RWA has become an important application of Blockchain technology, and traditional institutions are eager to try it.

Real World Asset (RWA) tokenization is becoming one of the most promising applications of Blockchain technology globally. It is expected to bring higher efficiency and security to the financial markets of the digital age.

A certain business development director stated that with the decline in on-chain yields and the Federal Reserve raising interest rates, there has been a significant differentiation between on-chain and off-chain interest rates. RWA may become a solution to bridge this gap.

He pointed out that although the stablecoin market is the cornerstone of the crypto ecosystem, the underutilization of these assets has been an ongoing issue. RWA is expected to address this problem and become a disruptive force in 2023, unlocking the potential of this asset class and fundamentally changing the way value is created, transferred, and stored.

The pursuit of risk-free real-world yields has shifted the industry's focus toward the tokenization of regulated financial instruments. Government bonds, real estate, precious metals, and artworks are regarded as the most viable tokenized assets.

The tokenized short-term treasury bond (STBT) launched by a certain platform has received a positive response, raising $123 million in just over five months. This meets the demand for a risk-free interest rate while avoiding the hassles of traditional trade execution and settlement. As the industry develops, the same logic applies to other real-world assets.

As tokenized government bonds are widely adopted, there is conceptually not much difference in exploring other liquidity-listed securities in a similar form. RWA can be extended to real estate, corporate bonds, and fine wines. The RWA industry is expected to become a major theme in the digital asset ecosystem in the coming years, adding hundreds of trillions of dollars to the market.

RWA will greatly enrich the scale and variety of on-chain available assets. With the expectation of continuously rising risk-free interest rates, it is anticipated that in the coming quarters, institutions will adopt tokenized notes due to economic incentives, while there will be further DeFi innovations in market products.

Although RWA is still in the early stages of the tokenization cycle, interest from both native cryptocurrency and traditional financial participants is growing increasingly strong.

There have been some noteworthy advances in the industry, including a central bank project in a certain country successfully utilizing DeFi for wholesale financing markets, conducting foreign exchange trading and government bond trading experiments, as well as a large bank testing tokenized funds on the Ethereum public network. The adoption rate of RWA is rising rapidly. Continuous innovation in clearing strategies and smart algorithms is driving this momentum, with significant progress expected by the end of the year.

Advantages and Challenges of Tokenization

One of the biggest benefits of tokenization is the democratization of financial markets by eliminating intermediaries, speeding up transaction times, and reducing costs, while also opening up investment opportunities that were previously available only to high-net-worth individuals.

Before the emergence of RWA, the main limitation of the market was concentrated on user experience, especially in terms of liquidity. Tokenization has the potential to completely change the financial landscape, creating new sources of income and even entirely new markets.

Compared to traditional lending, on-chain lending has several key advantages over real-world assets, including greater international accessibility, accessibility of crypto financial tools, and a more democratic decision-making process. These factors help make loans more inclusive, transparent, and facilitate a broader range of borrowers and lenders, while also promoting the stability of the lending ecosystem and reducing risk. As the industry evolves, we may see a convergence of traditional finance and DeFi, creating conditions for a smarter, more programmable global economy.

One of the biggest challenges currently facing RWA is regulatory uncertainty. Legal frameworks are struggling to keep pace with the rapid development of tokenization technology. This is particularly evident in the field of RWA infrastructure integrated with DeFi, where regulators must contend with Blockchain scalability issues to accommodate the capacity of traditional financial markets.

To overcome this obstacle, it is recommended to adopt a gradual regulatory approach, focusing on establishing a comprehensive framework that is fully compatible with DeFi standards. Such a framework must strictly enforce risk management protocols to enhance transparency and security. The success of a certain country's pioneering stablecoin regulation demonstrates the power of clear and strong guidelines. They not only protect investors but also create a favorable environment for issuers and financial institutions to innovate and explore new investment channels.

In terms of technology, it is actually easier to upgrade and develop because there are already viable solutions. The bottleneck is more on the regulatory and compliance side, needing clarity on what constitutes a security and how to handle on-chain property off-chain. Some jurisdictions are more progressive than others, and naturally, we will see these areas driving innovation.

The biggest obstacle may be that the internal compliance team wants to overlay the same framework on these new asset classes, which clearly has low relevance on-chain (such as retaining audit trails) and may even be unachievable (such as reversing transactions).

Conclusion

The future demand for on-chain deep liquidity is strong, especially for large protocols. Although STOs have restrictions and licensing requirements, there will be some flexibility in using securities as underlying assets for other products. The industry is exploring these possibilities in pursuit of innovation.

Once RWA achieves sufficient scale in the industry, the ultimate result will be a unified financial domain combining traditional finance and the cryptocurrency world, which is different from the past bull market trends; it will be astonishing.