Disclosure: The views and opinions expressed herein are solely those of the author and do not represent the views and opinions of the crypto.news editorial.

Integrating traditional real-world assets, or 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 and database management costs, and to make provenance and proof-of-ownership processes much less tedious.

2023 became the year when theory finally started to turn into practice. The private credit market, destroyed by the ripple effects of the Earth-Moon collapse in 2022, recovered by 60%, and its main beneficiary base has shifted from crypto-native finance companies to the automotive sector (42% of tokenized private credit in 2023). Most important for the industry, however, has been the emergence of a completely new type of RWA products:tokenized treasures. Tokenized Treasuries aim to dethrone what currently makes up the largest share of RWA: stablecoins. Sought after by both retail and institutional investors and experiencing seven-fold growth in volume, Treasuries are bringing an integral ingredient for maturity to blockchain: stability. It appears we are approaching the most significant year for RWA tokenization.

The main blockchain technological advances in recent years have involved various types of transaction optimization, helping to bring greater efficiency, security and scalability. For example, developing level 2 solutions such as zero-knowledge proofs or optimistic rollups have helped increase the throughput of primary blockchains, reduce transaction execution times, and significantly lower and stabilize the networks’ gas fees.

While L2 has pushed forward the capabilities of individual blockchains, cross-chain communications projects have worked to create further network value. Improved ease and security of interoperability has brought greater usability to the web3 ecosystem as a whole.

In addition to these developments, new services have emerged, which have improved the efficiency of RWA tokenization. Maple, Centrifuge, Backed and many others have taken well-explored concepts of defi, liquidity pools and collateralized lending and applied them to traditional finance. This allowed their users to invest in real-world corporate bonds across different jurisdictions, get a share of the private credit pie, and engage in tokenized lending with institutional lenders.

In early 2023, Issued by Ondo Finance the Ondo Short-Term US Government Bond Fund (OUSG), which offers investors access to a tokenized version of BlackRock’s (NASDAQ: SHV) iShares Short Treasury Bond ETF. While OUSG only raised a little more than $110 million in total locked value in one year, this marked the start of a new, much more discreet trend: the rise of tokenized U.S. Treasuries.

According to Fed research and data from DeFi Llama, the total fraction of real-world assets in defi is greater than doubled over the last year. Although this can be partially attributed to the release of institutionalized infrastructure such as Goldman Sachs‘ Digital Assets Platform (GS DAP) e JP MorganThe Tokenized Collateral Network, tokenized private credit and digital bonds alone cannot explain the booming dynamics of the overall market. Rather, special attention should be paid to the issuance of tokenized US government short-term debt.

Investors may have been attracted to short-term risk-free debt following continued increases in federal funds rates, a natural market dynamic. Another part of the equation is the collapse of abnormal returns across the cryptocurrency landscape. Second compared to Coinchange’s Defi return benchmarks, minimum risk returns in Defi hovered around 4-5%. This not only significantly narrowed the spread with Treasuries, but was even pushed into negative territory at times.

Although tokenized asset markets have shown some signs of maturation in 2023, several unanswered questions continue to inhibit the transparent development of the RWA industry. The most important of these is, of course, regulation: until there is an unambiguous regulatory framework or a precedent of failure in a major jurisdiction, it cannot be said with certainty that tokenized assets represent the same right of first refusal on the underlying asset . from a legal point of view. Another degree of freedom concerns how the infrastructure will evolve to enable efficient access to tokenized asset markets.

However, the increase in broader RWA adoption is expected to continue into 2024, with tokenized Treasuries becoming the biggest beneficiaries of renewed attention. I see this asset class as a perfect product-market for risk-averse defi investors: unlike stablecoins, tokenized Treasuries are immune to changes in confidence, are absolutely safe as long as the underlying smart contract is diligently monitored, and generate yield. In fact, we’ve already seen the start of the overhaul. From April 2024, capital allocation to tokenized US Treasury securities passed $1.09 billion, nearly ten times more than the $114 million at the start of 2023.

In my opinion, such a warm welcome requires urgently expanding the scope beyond the most obvious solution, especially since tokenized Treasuries are not a one-size-fits-all tool. A market worth almost a trillion dollars growing with a compound annual rate of 19.1%, Sukuk, the closest analogy to bonds in Islamic finance, will be next to appear on the chain. Islamic law prohibits investments in interest-bearing securities as they are considered usury, a haram activity, so traditional bonds are not available to religious Muslim market participants. Instead, Sukuk circumvents the ban by providing fractional ownership of the asset and a right to a portion of the cash flow generated. I think the potential tokenization of Sukuk will offer the Muslim community the opportunity for secure, transnational halal on-chain investment, taking digital Islamic finance to a new level. With the gradual growth of regional crypto markets in the MENA region and the continued involvement of companies and governments in infrastructure investments, I believe that a potential on-chain Sukuk has a well-matched target audience.

Anticipating the rise of digital bonds does not mean that stablecoins have already vanished. On the contrary, 2024 may finally bring competition and diversification to a market that, for a long time, was effectively divided between Tether and Circle. From controversial concepts like USDe to new entrants with confidence models such as the Ripple stablecoin, the sleepy stablecoin market is experiencing a shakeup. In this regard, I believe the most underrated opportunity that deserves special attention is gold-backed stablecoins, considering that gold is in the media spotlight after reaching an all-time high price level. While not an entirely new concept, its previous efforts lacked technical excellence and liquidity and attempted to enter an inconvenient market. In a turbulent reality where Costco gold bars are located swept off the shelves, I think it’s only a matter of time before the promising idea gets a new iteration.

Overall, it appears that tokenized real-world assets have successfully passed the initial phase. In my opinion, 2024 will likely lead to more widespread adoption of existing instruments, particularly tokenized Treasuries, and spur competition and innovation, particularly in the Sukuk, fiat, and gold-backed stablecoin markets.

Alex Malkov

Alex Malkov is co-founder of HAQQ, a blockchain platform with an ethical approach, which emphasizes real-world assets. He brings extensive legal consulting experience from his work with leading blockchain and fintech companies, including AAVE, Bequant, Scalable Solutions and Nebula. His legal and regulatory knowledge ensures that HAQQ aligns with broader legal frameworks. With over a decade of experience in legal practice, Alex has spent seven years focusing on web3 projects. His experience is fundamental for navigating the complex legal landscape of blockchain technology.

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