Petrichor

RWAs have been pitched as one of those ideas to herald in the next bull run. But are they a fix-all and will the future truly be tokenized? With the bera market skimming away hype daily, now is the time to take an honest look at RWAs and understand why world domination shouldn’t be the endgame.

Petrichor describes how humans can smell the onset of rain when a bacteria called geosmin is released into the air. There’s a similar effect in crypto where influencers are sniffing around for ‘narratives’ to champion. A faint scent appears from across the ether and it becomes a driver for hopium.

RWAs are unequivocally on this list.

Bringing as many assets as possible on-chain has long been a prime Web3 goal. The concept is simple: tokenize any IRL asset with value and it enjoys all of the juicy blockchain benefits. Any market propped up around them becomes permissionless, borderless, and composable.

RWAs in Real Time

Ironically, one of the first RWA examples was Digix, a digital representation of gold. The single off-chain asset that Bitcoin is so frequently compared to also provided the foundation for crypto’s pilot run. It was a failure, but that didn’t end development. 

While RWAs face significant challenges, which will be discussed more in a moment, they also represent one of DeFi’s most glittering successes. Combined TVL for the market’s stablecoins sits at a lofty ~$125b at the time of writing (September 18, 2023).

'Securities Token Global Market Cap x Ethereum Market Cap' (chart: Counterplot.io)

Alongside this, we’ve seen substantial growth in projects like Pendle, Goldfinch, Ondo, and Maple. These act more like quasi-RWAs, where the protocols wrap tokenization around concepts around off-chain lending, securities, and yield, instead of physical assets like sneakers, trading cards, and gold.

RWA Faux Pas

As our off- and on-chain spaces increasingly collide, the hurdles now facing RWAs are becoming more and more obvious. Here is where RWAs are lacking and need to be improved.

Management

Looking at something like real estate as an example, tokenization just isn’t a meaningful growth path right now.

Taking the time to understand the infrastructure around token management and the technology is a time-sink for normies. This really shows us that the issue around RWAs isn’t the assets themselves, but how we intend people to use them.

In this light, it makes sense to prioritize another narrative - account abstraction - over everything else. Forward-thinking protocols like Goldfinch understand this and have made it a central part of their mission.

Regulations

This uncertainty around the tech extends into KYC, compliance, and regulation.

While the average degen is willing to skirt the fine line of risk around audits and regulation, bonafide industries outside of crypto aren’t going to play this fast and loose.

Again, we’re asking normies to completely reconfigure their understanding of ownership and the implications of concepts like immutability. Without some form of structure and clarity in place, DeFi won’t shake off its ‘wild west’ reputation.

Liquidity

There’s a fair amount of magical thinking around RWAs - tokenize any asset and the masses will flock. The reality is that DeFi liquidity is already fragmented enough to barely facilitate demand for the average shitcoin longer than a few weeks.

The goal becomes even harder when we compare the typical degen’s dopamine-driven pursuit for the next 100x meme coin against practical, everyday applications like a real estate firm managing its property portfolio on-chain.

Stable and secure liquidity will be a prerequisite for any industry looking to tokenize and integrate off-chain assets. Without it, everything stops.

Final Thoughts

Remove shills and blind decentralization totalitarianism, and the potential for RWAs is still clear. But it’s unlikely that even a fraction of the assets that degens pitch as use cases will ever make it.

And that’s fine.

Look at the evolution of accounting abstraction over time and we can see that each iteration is designed as an adjunct to the technology before it. In modern society, cash and paper ledgers initially sufficed, then plastic cards were introduced, and finally we have mobile banking.

But we still have cash in our pockets.

“Crypto is a use case looking for a problem” - this comment recently popped up in a r/cryptocurrency discussion. It was intended as negative but, in actual fact, it feels like a positive when you frame it around RWAs. The true power of asset tokenization in this sense is its near-infinite capacity for flexibility.