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Integrating traditional real-world assets (RWA) into blockchain is not a new topic. Major institutional players like Euroclear and Goldman Sachs have explored tokenization to reduce transaction fees, execution time, and database management costs, and to simplify provenance and proof-of-ownership procedures.
The year 2023 marked a significant shift from theory to practice in RWA tokenization. The private credit market, which had been disrupted by the Terra-Luna collapse in 2022, recovered by 60%. The automotive sector became the primary beneficiary, accounting for 42% of tokenized private credit in 2023. A noteworthy development was the rise of tokenized treasuries. These aim to challenge the dominance of stablecoins, experiencing a seven-fold growth in volume and bringing much-needed stability to blockchain.
The Tech Leap Forward
Recent blockchain advancements have focused on transaction optimization, enhancing efficiency, security, and scalability. Layer-2 solutions like zero-knowledge proofs and optimistic rollups have increased blockchain throughput, reduced execution time, and stabilized gas fees.
Cross-chain communication projects have enhanced interoperability, adding value to the web3 ecosystem. New services like Maple, Centrifuge, and Backed have adapted decentralized finance (DeFi) concepts to traditional finance. These platforms enable users to invest in corporate bonds, partake in private credit, and engage in tokenized borrowing with institutional lenders.
In early 2023, Ondo Finance issued the Ondo Short-Term US Government Bond Fund (OUSG), offering a tokenized version of BlackRock’s iShares Short Treasury Bond ETF. Although OUSG raised just over $110 million in a year, it marked the beginning of a trend towards tokenized US Treasuries.
Tokenized Treasuries in 2023: The Backbone of Growth
According to the Federal Reserve and DeFi Llama, the fraction of real-world assets in DeFi more than doubled in the last year. This growth is partly due to the release of institutionalized infrastructure like Goldman Sachs’ Digital Asset Platform and JPMorgan’s Tokenized Collateral Network. However, the issuance of tokenized US government short-term debt played a crucial role.
Investors were drawn to short-term riskless debt amid Federal Funds Rate hikes. The collapse of abnormal yields across the crypto landscape also contributed, with DeFi yields fluctuating around 4-5%, sometimes even lower than Treasuries.
The Future of RWAs on Blockchain
While tokenized asset markets have matured in 2023, several questions remain, particularly around regulation. Until a clear regulatory framework or a bankruptcy precedent exists, the legal standing of tokenized assets remains uncertain. Infrastructure improvements will also play a significant role in enabling efficient access to these markets.
The adoption of RWAs is expected to continue in 2024, with tokenized treasuries likely to be a major beneficiary. This asset class is well-suited for risk-averse DeFi investors, offering stability and yield without the risks associated with stablecoins. As of April 2024, capital allocation to tokenized US Treasuries exceeded $1.09 billion, a ten-fold increase from $114 million at the start of 2023.
The potential tokenization of Sukuk, akin to bonds in Islamic Finance, could provide a new investment avenue for the Muslim community. Sukuk offers fractional ownership of assets and a claim to generated cash flow, complying with Islamic Law, which prohibits interest-bearing securities.
Stablecoins remain relevant, and 2024 could bring competition and diversification to a market dominated by Tether and Circle. Gold-backed stablecoins, in particular, hold promise given the recent surge in gold prices. This asset class could see renewed interest as technical and liquidity challenges are addressed.
Overall, tokenized real-world assets have moved beyond the infancy stage. 2024 is likely to bring broader adoption of existing instruments and foster innovation in the Sukuk, fiat, and gold-backed stablecoin markets.
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Alex Malkov is a co-founder of HAQQ, a blockchain platform focusing on real-world assets. With over a decade of legal experience, he has worked with leading blockchain and fintech firms, ensuring HAQQ aligns with broader legal frameworks. His expertise is crucial in navigating the complex legal landscape of blockchain technology.
