Unlocking the Potential: Integrating Real-World Assets into Decentralized Finance (DeFi)
The integration of real-world assets (RWA) into decentralized finance (DeFi) has the potential to revolutionize the industry. Not only could it increase volume and adoption for DeFi platforms, but it also offers the opportunity for risk diversification. There are billions of dollars worth of RWA that are currently disconnected from the DeFi ecosystem, but by creating a two-sided lending marketplace, these idle assets could be unlocked and utilized to power a new wave of decentralized applications. In order to continue growing, DeFi must find ways to bring the outside in and tap into the potential of RWA.
These assets are gaining attention as a way to bring more stability and trust to the often volatile world of cryptocurrency. But how do we create trust in RWA within the DeFi ecosystem, and what can be achieved with these assets on DeFi platforms? In this article, we will explore the potential of RWA in DeFi, the ways in which trust is established, and the various possibilities for using these assets to create new opportunities in the world of decentralized finance.
What is a RWA?
Real-world assets (RWA) can take the form of both fungible and non-fungible tokens that represent physical assets, such as real estate, shares of a company, contracts, guarantees or invoices. These RWA can be traded on-chain, allowing for a range of activities including buying, selling, and using them as collateral for loans. The possibilities for utilizing RWA in decentralized finance (DeFi) are vast, offering a new level of accessibility and flexibility in financial transactions.
For example, let’s say we want to take your home ownership on a chain. First step will be to tokenize the property into a single NFT, which will represent that we own the property. Once we have our home NFT, we could use it to apply for a loan and collateralize it with a real-world value asset using our NFT. As you could see, it’s quite similar to a mortgage but instead of the bureaucracy of a bank, you have tokenization.
How do you create trust in RWA?
So the first logical question will be, who will believe me that is really my home? How can investors and lenders trust that there is a real asset behind the NFT?
Here is where on-chain bridges with off-chain. Before you can mint your NFT, there are several third parties that will audit, give a valuation and document the process. These third parties act as service providers that create trust over the underlying asset. All this information will be attached to the NFT, creating what we can think of a respaldatory third-party validated set of documents that authenticate the ownership and value of the RWA.
So, I need to provide my identity.
The answer is yes. As RWAs are associated with identities, the same happens on-chain. To interact with Dapps and protocols that accept RWA, wallet accounts must complete KYC on the behalf of the RWA owner.
Nevertheless, this doesn’t mean that your identity and all the documents are attached to the NFT and public on-chain. A special type of privacy-enabled NFT keeps some or all of the asset’s information private, while the ownership of the NFT remains public on the blockchain.
So, to provide this extra layer of protection to data, only necessary information to identify all these documents are attached to NFT metadata while sensitive data is kept private off-chain.
And what can be made with RWA on DeFi?
Nowadays, RWAs in Defi are mainly used for lending and borrowing markets. Investors and other lending institutions assess the different assets and risks to provide liquidity in exchange for an interest rate. Well-known protocols just as MakerDao or Aave are offering different solutions for liquidity or RWA tokens.
RWAs can play a really important role in DeFi, as they are an opportunity to increase market size exponentially. These types of assets have the potential to unlock trillions of dollars of real-world assets, putting Defi in direct competition with banks and traditional lenders.
RWA means more stability in DeFi
As volatile as it gets, most of today’s DeFi value is created through price speculation of assets considered of high risk for the traditional finance sector. By introducing tangible assets and dynamics that are similar to conventional finance while removing limitations and expanding use cases possibilities, RWAs can bring more price stability to the sector.
With these types of assets and more stability, more secure investment opportunities arise that will appeal to risk-averse investors that today are out of decentralized finance.
Who is using RWA in DeFi?
As mentioned earlier, MakerDAO and Aave are working with RWAs, but two other notable protocols are Centrifuge and Defactor. Centrifuge’s TVL has recently skyrocketed from approximately $80M to over $115M and Defactor facilitated over $24M during 2022. While the wider crypto market is experiencing a downturn, the volume of economic activity in the RWA ecosystem is growing. The returns from the RWA market are not correlated to the wider crypto market which demonstrates the ability of RWA to bring stability to DeFi.
Follow Defactor and Centrifuge on Twitter to keep up to date with the leaders of this growing ecosystem.