Bittime - By using tokenization, blockchain technology can meet the world of traditional finance. Tokenization of assets such as property and gold could change the face of decentralized finance. This article discusses how real world assets (RWA) can be a bridge to connect the world of DeFi (Decentralized Finance) and crypto with traditional finance.
To understand how RWA can fit into the world of DeFi, we need to understand three important processes: formalization outside the blockchain, information linking, and regulation of supply and demand within the RWA protocol.
Important RWA Processes
In summary, these are the three processes:
Formalization beyond blockchain
RWA cannot be directly stored on the blockchain. The value, ownership and legal status of the asset must be clear first.
This usually requires proof of ownership such as a certificate or deed, as well as an assessment of the market value, previous ownership history, and condition of the asset.
Information connector
At this stage, physical assets are converted into digital tokens. Important information regarding asset value and ownership will be stored in the token's metadata. The advantage of blockchain is transparency.
Also read: Real World Asset (RWA): A Brief History of RWA Tokenization that You Must Know!
This allows anyone to check the authenticity of the token through the metadata. For highly monitored assets, regulatory compliance is also important.
Demand and supply in RWA protocol
The presence of a dedicated RWA DeFi protocol can make this process easier. This protocol aims to simplify the creation of new RWAs and attract investors' interest in trading these assets.
The protocol also regulates supply and demand so that RWA can function properly in DeFi. Essentially, this protocol creates a real-world system of law and judgment within a decentralized digital world.
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The Importance of RWA in DeFi Measurement
Total Value Locked (TVL) is a measure of the amount of capital stored in a DeFi protocol. During the “DeFi Summer” in November 2021, TVL reached $180 billion.
However, this figure then fell to $49.87 billion in June 2022. The world of DeFi is indeed volatile. Market changes make investors look for stable long-term investments. This is what makes RWA expected to become increasingly popular after 2021.
Facts and Figures: A Look at the RWA Market
Research shows that in the period 1 January to 30 September 2023, the RWA market experiences significant growth:
- The value of RWA on the blockchain (excluding stablecoins) increases by $1.05 billion in 2023.
- Treasury securities, property and private credit contributed 82% of that growth, or $855 million.
- Private credit loans active on the blockchain increased by $210.5 million.
- Treasury bills and other bonds increased by $557 million during the period.
Major Players in RWA Market
To create an RWA, publishers must purchase physical assets, convert them into tokens, and then distribute them on the blockchain. Some well-known RWA publishers include:
- Centrifuge: Popular platform for credit lending on the blockchain.
- Franklin Templeton: Top traditional financial institution with total assets under management (AUM) of more than $1.5 trillion. Franklin Templeton recently dived into the world of crypto by issuing treasury tokens.
- WisdomTree: Market leader in exchange-traded fund (ETF) products with total assets under management approaching $96 billion.
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Advantages and Limitations of RWA in DeFi
Profit:
Higher liquidity
With tokenization, hard-to-sell assets such as property become more accessible to investors. Digital tokens make the market more liquid and attract more investors.
Assets broken down into smaller units also allow investors to diversify, thereby increasing market liquidity.
Fractional ownership
RWA makes investing more accessible. Tokenization allows people to purchase partial (fractional) ownership of a property or other asset, instead of having to buy it in its entirety at a high price. This makes investing more inclusive, even for those with limited capital.
Transparency
RWA transactions are recorded on a public blockchain, making them immutable and transparent. All transactions are recorded on the blockchain and provide an immutable audit record.
This increases investor confidence because they can directly check ownership and transaction history quickly and without intermediaries.
Inclusivity
DeFi tokenization makes assets more accessible by allowing easier investor participation. High minimum investment requirements or complicated rules often discourage small investors from investing in certain assets through traditional finance.
On the other hand, RWA allows anyone to invest in fractional ownership of valuable assets, making investing more inclusive.
Also read: What are Real World Assets (RWA), 5 Crypto & Blockchain Coins That Use the RWA Narrative
Limitations:
Regulatory complexity
Rules for RWAs vary depending on asset type, jurisdiction, and tokenization blockchain platform, making regulation complex. Issuers and investors struggle to meet regulatory requirements because they change frequently and vary by location.
Security
Linking physical assets and digital tokens is important to prevent fraud and legal disputes. Smart contracts and blockchain networks with security gaps can compromise RWA.
People may lose assets or become involved in ownership disputes. Only strong security measures such as multi-factor authentication and secure storage can mitigate this risk.
Scalability
Scalability is becoming important for blockchain networks and DeFi platforms as the use of RWA increases. Transactions and data throughput can overload the network, making it busy and slower to process. The increasing demand for RWA in DeFi requires layer 2 protocols to address this issue.
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Conclusion
Despite its drawbacks, RWA could change the world of DeFi. RWA combines traditional and decentralized finance, opening up new opportunities for investors and asset owners. However, to maximize the potential of RWA, collaboration between industry players, clear regulations and improvements in blockchain technology are needed.
As DeFi develops, RWA may become more important for diversifying investment portfolios, increasing market liquidity, and expanding access to a variety of assets.
The DeFi community can transform RWA by addressing regulatory, security, and scalability issues. The new era of decentralized finance will be more open, transparent and accessible.
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Also read:
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DISCLAIMER: This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.
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