Real World Assets: The Bridge Between TradFi and DeFi

Table of Contents
Key Takeaways 3

Introduction 4

Real World Assets 101 5

What are Real World Assets? 5

What’s the purpose of Real World Assets? 5

How do Real World Assets work? 8

Example: RealT Real Estate RWA 10

Market Analysis of the RWA Ecosystem 12

RWA Markets 12

RWA Underlyings 18

Highlighted RWA Protocols & Market Participants 21

MakerDAO 21

Centrifuge 24

Goldfinch 25

Ondo Finance 27

Maple 27

Future Trends to Watch 28

Layer 1 RWA Chains 28

Regulation and Enforcement 29

Macro vs. DeFi Environments 30

Conclusion 31

References 32

2
Real World Assets: The Bridge Between TradFi and DeFi

Key Takeaways
❖ Real World Assets (“RWAs”) are assets that exist off-chain, but are tokenized and
brought on-chain to be used as a source of yield within DeFi.

❖ The potential impact that RWAs could have on DeFi seems transformative.

❖ RWAs can offer yields to DeFi which are sustainable, reliable, and backed by traditional
asset classes.

❖ RWAs can render DeFi to become more compatible with external markets, resulting in
greater liquidity, capital efficiency, and investment opportunities.

❖ RWAs allow DeFi the ability to bridge the gap between decentralized financial systems
and traditional financial systems.

❖ RWAs can represent tangible assets, such as gold and real estate, as well as intangible
assets, such as government bonds or carbon credits.

❖ The main driving force behind bringing real world assets onto the blockchain is the
belief that, in the long-term, DeFi will offer unique opportunities and market efficiencies
to asset holders, which cannot be found in traditional financial systems.

❖ The ability to easily fractionalize and disperse RWAs in DeFi renders previously
unfractionalized, total sum, private credit investments to become accessible to a new
set of investors.

❖ Fixed income is the predominant market in the RWA space.

❖ There are a number of topical trends that are shaping the evolution of the RWA
ecosystem: layer 1 RWA protocols, regulation and enforcement mechanisms, macro
environment.

3
Real World Assets: The Bridge Between TradFi and DeFi

Introduction
Since November 2021, total value locked (“TVL”) in DeFi has fallen by over US$120B.(1) DeFi
yields have hit rock bottom, closely correlating with two-year lows in transaction volume and
investor participation.(1) This plight of activity has exposed the self-reliant and recursive nature
of DeFi yields. On most DeFi protocols today, investors earn yield at a rate that is based on
on-chain activity (e.g. DEX transaction fees, lending protocol borrowing costs). During bull
markets, when on-chain activity is high and crypto prices are rising, investors can find lucrative
yields and reinvest their earnings back into DeFi, creating a positive feedback loop. However, as
on-chain activity and prices drop during bear markets (like the one we are in now), a bull run
can quickly reverse, leaving little to no traces of appealing yield opportunities for investors.(2)

A new source of real yield is emerging to address this problem: Real World Assets (“RWAs”) are
assets that exist off-chain, but are tokenized and brought on-chain to be used as a source of
yield within DeFi. RWAs can represent many different kinds of traditional assets such as
commercial real estate, bonds, cars, and almost any other store of value that can be properly
tokenized and accounted for. Since the early days of blockchain technology, market
participants have sought to bring RWAs on-chain. However, the most recent bear market has
been an especially notable period of development and growth within the RWA space. TradFi
institutions, such as Goldman Sachs, Hamilton Lane, Siemens, and KKR all have announced
that they are working towards bringing their real world assets on-chain. Furthermore,
protocols, such as MakerDAO and Aave, are tailoring their crypto-native platforms to become
compatible with RWAs.

The potential impact that RWAs could have on DeFi seems transformative. RWAs can offer
yields to DeFi which are sustainable, reliable, and backed by traditional asset classes.
Furthermore, RWAs allow DeFi the ability to bridge the gap between decentralized financial
systems and traditional financial systems. This means DeFi can begin to address the sea of
liquidity, opportunities, and value which exists outside the digital asset space (~US$1T in
digital assets vs. >US$600T in asset value in traditional financial systems).(3) If DeFi wants to
have a significant impact on how finance is conducted, a successful implementation of RWAs
seems critical.

In this report, we investigate the rapidly evolving RWA ecosystem. More specifically, we
breakdown what RWAs are, how RWAs work, and the purpose behind RWAs. We additionally
offer an in-depth market analysis of the RWA ecosystem and highlight major players within the
RWA space. Lastly, we provide an overview of important trends and narratives to watch as the
RWA ecosystem evolves.

4
Real World Assets: The Bridge Between TradFi and DeFi

Real World Assets 101

What are Real World Assets?
Real World Assets (“RWAs”) are assets that exist off-chain, but are tokenized and brought
on-chain to be used within DeFi.

To bring real world assets into DeFi, the value of an asset must be “tokenized” - a process of
converting something of monetary value into a digital token so that its value can be
represented and transacted on the blockchain. RWAs are, in this way, simply tokens
representing the value of a real world asset, which is brought on-chain so that it can be utilized
on a DeFi protocol.

Any real world asset that has a well-defined monetary value can be represented by RWAs.
RWAs can represent tangible assets, such as gold and real estate, as well as intangible
assets, such as government bonds or carbon credits. Below includes a non-exhaustive list of
real world asset classes that can be brought onto the blockchain through the RWA vehicle.

Figure 1: Examples of real world assets

Source: Binance Research

What’s the purpose of Real World Assets?

While there are noteworthy short term catalysts accelerating the development and growth of
RWAs (see the Future Trend to Watch section), the true purpose behind RWAs lies with its
long term potential. The main driving force behind bringing real world assets onto the
blockchain is the belief that, in the long-term, DeFi will offer unique opportunities and

5
Real World Assets: The Bridge Between TradFi and DeFi

market efficiencies to asset holders, which cannot be found in traditional financial

systems.

Over the course of history, traditional financial systems (“TradFi”) have relied on
intermediation systems, consisting of middle-men, background checks, and regulations. While
these intermediation systems have helped instill a certain level of security and control, they
have been at the expense of optimal market efficiency and opportunities for asset holders.
Market efficiency and opportunities dwindle when market participants are unwilling to pay fees
to rent-seeking intermediaries, are denied access to the market by a centralized regulator, or
are uncomfortable transacting in a system in which their assets are controlled by a third-party.

Decentralized financial systems (“DeFi”) hold promise to dismantle some of the constraints
found within TradFi, and in turn, deliver material improvements in regards to market efficiency
and opportunities for asset holders. DeFi minimizes or completely cuts out the intermediation
systems found in TradFi to effectively decentralize the back-end of financial markets. In the
International Monetary Fund’s (“IMF”) 2022 Global Financial Stability Report, the IMF has
found that DeFi’s nuanced approach to financial markets results in outstanding cost savings as
compared to TradFi systems.(4) Savings mostly accrued from the absence of labor and
operational costs, which are normally high in TradFi systems given their complex intermediary
systems.

Figure 2: Marginal Costs of Different Financial Systems

Source: International Monetary Fund, Binance Research

6
Real World Assets: The Bridge Between TradFi and DeFi

Beyond the removal of the intermediation system, idiosyncratic innovations found within DeFi
have the potential to further market efficiency and bolster opportunities. For example,
Automatic Market Maker (“AMM”) models allow asset holders instantaneous access to liquidity
and transaction finality, which are investment dynamics not commonly found within traditional
settlement systems. Additionally, within DeFi, asset holders have the ability to easily
fractionalize value and distribute exposure via digital tokens. This opens up new markets and
enables even smaller investors (e.g. retail) to gain exposure to assets with traditionally high
investment thresholds. Lastly, the transparency of the blockchain ledger provides market
participants within DeFi unique clarity into transaction flow, asset ownership, and
mark-to-market prices, which tend to be hidden in TradFi systems.

Figure 3: TradFi vs. DeFi from first principles.

Source: Frigg.eco, Binance Research

Overtime, DeFi has the potential to prove as the superior back-end for financial systems. As
DeFi continues to mature and prove its viability, asset holders may desire to represent their
assets via RWAs in order to access improvements in market efficiency and opportunities
afforded by DeFi.

“Whereas the internet created a better standard for how text, photos, audio,
and video were exchanged, DeFi will create a better standard for how
assets are exchanged.” - Teej Ragsdale for Nasdaq(5)

7
Real World Assets: The Bridge Between TradFi and DeFi

How do Real World Assets work?

Figure 4: RWAs describe how real world assets are accounted for in a blockchain environment

Source: @Lempheter on Twitter

Thus far, we have established that RWAs are literally tokenized representations of off-chain,
real world assets. However, we have not clarified how ownership and representation of those
assets can be seamlessly accounted for when moving between the digital and physical realms.
In this section, we breakdown how RWAs work, and more specifically, how they can be
accounted for as legitimate representations of real world assets.

The process of RWA tokens becoming legitimate bearer assets can be conceptualized as three
phases: (1) Off-Chain Formalization (2) Information Bridging (3) RWA Protocol Demand and
Supply.

Figure 5: How RWA tokens become legitimate bearer assets

Source: Binance Research

8
Real World Assets: The Bridge Between TradFi and DeFi

❖ Off-Chain Formalization

A real world asset that is to be brought to DeFi, must first be formalized off-chain so that
there’s clarity in how much the asset is worth, who owns the asset, and which legal process
protects any related property rights.

Representation of Economic Value: An asset’s economic value can be represented by the

asset’s fair market value in traditional markets, its recent performance data, its physical
condition, or any other economic specifiers.

Ownership & Legitimacy of Title: The ownership of an asset can be formalized by a deed, a
mortgage, an invoice, or any other reflection of one’s holdings.

Legal Backing: In the scenario where there are any legal ramifications concerning the
representation / ownership of an asset, there should be a well-defined resolution process.
Often this includes understanding asset specific legal proceedings for liquidations, dispute
resolutions, and enforcement.

❖ Information Bridging

Next, the information regarding an asset’s economic value and ownership is brought on-chain
to be stored within a blockchain ledger.

Tokenization: The information collected in the Off-Chain Formalization phase is translated into
code and represented by the metadata of a digital token. This metadata can be accessed via
the blockchain, providing full transparency into an asset’s economic value and ownership. As
previously mentioned, this process is called “tokenization.” As shown below, there have been
numerous proposals attempting to create a DeFi standard for asset tokenization.

Figure 6: DeFi standards to tokenize real world assets

9
Real World Assets: The Bridge Between TradFi and DeFi

Regulatory Technology/Securitization: For assets that require some type of regulatory

oversight or are deemed to be securities, there exists different regulatory technologies which
serve to onboard assets into DeFi in a legally compliant way. Regulatory technologies include
but are not limited to licensed security token issuers, crypto KYC/KYB providers, and cleared
security token exchanges.

Oracles: For RWAs to accurately portray the value of an asset that lives off-chain, it requires
external data. Consider a share of stock represented as an RWA. DeFi needs to access the
performance data of that stock, so its market value on-chain can mimic its market value
off-chain. Blockchains, however, due to the Oracle Problem, are unable to pull external data
directly from centralized sources (such as a stock exchange) onto the blockchain. Instead,
decentralized oracles, such as Chainlink, are used to supply off-chain asset data to DeFi
protocols.

❖ RWA Protocol Demand and Supply

DeFi protocols, which specialize in RWA offerings, drive this entire process; On the supply side,
DeFi protocols oversee the origination of RWAs. Additionally, on the demand side, DeFi
protocols facilitate investor demand for RWA opportunities. In this way, most DeFi protocols
that specialize in RWAs, serve as both the starting point of new RWA originations and the
marketplace for RWA end products.

Example: RealT Real Estate RWA

By looking at a practical example, the three different phases required to properly convert a real
world asset into a RWA become clear. Consider RealT, a platform that creates a DeFi market
around fractional ownership of US real estate properties. Investors on RealT are able to obtain
exposure to real estate investing, without owning the entire property. Real estate owners on
RealT, can sell fractional shares of ownership in their properties to diversify away from
complete ownership.

10
Real World Assets: The Bridge Between TradFi and DeFi

Figure 7: Interface of RealT, Real Estate RWA Marketplace

Source: RealT

For a US real estate property to become converted into a RWA digital token, the property’s
value must first be formalized off-chain. Each residential property that RealT tokenizes as an
RWA, has a third-party property valuation, a deed representing ownership, and a well-defined
process in the case that a tenant does not pay rent or the house must be foreclosed.

Next, information regarding the property will be bridged to the blockchain. More
specifically, a property’s information must be tokenized, securitized, and transmitted through
oracles. RealT does not tokenize the physical asset, but rather tokenizes shares in an LLC which
owns the deed to the property under the ERC-20 standard. On the securitization front, RealT
files under US securities law exemption D & exception S and has accompanying KYC
technology built into the protocol to legally onboard investors and sellers. Lastly, RealT uses
oracles to provide property fair market value to its DeFi application.

RealT originates RWAs and proceeds to list new RWA offerings on their protocol. RealT has
sold out on a number of offerings, and must meet investor demand with new RWA originations.

11
Real World Assets: The Bridge Between TradFi and DeFi

Market Analysis of the RWA Ecosystem

DeFi markets that offer exposure to RWAs are flourishing. There is growing diversity in both the
types of markets that are being offered as well as the types of underlying assets that are being
represented by RWAs. Furthermore, there is increased engagement from both crypto-native
and TradFi companies in these DeFi markets. In this section, we provide market analysis of the
RWA ecosystem and additionally, highlight major protocols and participants who are shaping
RWA markets.

RWA Markets
There exists a diverse set of markets that surround the RWA asset class. In DeFi today, RWAs
serve as the primary instrument for equity based DeFi markets, real asset based DeFi
markets, and fixed income based DeFi markets.

Figure 8: Varied markets surrounding RWA Instruments

Source: Binance Research

12
Real World Assets: The Bridge Between TradFi and DeFi

❖ Equity and Real Asset Markets

Equity and real asset markets in the RWA space are relatively small, with few protocols
currently building in the space. One reason for this may be that equities or real assets (such as
commodities) are typically traded in public markets, and as a result, are heavily regulated. In
most jurisdictions, public equities and real assets can only be offered by registered and
scrutinized exchanges. Another reason for this is because equity and real asset instruments
often entail off-chain physical ownership in the underlying asset class. This adds a layer of
operational complexity as equity/real asset protocols are not simply facilitating financial
contracts on paper, but actually must store the equity/real asset and have the ability to transfer
ownership of the equity/real asset in the case of a redemption. For example, Backed Finance,
one of the few protocols that offers public equity RWAs, is required to be registered under the
Swiss-DLT act, and must back every RWA asset fully with ownership over underlying stocks. In
the case of the redemption, Backed Finance must sell the user's stock holdings, and then
coordinate if they would like to be reimbursed in cash or crypto.(6) Lastly, DeFi derivative and
synthetic (contractual, non-ownership) based markets, such as Synthetix, have been
established within crypto for a long time, serving as an entrenched alternative to equity/real
asset RWA markets.

❖ Fixed Income Markets

Fixed income is the predominant market in the RWA space. In comparison to the equity or
real asset markets, RWA based fixed income markets are more active in terms of transaction
flow, rich in terms of offerings, and diverse in terms of market participation. As shown in Figure
8, fixed income markets offer both private and public credit offerings.

Private credit based RWAs offerings are abundant within DeFi. In fact, private credit offerings
have comprised over US$4B in total loan value across 1,560 different loans. The ability to
easily fractionalize and disperse RWAs in DeFi renders previously unfractionalized, total
sum, private credit investments to become accessible to a new set of investors. This unique
innovation in the private credit space has notably attracted non-traditional borrowers and
investors. Borrowers are able to benefit from private credit based RWAs because they are able
to reach a new market of lenders through fractionalization and the lowering of liquidity barriers.
DeFi investors are able to gain exposure to private credit markets which, in the TradFi
space, have been traditionally reserved for credit funds and other institutions with access
to large sums of capital and private connections.

13
Real World Assets: The Bridge Between TradFi and DeFi

Figure 9: Private Credit RWA Market Metrics

Source: RWA.xyz, Binance Research

During May 2022, the total active value of private credit loans across all RWA protocols,
reached an all time high of over ~US$1.4B. However, since May 2022, total active loan value
and new issuance in the private credit space has declined in correspondence with the broader
market. Today, total activeloan value is down by over -75% from the January highs of US$1.4B
and now sits ~US$320M as of February 28, 2023. Similarily, new issuance was highest in
October 2021 with US$458 issued as compared to only US$40M issued in February 2023.

Figure 10: Private Credit total loan value outstanding and new issuance have fallen steeply

Source: RWA.xyz

The average interest rate that borrowers must pay on these RWA-collateralized loans is
9-9.75%. This is a relatively high rate, given that currently, the average business loan ranges
from 4.90% to 9.83% at TradFi banks.(7)

Figure 11: Interest rate distribution of private credit loans

14
Real World Assets: The Bridge Between TradFi and DeFi

There are a number of protocols that make up RWA private credit markets. These protocols can
be segmented into two groups: whether they offer asset-backed (or secured) private credit,
or unsecured private credit (undercollateralized or not collateralized).

Asset-backed private credit protocols, such as Centrifuge, Goldfinch, or Credix, orchestrate

private credit markets in a way that is familiar to DeFi; just like any other crypto native
lending/borrowing protocol, a borrower chooses a crypto asset to borrow, deposits collateral,
and makes interest payments to liquidity providers. The only distinction between crypto native
lending/borrowing protocols and asset-backed RWA private credit protocols is that the
collateral posted is not crypto, but rather a real world asset, such as a real estate property, an
or any other kind of RWA.

By allowing borrowers to secure their loans with RWAs instead of crypto, asset-backed
protocols have unlocked access to cryptocurrency capital for most businesses and institutions
in the world. Asset backed DeFi protocols have been extremely beneficial to borrowers who
lack access to traditional financial markets or a stable store of value in their countries’
native fiat currency. As shown below in Figure 11, most of the loans taken out on
asset-backed private credit protocol Goldfinch, are from emerging market economies. For an
emerging market business/institution, whose native currency is subject to frequent
devaluation, a cryptocurrency or stablecoin denominated loan can provide greater stability and
predictability than a fiat denominated loan from their TradFi bank.

Figure 12: The majority of private credit loan exposure from Goldfinch is in Emerging Markets

15
Real World Assets: The Bridge Between TradFi and DeFi

Source: RWA.xyz, Binance Research

Unsecured private credit protocols, on the other hand, significantly differ from crypto native
protocols. Since the early days of DeFi, crypto native borrowing/lending protocols, such as
Aave and Venus, have required that borrowers deposit enough crypto collateral so that the
value of their collateral exceeds the value of their loan (a.k.a “overcollateralization”).
Overcollateralization is in line with DeFi’s decentralized and trustless ethos; borrowers do not
need to submit any proof of identity or credit score because even if they default on their
interest payments, lenders are programmatically insured (by smart contracts) to be made
whole from the initial overcollateralization deposit. While overcollateralization allows crypto
native protocols to more easily manage counterparty risk amongst a
decentralized/trustless system, it discriminates against borrowers who are unable to meet
the collateralization threshold and ultimately, reduces capital efficiency within the
market. For example, for any large company and institution, who require sizable credit lines,
overcollateralization is operationally infeasible and adverse to financial performance.

In attempts to improve capital efficiency within DeFi and enable underserved borrowers,
unsecured RWA based private credit protocols have come to market. Protocols such as Maple,
Clearpool, and TrueFi are redefining crypto lending/borrowing protocols by removing
overcollateralization requirements. Instead, these protocols pride themselves on allowing
cleared business/institutions to borrow cryptocurrency while being undercollateralized with
RWA assets or depositing no RWA collateral at all.

In order to move away from overcollateralization, these protocols have had to implement
centralized background checks, due diligence procedures, and credit checks for any
person/entity who wants to borrow/lend off their protocol. For borrowers, this means
submitting an application that describes the borrower’s financial background and
communicating with a team of the protocol’s underwriters, who deem if the borrower is fit to
borrow off their protocol. Borrowers on these protocols are mostly large institutions who
require sizable credit credit lines. They are often willing to engage in deep due diligence
processes to surpass the overcollateralization requirements on other DeFi protocols.
Alternatively, for lenders, due diligence includes background checks that reveal one’s identity,
geographic location, and finances. After this information is collected, users are granted a
whitelisted wallet, which can interact with DeFi applications on-chain.

16
Real World Assets: The Bridge Between TradFi and DeFi

Figure 13: Unsecured lending protocols (ex. TrueFi) require whitelisted wallets to lend capital

DeFi maximalists argue that since unsecured lending protocols require centralized KYB/KYC
evaluations, they are incompatible with DeFi. However, it should be recognized that despite
their preference towards centralized borrower evaluations, these protocols still
incorporate many DeFi primitives, such as using liquidity pools to operate debt offerings,
smart contracts to automate distribution of interest payments, and blockchains to make
borrowing/lending dynamics completely transparent.

Another recent concern raised within the latest bear market, has been widespread fallout of
unsecured crypto lending institutions. It should be recognized that this fallout does not
represent the broad-scoping, blanket failure of the unsecured lending protocol model, but
rather a failure of unsecured lending firms who failed to properly evaluate risk. In the future,
RWA unsecured lending protocols can offer an essential lending market to non-crypto native
firms and businesses, as long as risk management, due diligence, and legal measures are
present to shield the broader crypto industry from contagion.

Beyond private credit offerings, there are also public credit offerings available in the RWA
based fixed income markets. The public credit market currently has less activity as compared
to the private credit market. This is most likely for the same reasons described for the lack of
activity in the public equity/real asset markets; for a protocol to offer a tokenized form of a
public instrument, they must meet strict regulatory guidelines and be cleared to offer such
products. However, while there is still less activity as compared to their private credit
counterparts, a number of public credit protocols are building in this space. Take for example,
Ondo Finance, which has announced three separate RWA funds that track US treasuries,
investment grade corporate bonds, and high yield corporate bonds, or BondBlox, which
currently offers 57 different RWA corporate bonds.Protocols, like Ondo Finance and BondBlox,

17
Real World Assets: The Bridge Between TradFi and DeFi

have been willing to rise to the demands of regulatory scrutiny, to offer public fixed income
products to DeFi. An opportune global rise in interest rates and increased demand for relatively
safe, public fixed income products, has perhaps bolstered a willingness for public fixed income
protocols to come to market and reach the high bar set by regulation. In the Future Trends to
Watch section, we discuss how influential regulation is to the RWA space and more
specifically, how regulation specific to digital assets will shape the space in the future.

A number of RWA public credit offerings are also coming from governments. While these tend
much more towards the TradFi side of the spectrum rather than the DeFi end, they should be
recognized as a significant offering in the RWA markets. For example, El Salvador is planning to
use RWAs to represent investment into a planned US$1B bond offering.(8) Additionally, Israel’s
Ministry of Finance and the Tel Aviv Stock Exchange has already completed live tests for its
tokenized digital bonds.(9)

RWA Underlyings
As mentioned previously, there are a number of different underlying assets that RWAs
represent.

Fiat-based stablecoins are the original and by far the most notable underlying instrument
for RWAs. Stablecoins are a type of crypto asset that aims to keep its price pegged to the
market value of an external asset, typically fiat-currencies. Since the first stablecoins in 2014,
stablecoins have increasingly become the foundations of the crypto markets, serving to provide
an on/off-ramp into DeFi, price stability on-chain, and a familiar means of exchange.

Figure 14: Stablecoin supply in US$ has grown significantly

18
Real World Assets: The Bridge Between TradFi and DeFi

There are three different types of stablecoins: fiat-backed, algorithmic and

crypto-overcollateralized. Fiat-backed is the most pure form of a RWA, as organizations issuing
a fiat-backed stablecoin, must store real fiat currency or a fiat-equivalent off-chain. To
compete in a competitive stablecoin market, fiat-backed currencies must be able to be fully
redeemable and collateralized in a way that allows it to be flexible with market demand.
Algorithmic, and Crypto-overcollateralized stablecoins, unlike their fiat-backed counterparts,
maintain a stable peg to the dollar by manipulating the reserves of non-fiat currency (usually
crypto assets). Fiat-backed stablecoins make up most of the stablecoin market cap today.

Figure 15: Fiat-backed RWAs currently dominate the stablecoin market

Source: Dune Analytics (@KARTOD), Binance Research

It should be noted that operationally, fiat-backed stablecoins have experienced friction in their
bridge from the real world to DeFi. Outspoken critics of fiat-backed stablecoins have raised
concerns about the centralization of the stablecoin issuer (e.g. custody, issuance, redemptions)
and permission controls for regulatory compliance (e.g. KYC/AML checks, on-chain blacklists)
remain. Furthermore, critics highlight that fiat-backed stablecoins are not always backed in the
fiat currency alone, but in part with other assets as well, including cash equivalents (e.g. US
treasuries, commercial paper), secured loans, corporate bonds, and more.(10)

Nonetheless, fiat-backed stablecoins as RWAs are foundational to DeFi and serve to enhance
functionality of fiat currency, allowing stores of value to become digital, programmable,
compatible, and atomically settled. Overtime, fiat-backed stablecoins will attempt to improve
how they bridge between the real world and DeFi. As we will discuss in the Future Trends to
Watch section, the RWA process must continue to improve in terms of transparency and
reporting.

19
Real World Assets: The Bridge Between TradFi and DeFi

Beyond stablecoins, the asset class which serves as the most popular underlying for RWAs is
real estate. This is followed by climate-related underlyings (e.g. carbon credits) and public
bond/stock underlyings. Next, emerging market credit (mainly corporate debt) underlyings and
so on.

Figure 16: Non-stablecoin protocols segmented by RWA underlying

Figure 17 depicts a non-exhaustive, yet relatively comprehensive industry map of RWA

protocols segmented based on the type of underlying they tokenize.

Figure 17: RWA industry protocol map, segmented by underlyings

20
Real World Assets: The Bridge Between TradFi and DeFi

Highlighted RWA Protocols & Market Participants

In the following section, we highlight some of the major protocols and market participants
engaging in the RWA ecosystem.

MakerDAO
MakerDAO is a collateralized debt platform on Ethereum that has arguably made the most
progress in terms of RWA adoption.

MakerDAO allows borrowers to deposit collateral assets into “vaults” so that they can take out
debt denominated in the protocol’s native US$-based stablecoin, DAI. Vaults are simply smart
contracts, which hold the borrower’s Ethereum-based collateral until all the borrowed DAI is
returned. As long as the value of the collateral remains above a specific threshold, the
borrower will have complete control over their collateral. However, if the value of the collateral
drops to become undercollateralized, the vaults will automatically liquidate the collateral
through an auction process, so that the loan can be repaid in a trustless manner.

Figure 18: MakerDAO lending operations

Source: Binance Research

The types of collateral that can be used by borrowers is determined by the protocol’s
governance DAO, MakerDAO. In 2020, MakerDAO voted to allow borrowers the ability to post
RWA based collateral to vaults. In addition to this vote, MakerDAO elected to fund oracle
development, so that the value of RWA-based collateral on the platform could be seamlessly
priced with the collateral’s value off-chain.

21
Real World Assets: The Bridge Between TradFi and DeFi

Today, the value of MakerDAO’s RWA vaults is over US$680M. This means that through RWA
backed loans, MakerDAO has been able to scale the amount of DAI issued into the market.
Furthermore, this means that there is US$680M+ worth of RWAs helping maintain MakerDAO’s
$1 peg stability.

Figure 19: RWA based vaults on MakerDAO

Source: Dune Analytics (@SebVentures), Binance Research

Furthermore, MakerDAO has benefited from the interest revenue paid by RWA vault borrowers.
While MakerDAO’s overall revenue has decreased over the past year due to a downturn in
the crypto markets, RWA vault revenues has been a brightspot. RWA vaults generate an
annualized US$23M of revenue for MakerDAO.

In fact, 56.7% of MakerDAO’s annualized revenue come from RWA vaults,

even though RWA vaults only account for ~13% of debt on the platform.(11)

22
Real World Assets: The Bridge Between TradFi and DeFi

Figure 20: RWAs account for more than half of MakerDAO’s annualized revenue

Source: Dune Analytics (@Steakhouse), Binance Research

A number of different institutional borrowers have originated RWA collateralized vaults on

MakerDAO. Their capital allocation plans for the debt is varied.

Figure 21: Different borrowers from MakerDAO’s RWA collateralized vaults

Source: Binance Research

23
Real World Assets: The Bridge Between TradFi and DeFi

The majority of MakerDAO’s RWA collateral (~US$500M) comes in the form of US treasury
bonds managed by Monetalis (MIP65). MakerDAO also launched a vault backed by US$100M
worth of loans originating from a community bank in Philadelphia called Huntingdon Valley
Bank (“HV Bank”). HV Bank used MakerDAO to support the growth of its existing businesses
and investments around real estate and other related verticals, and served as the first
commercial loan participation between a US-regulated financial institution and a decentralized
digital currency protocol. In a separate vault, French multinational banking giant, Société
Générale borrowed US$7M from MakerDAO in a position backed by €40M worth of AAA-rated
tokenized bonds.(12)

Centrifuge
Centrifuge is a DeFi protocol for structured credit. In TradFi, structured credit involves
securitizing and pooling similar debt obligations and selling off the resulting cash flows.
Centrifuge mimics this TradFi process in DeFi, and uses the resulting securities as collateral so
that borrowers can obtain crypto-denominated debt. Centrifuge has helped facilitate debt
pools collateralized by structured credit assets such as pooled mortgages, invoices,
microlending, consumer finance, and others. Centrifuge aggregates all of its different debt
offerings into a decentralized marketplace for RWA pools, which is called Tinlake. Overall, you
can think of Centrifuge protocol as offering a turnkey solution for structured credit tokenization
and loan origination. This streamlined approach has made Centrifuge a top choice for real
world businesses looking to originate crypto loans.

What is particularly notable about Centrifuge, is that it was one of the first protocols to
integrate tranching natively into its contracts. Tranching in TradFi, allows investors to access
different kinds of risk exposures and yields on the same asset class. In the case of a default,
more senior tranches are paid first, hence, they have less risk and yield less than a junior
tranche. Centrifuge has created structures to allow investors access to tranches on a particular
Tinlake debt offering. Centrifuge currently offers two different tranches to debt offerings:
senior exposure, which is represented by a token called DROP, and junior exposure, which is
represented by a token called TIN.

Centrifuge also stands out in the RWA space for its impressive network of crypto and TradFi
partners. On the crypto side, Centrifuge has integrated with MakerDAO and Aave, so that debt
offerings could access the liquidity of MakerDAO and Aave’s entrenched liquidity pools.
Furthermore, Centrifuge RWA pools are already backing the DAI stablecoin, and is currently
petitioning to back the Aave’s GHO stablecoin in the future.(13) On the TradFi side, Centrifuge
has onboarded into DeFi a number of notable financial institutions who are looking to issue
debt. For example, in December 2022, Centrifuge announced a launch of a US$220M fund with

24
Real World Assets: The Bridge Between TradFi and DeFi

MakerDAO and BlockTower Credit. This stands to be the largest on-chain investment in RWAs
to date, and marks the first institutional credit fund to bring their collateralized lending
operations on chain.(14)

Goldfinch
Goldfinch is a protocol that helps businesses, primarily emerging-market based, access crypto
lending without having to post crypto collateral. Instead, loans are collateralized with RWAs. By
allowing loans to be collateralized with RWAs instead of crypto, Goldfinch allows almost any
business to obtain crypto loans. As noted earlier, a crypto-denominated loan can be extremely
beneficial to an emerging market business if their native country does not have adequate
financial infrastructure, or if their native currency is susceptible to debasement.

Goldfinch currently has originated over US$120M of RWA based loans to emerging market
businesses.

Figure 22: Over US$120M of RWA loans have been originated on Goldfinch

Source: Dune Analytics (@goldfinch), Binance Research

Goldfinch has a unique way of vetting which businesses can become borrowers on their
platform. So-called “auditors" are users on the Goldfinch platform that stake the Goldfinch
native token, GFI, so that they can cast a vote on whether a borrower should be able to
open a credit line on Goldfinch or not. Auditors are instructed to vote based on their
perception of a borrower’s creditworthiness. When auditors vote with the consensus, they are

25
Real World Assets: The Bridge Between TradFi and DeFi

awarded GFI tokens. Once a borrower has been verified by auditors to extend credit, their
proposed deal terms for the credit lines will be structured into a DeFi borrowing/lending pool.

Next, investors can choose how they want to allocate capital. Similar to Centrifuge, there is a
seniority structure within Goldfinch debt offerings. Goldfinch investors can allocate capital to
individual pools (to become “backers”), or indirectly by automatically allocating capital across
the entire protocol. By allocating to an individual pool, a backer is willing to invest in a more
risky, first-loss junior tranche. By allocating liquidity across the protocol, an investor’s funds are
diversified and deemed by the Goldfinch protocol to be “senior” to the first-loss capital of
backers. Thus far, Goldfinch’s within loan book there has been no defaults / bad debt.

Figure 23: Goldfinch borrowing/lending process

Source: Goldfinch, Binance Research

The Goldfinch protocol earns revenue through withdrawal fees from investors and backers as
well as 10% of the interest payments as protocol reserves.(15) Since inception the protocol has
generated US$1.6M+ in revenue.(16) Goldfinch maintains a business model that is not reliant on
crypto markets, and has proven the ability to be counter-cyclical.(15)

26
Real World Assets: The Bridge Between TradFi and DeFi

Ondo Finance
Ondo Finance is bringing institutional grade products ranging from government bonds to high
yield bonds to DeFi. To do this, Ondo has created three different investment funds, OUSG
(Short-term US Government Bond Fund), OSTB (Short-term Investment Grade Bond Fund), and
OHYG (High-Yield Corporate Bond Fund), which own the underlying institutional assets. They
then tokenize these investment funds to become RWAs (called “fund tokens”). After users
engage in a KYC/AML process, they are able to trade fund tokens and use those fund tokens in
permissioned DeFi protocols.

Ondo Protocol is particularly noteworthy because, with Bondblox, it is one of the few
protocols building out the public credit RWA market. Allowing access to public credit on the
blockchain, means that blockchain users who have a significant amount of capital on-chain,
can keep it on chain, while earning a return outside of crypto, in relatively safer fixed income
products. This service has become highly demanded as a means of on-chain cash
management, as real DeFi yields have decreased and interest rates have increased in the
public credit markets.

Maple
Maple is an uncollateralized borrow/lending protocol. Unlike Goldfinch’s
community-determined underwriting mechanism, Maple hosts “pool delegates” which are
credit professionals that rigorously assess creditworthiness, set loan terms with borrowers,
and actively manage loan books. Otherwise, the borrowing/lending process is standard. Maple
LPs allocate capital to permissioned liquidity pools and receive back MPL interest.

While Maple protocol previously focused on uncollateralized lending to crypto native firms, it is
increasingly venturing into more RWA based loans. Previously, uncollateralized crypto lending
to crypto trading firms, left Maple with US$52M in bad debt and up to 80% losses for select
Maple LPs. These losses came after last year’s centralized contagion spread to Maple’s
crypto-native borrowers. In efforts to diversify their offerings, Maple’s pool delegates are
looking to originate loans with real world asset collateral, instead of crypto collateral. For
example, in January, Maple created a US$100M liquidity pool that are backed by tax
receivables.(17)

27
Real World Assets: The Bridge Between TradFi and DeFi

Future Trends to Watch

Layer 1 RWA Chains
One trend to watch as the RWA ecosystem evolves is the emergence of RWA based layer 1s.
Currently, the most popular RWA protocols are applications which are deployed on top of
permissionless layer 1 blockchains such as Ethereum and BNB. Chain. While there are benefits
to deploying to a permissionless blockchain, such as ease of development and crypto-native
network effects, there are also operational and technical downsides.

Structurally, permissionless blockchains were made to be public, not to be restrained by any

kind of regulatory or permissioned logic. Many RWA protocols, especially those which are
bringing securities or credit based assets to the blockchain, are required to follow regulations
and constrain the usage of their protocol to entities who have undergone a strict KYC/KYB
process. The permissioned nature of these RWA protocols structurally misaligns with the
public, free-floating access that permissionless blockchains offer. As a result, current RWA
protocols have resorted to gum-and-stick solutions to restrict access to their platforms and
comply with regulations (e.g. manually whitelisting wallet addresses, restricted frontends,
token-gated account access).

Operationally, established token standards and transparency of permissionless blockchains

may be inappropriate in the context of RWA protocols. Token standards on permissionless
blockchains, allow smart contracts of DeFi applications to be developed and run effectively.
However, these conventions can be restricting, and operationally, often cannot represent the
idiosyncrasies of real world assets. For example, if a corporate bond has a balloon payment at
expiration and is to be tokenized into a RWA, current token standards may not be able to
capture the arbitrary payment logic of this type of asset. Furthermore, all operations and
transactions on permissionless blockchains are by definition transparent and can be reviewed
on a public ledger. For certain RWA markets, there may be sensitive information that should be
kept confidential. For example, if a real estate property is to be represented as an RWA, the
person selling the property or the person buying the property may not want to disclose the
exact location for privacy purposes.

In response to the structural and operational restraints, custom-built layer 1s are being
developed to cater to the unique, permissioned demands of RWA protocols. For example,
Inatain Markets recently launched an Avalanche subnet which is specifically designed for the
permissioned on-chain issuance and trade of asset-backed securities.(18) Another example is
Provenance blockchain, which is a layer 1 that is purpose-built to seamlessly and securely

28
Real World Assets: The Bridge Between TradFi and DeFi

issue, transact, and service digitally-native financial assets at scale.(19) As the RWA space
continues to evolve, it will become more clear if the structural and operational features of
custom-built, permissioned layer 1s are more adept to handle the RWA protocol use cases.

Regulation and Enforcement

RWAs are innovative in the way they are able to bridge TradFi with DeFi. However, for this
bridge to be viable in the long term, clarity around regulation and enforcement measures of
RWAs must catch up with the innovations that have been made. This will be a critical trend to
watch for space.

In most countries today, there exists a lack of clear regulation to govern the tokenization and
securitization of real world assets. Only a few countries such as Switzerland (which recognizes
digital assets as bearer assets) and France (which has adopted the CAST Framework, a hybrid
between using the underlying blockchain as a settlement while keeping an off-chain register),
have meaningful regulation that clarifies how a protocol should bring a real world asset to the
blockchain. Further regulatory clarity will facilitate continued development and innovation in
the space.

Furthermore, enforcement mechanisms that protect the value of RWA are not well-established.
Consider a scenario in which a borrower defaults on their loan and must liquidate their RWA
collateral to pay back the lender. Given that the collateral is not liquid ERC-20 tokens, the
liquidation of these assets to recoup lender capital could prove to be far more cumbersome
than loans with crypto collateral. An alternative liquidation process that serves the lenders
must then be employed. Additionally there must be an off-chain, and legally tied enforcement
mechanisms of making sure this liquidation process is handled optimally for borrowers.

Within the next year, there is a sizable amount of debt that is due to mature. Take for example
the private credit space - over the next few years, a large amount of debt is set to mature. In
the next month alone, an expected US$15mm of loans are due.

29
Real World Assets: The Bridge Between TradFi and DeFi

Figure 24: Outstanding private credit loans to be repaid

Source: RWA.xyz, Binance Research

There have already been a few cases of bad debt on RWA protocols (e.g. Two pools on
Centrifuge undergoing off-chain resolution, Auros on Maple, resolved through off-chain
liquidation). To minimize the contagion of bad debt, it is important to establish regulation and
enforcement mechanisms that will liquidate borrower’s collateral and optimally serve lenders.

Macro vs. DeFi Environments

While the driving motivator for many protocols building in the RWA space is the long term
promise of DeFi, RWA interest in the short term has been catalyzed by rising macroeconomic
interest rates, and the fall of real DeFi yields. A bear market plight of declining prices, falling
crypto yields, and an increase of protocol hacks within DeFi has increased attention towards
more lucrative and potentially more sustainable yields outside of DeFi. DeFi native investors
have eagerly sought to engage in a globally rising interest rate environment. As such, protocols
have accelerated development of RWA offerings to meet the demand of these investors and
bridge the gap between TradFi and DeFi. As the macroenvironment fluctuates, it will be
noteworthy to watch how development, interest, and offerings in the RWA space respond.

30
Real World Assets: The Bridge Between TradFi and DeFi

Conclusion
In conclusion, RWAs are truly becoming the bridge between TradFi and DeFi. Short term
phenomena, such as rising macro interest rates, as well as long term driving motivators, such
as the efficiencies and opportunities found within DeFi, are catalyzing the development of the
RWA ecosystem. For the first time, real world, traditional assets such as bonds, real estate,
carbon credits, etc, are being brought onto the blockchain.

As time goes on, DeFi native protocols and TradFi institutions will continue to build out the
RWA ecosystem. An increasing number of DeFi and TradFi entities appear to recognize the
numerous benefits that DeFi and more specifically RWAs provide, such as tokenization, ease of
distribution, and transparency.

While the thought of a bridge between TradFi and DeFi is exciting, it should be recognized that
the bridge can only be made viable through seamless legal, operational, and structural
coordination between the physical and digital realms. This type of coordination requires
seamless information exchange and well-defined processes in the case of fault either in DeFi
or in TradFi.

More broadly, the RWA narrative is particularly notable for the crypto space as it serves as an
example between a more interconnected world. No longer is DeFi isolated from the real world
and TradFi. Blockchain is increasingly having real world use cases and proving its worth as a
transformative technology.

31
Real World Assets: The Bridge Between TradFi and DeFi

References
1) https://defillama.com/

2) https://blockworks.co/news/what-are-real-world-assets-defis-newest-yield

3) https://research.thetie.io/real-world-assets/#Credit_Protocols

4) https://www.imf.org/en/Publications/GFSR/Issues/2022/04/19/global-financial-stability-report
-april-2022

5) https://www.nasdaq.com/articles/defis-role-in-bringing-real-world-assets-into-the-21st-centur
y

6) https://www.mondaq.com/fin-tech/1138726/tokenized-assets-in-switzerland-new-structures-a
nd-standards

7) https://www.nerdwallet.com/article/small-business/small-business-loan-rates-fees

8) https://coingape.com/el-salvadors-volcano-token-all-set-to-go-live-this-year/

9) https://cointelegraph.com/news/israel-kicks-off-live-tests-for-its-tokenized-digital-bonds

10) https://blog.chain.link/tokenized-real-world-assets/

11) https://dune.com/queries/58495/116320

12) https://blog.chain.link/tokenized-real-world-assets/

13) https://blockworks.co/news/centrifuge-wants-to-back-gho-with-rwas

14) https://medium.com/centrifuge/blocktower-credit-and-makerdao-to-fund-220-million-of-real-
world-assets-through-centrifuge-b52d0fab0fee

15) https://members.delphidigital.io/reports/real-world-assets-in-decentralized-finance#goldfinch

16) https://dune.com/goldfinch/goldfinch

17) https://www.coindesk.com/markets/2023/01/25/maple-finance-plots-comeback-with-new-10
0m-liquidity-pool-for-tax-receivables-with-10-yield/

18) https://www.binance.com/en/feed/post/190320

19) https://provenance.io/

32
Real World Assets: The Bridge Between TradFi and DeFi

About Binance Research

Binance Research is the research arm of Binance, the world's leading cryptocurrency
exchange. The team is committed to delivering objective, independent, and comprehensive
analysis and aims to be the thought leader in the crypto space. Our analysts publish insightful
thought pieces regularly on topics related but not limited to, the crypto ecosystem, blockchain
technologies, and the latest market themes.

Mac Naggar, Macro Researcher Intern

Mac is currently working for Binance on their Macro Research team. Prior to joining Binance, he
worked as a Web3 Product Manager for HSBC's Global Ventures, Innovation, and Partnerships
team. Additionally, Mac has had experience on the trading side, spending time with Morgan
Stanley's Fixed Income Division, Algorand's Capital Markets Team, and CrossTower's Digital
Assets Trading Desk. Mac is a recent graduate of Cornell University and currently a Master of
Science student at the University of Nicosia, where he is specializing in Blockchain & Digital
currencies. His sector interests primarily lie in Blockchain Design & Interoperability, DeFi,
DeSo, and Institutional Adoption.

33
Real World Assets: The Bridge Between TradFi and DeFi

Read more Share your feedback

https://research.binance.com/en/analysis https://tinyurl.com/bnresearchfeedback

General Disclosure: This material is prepared by Binance Research and is not intended to be relied upon as a forecast
or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities, cryptocurrencies
or to adopt any investment strategy. The use of terminology and the views expressed are intended to promote
understanding and the responsible development of the sector and should not be interpreted as definitive legal views
or those of Binance. The opinions expressed are as of the date shown above and are the opinions of the writer, they
may change as subsequent conditions vary. The information and opinions contained in this material are derived from
proprietary and non-proprietary sources deemed by Binance Research to be reliable, are not necessarily all-inclusive
and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility
arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is
accepted by Binance. This material may contain ’forward looking’ information that is not purely historical in nature.
Such information may include, among other things, projections and forecasts. There is no guarantee that any
forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
This material is intended for information purposes only and does not constitute investment advice or an offer or
solicitation to purchase or sell in any securities, cryptocurrencies or any investment strategy nor shall any securities or
cryptocurrency be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale
would be unlawful under the laws of such jurisdiction. Investment involves risks.

34