutional lenders.
In early 2023, Ondo Finance released the Ondo Short-Term U.S. Government Bond (OUSG) Fund, which provides investors with access to a token version of BlackRock's iShares Short Treasure Bond ETF (NASDAQ: SHV). While OUSG has only amassed just over $110 million in total value locked in one year, this signals the beginning of a new, much less obvious trend – the rise of token US Treasuries.
According to Fed research and DeFi Llama data, the overall portion of real-world assets is more than challenging Doubled During the past year. While this can partly be attributed to institutional infrastructure releases e.g Goldman SachsDigital Asset Platform (GS DAP) and JP MorganThe network of tokenized collateral, private credit and digital bonds alone cannot explain the thriving dynamism of the overall market. Instead, special attention should be paid to issuing token short-term US government bonds.
Investors may have been attracted to risk-free short-term debt in the wake of ongoing increases in the federal funds rate – a natural market dynamic. Another part of the equation is the collapse of abnormal returns across the cryptocurrency landscape. According to According to Coinchange's Defi return benchmarks, Defi's minimum risk returns ranged around 4-5%. This has not only significantly narrowed the spread with Treasuries, but has sometimes pushed it into negative territory.
While token asset markets have shown some signs of maturity in 2023, many unanswered questions still prevent the transparent development of the RWA industry. The most important of which is, of course, regulation: until there is an unambiguous guiding framework or bankruptcy precedent in one of the major jurisdictions, it cannot be said with certainty that tokenized assets represent the same seniority claim as the underlying asset from a legal perspective. Another degree of freedom is the way the infrastructure will evolve to enable efficient access to tokenized asset markets.
However, the increase in RWA adoption is expected to continue more broadly in 2024, as tokenized Treasuries become the biggest beneficiary of renewed interest. I see this asset class as the ideal product market suitable for risk-averse investors: unlike stablecoins, token treasuries are immune to tremors in confidence, are completely safe as long as the underlying smart contract is carefully audited, and generate a return. In fact, we have already witnessed the beginning of comprehensive reform. Starting in April 2024, capital will be allocated to tokenized US Treasuries I exceeded $1.09 billion – nearly a tenfold increase from $114 million at the start of 2023.
To me, such a warm reception calls for urgent expansion of the scope beyond the most obvious solution – especially since tokenized Treasuries are not a one-size-fits-all tool. Nearly a trillion dollar market increase At a compound annual rate of 19.1%, the sukuk – the closest analogy to bonds in Islamic finance – will be the next version to appear on the series. Islamic law prohibits investing in interest-bearing securities because they are considered usury forbidden activity, therefore conventional bonds are not available to participants in the Islamic religious market. Instead, sukuk circumvent the ban by providing partial ownership of the asset and claiming a portion of the resulting cash flow. I believe that the potential tokenization of the Sukuk will give the Islamic community an opportunity for a secure cross-border state Halal Investing online, taking digital Islamic finance to a new level. With the gradual rise of regional cryptocurrency markets in the MENA region and the continued involvement of companies and governments in investing in infrastructure, I believe that potential cross-chain instruments will have a well-suited target audience.
The prospect of a rise in digital bonds does not mean that stablecoins have died out just yet. Conversely, 2024 could finally bring competition and diversification to a market that has long been effectively divided between Tether and Circle. From controversial concepts like USDe to new entrants with reliable models like the Ripple stablecoin, the once quiet stablecoin market is experiencing a shake-up. In this regard, I think the most underrated opportunity here that deserves special attention is gold-backed stablecoins, considering that gold is in the media spotlight after reaching an all-time high price level. Although it was not an entirely new concept, his previous achievements lacked technical excellence and liquidity and attempted to enter an ill-timed market. In a turbulent reality where gold bars from Costco exist Swept From the shelves, I think it's only a matter of time before the promising idea receives a new edition.
Overall, it appears that tokenized real-world assets have made it past the start stage. In my opinion, 2024 is likely to bring broader adoption of existing instruments, especially tokenized Treasuries, and generate competition and innovation, specifically in the markets for sukuks, fiat currencies and gold-backed stablecoins.
