Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of crypto.news editorial.
Integrating traditional real-world assets (RWA) into blockchain is not a new topic of discussion. Major institutional players, from Euroclear to Goldman Sachs, have turned to tokenization to reduce transaction fees, execution times, database management costs, and make provenance and ownership procedures much less tedious.
2023 was the year that theory finally began to translate into practice. In 2022, private credit markets collapsed as a result of the ramifications of the Terra Luna collapse, recovering by 60%, with the main beneficiary base shifting from cryptocurrency-based financial companies to the automotive sector (42% of tokenized private credit in 2023). But most significant to the industry has been the emergence of an entirely new type of RWA product: tokenized treasury. Tokenized Treasury aims to dethrone stablecoins, which currently account for the largest share of RWA. Seeked by both retail and institutional investors and with a 7x increase in trading volume, Treasuries is providing blockchain with maturity, an essential ingredient for stability. The most important year for RWA tokenization appears to be approaching.
Over the past few years, leading blockchain technology advancements have addressed various types of transaction optimization, helping to increase efficiency, security, and scalability. For example, the development of layer 2 solutions, such as zero-knowledge proofs or optimistic rollups, has helped increase the throughput of the underlying blockchain, shorten transaction execution times, and significantly lower and stabilize the network’s gas fees.
While L2 drives the capabilities of individual blockchains, cross-chain communication projects work to create additional network value. The usability of the entire web3 ecosystem has been improved by enhancing interoperability and security.
In addition to these developments, new services have emerged to improve the efficiency of RWA tokenization. Maple, Centrifuge, Backed and many others have taken the well-explored concepts of Defi, liquidity pools and collateralized lending and applied them to traditional finance. This allowed users to invest in real corporate bonds from a variety of jurisdictions, get a piece of the personal credit pie, and participate in tokenized lending through institutional lenders.
In early 2023, Ondo Finance launched the Ondo Short-Term U.S. Government Bond Fund (OUSG), which provides investors with access to a tokenized version of BlackRock’s iShares Short Treasury Bond ETF (NASDAQ: SHV). While OUSG has raised just over $110 million in total fixed valuation over the year, it marks the beginning of a new, much less noticeable trend: the rise of tokenized U.S. Treasury bonds.
The overall percentage of real assets held in DeFi has more than doubled over the past year, according to research from the Federal Reserve and data from DeFi Llama. This can be partly due to the launch of institutionalized infrastructure such as Goldman Sachs’ Digital Asset Platform (GS DAP) and JPMorgan’s Tokenized Collateral Network, but tokenized private credit and digital bonds alone do not explain the overall market boom. You can not. Rather, special attention should be paid to tokenized U.S. government short-term bond issuance.
Investors may have been attracted to short-term risk-free debt as the federal funds rate continues to rise. This is a natural market dynamic. Another part of the equation is the collapse of abnormal returns across the cryptocurrency landscape. According to CoinChange’s DeFi return benchmark, DeFi’s minimum risk return has fluctuated around 4-5%. This has not only caused Treasury spreads to shrink significantly, but at times pushed them into negative territory.
Although the tokenized asset market showed some signs of maturity in 2023, several unresolved questions still hinder the transparent development of the RWA industry. The most important of these is, of course, regulation. Until there is a clear regulatory framework or bankruptcy precedent in one of the major jurisdictions, it is impossible to say for sure whether tokenized assets will exhibit the same priority claim as the underlying assets. From a legal perspective. Another degree of freedom is how the infrastructure evolves to provide efficient access to tokenized asset markets.
Nonetheless, the growing widespread adoption of RWAs is expected to continue in 2024, with tokenized Treasury bonds being the biggest beneficiaries of their return to prominence. I see this asset class as a perfect product market fit for risk-averse DeFi investors. Unlike stablecoins, tokenized government bonds are immune to trust fluctuations and are absolutely safe as long as the underlying smart contracts are diligently audited and monetized. In fact, we have already seen the beginning of an overhaul. As of April 2024, capital allocation to tokenized U.S. Treasury securities exceeded $1.09 billion. This is almost a tenfold increase from $114 million at the start of 2023.
To me, this warm welcome calls for a more urgent expansion of scope than the most obvious solutions. Especially since tokenized government bonds are not a one-size-fits-all instrument. Sukuk (the closest equivalent to bonds in Islamic finance), a nearly $1 trillion market growing at a CAGR of 19.1%, will be the next market to come on-chain. Islamic law prohibits investment in interest-bearing securities, which are considered usury. Haram Therefore, religious Muslim market participants cannot use traditional bonds. Instead, Sukuk circumvents the ban by providing partial ownership of the asset and a claim on a portion of the cash flows generated. We believe that the potential tokenization of sukuk will provide Muslim communities with an opportunity for secure transnational unity. halal Taking digital Islamic finance to a new level through on-chain investments. With the gradual growth of the cryptocurrency market in the MENA region and the continued participation of companies and governments in infrastructure investment, I believe that a potential on-chain Sukuk could align well with the target audience.
Expecting a rise in digital bonds doesn’t mean stablecoins are in decline yet. Conversely, 2024 could finally bring competition and diversification to a market that has long been effectively split between Tether and Circle. From controversial concepts like USDe to new entrants with trustworthy models like the Ripple stablecoin, the sleepy stablecoin market is undergoing a transformation. In this regard, considering that gold has been in the media spotlight after hitting record high prices, I think the most underrated opportunity that deserves special attention here is gold-backed stablecoins. Although not an entirely new concept, previous realizations lacked technical excellence and liquidity and attempted to enter markets where the timing was poor. In the turbulent reality of Costco gold bars being swept off the shelves, I think it’s only a matter of time before a promising idea receives a new iteration.
Overall, tokenized real-world assets seem to have successfully passed the initial phase. In my view, 2024 will likely see more widespread adoption of existing products, especially tokenized government bonds, and competition and innovation, especially in the sukuk, fiat and gold-backed stablecoin markets.