Over the past decade, the world of cryptocurrency has exploded with new and innovative projects seeking to disrupt traditional finance. One area of particular interest has been the rise of real-world assets (RWA) Altcoins. They are coins backed by real-world assets such as gold, real estate, or other physical goods. These Altcoins offer the stability and security of tangible assets, while also leveraging the advantages of blockchain technology.
RWA Altcoins have gained significant attention as a potential solution to the volatility and lack of stability that has plagued the cryptocurrency market. By tying the value of a token to a real-world asset, investors can have greater confidence in their holdings, and the token can potentially serve as a hedge against inflation and market turbulence.
However, RWA Altcoins are not without their challenges. Questions about how assets are verified and stored, as well as regulatory issues, can make the development and adoption of these tokens more complex. Nevertheless, the potential benefits of RWA Altcoins are significant, and many are watching closely as this exciting new field continues to evolve. In this article, we’ll explore the world of RWA Altcoins and examine the benefits, challenges, and future potential of this exciting area of innovation.
What are Real World Assets?
Real-world assets (RWAs) refer to tangible or off-chain assets that have value in the physical world and can be represented on the blockchain. Examples of RWAs include real estate, precious metals, commodities, and traditional financial instruments such as bonds and stocks.
In the DeFi industry, RWAs can serve as collateral for loans and other financial transactions, bringing greater stability and security to the ecosystem. This has opened up vast opportunities for emerging markets, as previously underserved populations can now access global lending platforms and financial services through blockchain technology.
Real-world lending on the blockchain has the potential to transform the traditional lending industry by making it more accessible, transparent, and efficient. By leveraging the benefits of blockchain technology, such as increased security and immutability, RWA lending can reduce fraud and lower transaction costs while increasing access to capital for those who need it most.
In addition, smart contracts can automate the loan application process, streamlining the workflow and reducing paperwork. This makes it easier for lenders to evaluate potential borrowers and offer them better terms. Blockchain-backed loans can also be used to create new types of financial instruments that were not previously possible, such as cross-border lending or peer-to-peer lending. By taking advantage of these new opportunities, lenders can extend their services to a larger, more diverse range of customers than ever before.
Ultimately, blockchain-backed loans will revolutionize the lending industry and provide more equitable access to capital for everyone. Blockchain-based loan platforms offer many advantages over traditional lending models. For example, they are highly secure and offer transparency throughout the entire loan process. This makes it easier for lenders to track payments and detect any fraudulent behavior.
Blockchain-backed loans also come with low processing fees, making them more affordable than traditional loans. They provide borrowers with greater flexibility in terms of repayment schedules and interest rates. In short, blockchain-based loans offer an efficient, secure, and cost-effective way for borrowers to access capital.
The potential of blockchain-backed loans has already been recognized by major financial institutions around the world. Several banks and online lenders have started offering this type of loan in recent years. Cryptocurrency exchanges are also beginning to offer their version of blockchain-based loans. These loans are often referred to as “decentralized lending” and come with the added benefit of being accessible from anywhere in the world.
How do RWA altcoins work?
RWA tokenization is a process of creating a digital copy of a real-world asset on the blockchain. This can be achieved in two ways. The first method involves creating a synthetic version of the asset on the blockchain. For example, the Synthetix platform allows users to trade synthetic assets such as Gold, Silver, Euro, and Japanese Yen on-chain. Users must put up collateral to mint these synthetic assets, which help to improve the market’s liquidity. Synthetix uses on-chain and off-chain oracles to ensure that the prices of these synthetic assets do not stray away from their actual value.
The second method of RWA tokenization involves tokenizing the underlying asset on the blockchain. CitaDAO is an example of a platform that tokenizes real estate by turning it into ERC-20 tokens. This enables transactions of the underlying asset and fractionalizes the property into smaller portions, which allows holders to own a fraction of the real estate for as little as $1. The rental income generated is used to buy back and burn ERC-20 tokens, which represents the underlying property. This incentivizes liquidity through fees and theoretically increases the value of the token. Unlike synthetic tokens, the prices of these tokens are determined by the free market rather than on-chain oracles.
Advantages of Adopting RWA
There are many advantages to investing in real-world assets (RWAs). By eliminating intermediaries and rent-seekers, investors can save money. Additionally, tokenization of these assets provides access to smaller investments, allowing investors to purchase a small fraction of a larger asset. This can improve loan access for emerging-market businesses. RWAs can also enhance liquidation of traditionally illiquid assets such as real estate, fine art, and private equity. The transparency provided by RWAs enables investors to see the asset’s economic value and history of ownership, which enhances accountability and trust in the investment. Overall, RWAs offer a unique opportunity for investors to access and benefit from traditionally hard-to-reach assets.
Difficulties of Adopting RWA
While there are significant advantages to RWA tokenization, there are also risks that must be considered. For instance, if a building is tokenized as an NFT and the owner’s wallet is hacked, does the legal ownership of the building transfer to the hacker? Although this scenario may seem humorous to those in traditional finance, it highlights the potential risks associated with tokenization due to the nascent nature of crypto.
Another risk to consider is liquidity crunches. When market conditions become volatile, low liquidity can have disastrous effects on pegged or algorithmically-pegged assets. Users may rush to sell their positions, which can compound the effect. However, this can be offset by arbitrage opportunities, where an entity can redeem the underlying asset and sell it for its real value. By using the profits, the entity can purchase the de-pegged asset and repeat the process to stabilize its price.
There are several concerns surrounding the regulation and taxation of RWA investments. Collateral holdings firms’ centralized structure and the limited accessibility of some assets could raise regulatory concerns. Selling assets in prohibited areas can be discovered by regulatory agencies like the CFTC, which could result in legal problems.
In addition to regulatory concerns, RWA investments may also face challenges with taxes. Double taxation and low yields are among the issues that could arise. For example, taxes could reduce a 4% interest on US Treasury Bills to a 1-2% yield, both at the level of the collateral fund and the level of the individual investor. This could make yield farming in DeFi more appealing than RWA investments.
Examples of Successful RWA Projects
Centrifuge
Centrifuge is a DeFi lending protocol designed to increase small businesses’ access to credit while providing stable returns for investors. The platform opens up pooled liquidity to traditional finance, allowing investors to earn a predictable reward on their investments while protecting themselves from the volatile nature of the crypto markets.
Centrifuge’s dApp, Tinlake, is a marketplace for tokenized real-world assets. By creating NFTs that represent verified real-world assets, companies can use them as collateral on their loans and access more liquid funds quickly. Individual investors provide these funds, and they can use traditional business lending methods to earn a more predictable return on their investment. In summary, Centrifuge and Tinlake provide an innovative solution that benefits both small businesses and investors in the DeFi space.
Centrifuge is working with Maker and Aave, and in December 2022, it launched a $220 million fund in collaboration with BlockTower Credit to bring institutional credit onto the blockchain.
Goldfinch
Goldfinch is a decentralized lending protocol that eliminates the need for intermediaries in the lending process. By leveraging smart contracts, Goldfinch creates a transparent, automated, and cost-effective borrowing and lending experience for its users. The platform’s primary goal is to provide affordable and accessible lending options to businesses worldwide.
Unlike highly volatile DeFi lending, Goldfinch’s yields come from real-world lending, and investments are collateralized off-chain. This sets them apart from other DeFi lending protocols. Investors on Goldfinch can expect returns that won’t disappear, and they can use the platform’s global credit marketplace to access sustainable APYs from businesses that create real value in the world. In summary, Goldfinch offers a secure and reliable platform for businesses and investors to participate in the lending ecosystem.
Maple Finance
Maple is a blockchain-based capital marketplace that aims to simplify the process through which businesses access funding. The protocol is built on Ethereum and Solana, and its mission is to redefine capital markets through digital assets. Maple uses smart contracts to remove time and cost frictions, while blockchains provide immutability. The protocol offers tooling for credit experts to build lending businesses on Maple, which allows for undercollateralized lending for institutional borrowers and income opportunities for lenders.
Maple’s native token, MPL, is a utility and governance token that conforms to Ethereum’s ERC-20 and ERC-2222 token standards. In summary, Maple provides a cutting-edge solution for businesses seeking funding by leveraging blockchain technology to streamline and simplify the lending process.
Conclusion
RWA and Blockchain-based loans tokenization can transform the traditional lending industry by making it more accessible, transparent, and efficient. However, RWA investments also face challenges with regulation, taxes, and liquidity risks. Despite these obstacles, successful RWA projects like Centrifuge, Goldfinch, and Maple Finance are disrupting traditional finance and opening up new opportunities for investors and businesses. The potential benefits of RWA altcoins are significant, and as this innovative field continues to evolve, it is sure to attract more attention and investment from the crypto community.
