What is RWA? Revealing how real-world assets are transforming the DeFi ecosystem

Real World Assets (RWA) are becoming a new trend in the crypto market. But what exactly is RWA? Why are many DeFi projects and traditional financial institutions eager to get involved? To understand the value of RWA, we need to first see the trillion-dollar opportunities behind it.

Why RWA Can Unlock a Trillion-Dollar Market

RWA generally refers to various assets existing in the real world. These assets cover a wide range: cash (like USD), precious metals (gold, silver), real estate, bonds (especially U.S. Treasuries), insurance products, consumer goods, credit notes, and licensing fees, among others.

How big is the potential in this sector? Just look at these figures—globally, the fixed income bond market is about $127 trillion, real estate totals approximately $362 trillion, and gold market value is around $11 trillion. In comparison, the total market cap of native crypto assets is only about $1.1 trillion, less than one-tenth of gold’s value.

What does this mean? If even a small portion of these RWAs are integrated into DeFi, the scale of DeFi could experience a qualitative leap. That’s why RWA is often called the new engine for DeFi growth.

Three Core Applications of RWA in DeFi

To bring RWA onto the blockchain, projects typically rely on smart contracts to create tokens representing these assets, while off-chain guarantees ensure that the issued tokens can be redeemed for the underlying assets at any time. Based on this logic, RWA has evolved into three main application forms in DeFi.

Stablecoins: The Most Mature RWA Form

Major stablecoins like USDT, USDC, BUSD are actually RWA. Issuers like Tether, Circle, and Paxos maintain audited USD reserves to back their tokens, providing a value anchor for blockchain and DeFi protocols. This is the earliest and most mature practice of RWA.

Synthetic Assets: Bringing Stocks and Commodities On-Chain

Synthetic assets are another important RWA application. They allow traditional assets like stocks and commodities to be traded on-chain as derivatives. Synthetix is a pioneer in this field; during the 2021 bull market, the protocol locked over $3 billion in assets, demonstrating strong market demand for such products.

Lending Protocols: RWA as Collateral

RWA can also serve as collateral in lending protocols. Borrowers can tokenize real assets like real estate or bonds and use them as collateral on DeFi platforms. More innovatively, credit-based lending is emerging—where, even without traditional collateral, reputable institutions can borrow based on their credibility. These innovations significantly promote the sustainable development and revenue growth of DeFi lending.

MakerDAO Leading the RWA Track: How $680 Million Is Achieved

Among DeFi projects, MakerDAO has gone the furthest and deepened the most in RWA. Its RWA business exceeds $680 million, accounting for over 58% of the protocol’s revenue—indicating RWA has become a core part of MakerDAO’s business.

A key reason is that traditional finance generally offers higher yields. For example, U.S. Treasuries yield about 3.5%, while top DeFi lending protocols offer around 2%. This yield spread presents an opportunity for DeFi protocols to generate sustainable income.

To manage this large RWA portfolio effectively, MakerDAO established a dedicated RWA Foundation, setting up different funds for various collateral types. Each special purpose vehicle (SPV) can choose the most suitable jurisdiction and legal structure based on business needs.

Off-chain assets are handled with innovative adjustments to traditional collateral logic. Instead of on-chain auctions for liquidation, authorized third parties enforce liquidations off-chain. MakerDAO developed specialized smart contract modules (like RwaLiquidationOracle, RwaFlipper, RwaUrn) to manage liquidation processes, payments, and token representations.

When MakerDAO needs to initiate liquidation, it triggers an oracle function to start a countdown. If the issue is resolved, governance can call functions to restore normal. If the off-chain executor reports the position as liquidated, the system records the loss. This mechanism is more flexible than traditional liquidation and better suited for off-chain assets.

Three MakerDAO RWA Cases:

1. U.S. Treasuries managed by Monetalis—about $500 million—providing yield from idle USDC collateral.

2. Partnership with Huntingdon Valley Bank (HVB): MakerDAO provided $100 million in loans to HVB, which used the funds to grow existing business and invest in real estate. This is the first case of a U.S. regulated financial institution engaging in a commercial loan with a decentralized digital currency.

3. French banking giant Société Générale: Borrowed $7 million from MakerDAO, collateralized by €40 million in AAA-rated bonds (represented as OFH tokens).

Centrifuge and NFTs: Redefining RWA in Crypto

While MakerDAO upgrades RWA within traditional frameworks, Centrifuge redefines RWA’s role in crypto through NFTs. Its core dApp, Tinlake, innovatively tokenizes real assets directly as NFTs.

How Tinlake Works:

Asset originators use the Tinlake bridge to convert real-world assets into NFTs containing legal documents. These NFTs serve as collateral to create asset pools.

Each new pool issues two tokens—DROP and TIN. Investors choose to invest in a pool and buy the corresponding tokens based on their risk appetite.

• DROP tokens offer guaranteed returns, determined by a fee function, with fixed interest and continuous compounding—similar to bond yields—stable but limited.

• TIN tokens do not have guaranteed returns; their yields depend on the pool’s actual investment performance, potentially higher but with greater risk. If the borrower defaults, TIN holders are the first to bear losses.

This design creates risk layers, attracting both conservative and risk-tolerant investors. To date, Centrifuge’s TVL has exceeded $170 million.

Opportunities and Challenges in RWA Development

The RWA market has vast potential but also faces real challenges.

Trust Cost Remains a Core Issue

RWA tokenization involves assets that exist off-chain, which cannot be forcibly liquidated or disposed of via smart contracts. This means trust in these assets still relies heavily on traditional financial institutions’ backing. As a result, RWA’s trust attribute is currently hard to match with fully on-chain native assets.

Because of this, permissionless DeFi protocols find it difficult to support RWA without centralized involvement. Most RWA tokenization projects still require some form of centralized endorsement when handling off-chain assets.

Lessons from STOs

It’s worth noting that Security Token Offerings (STOs) were once seen as a limited form of RWA. Although STOs are mainly conducted on permissioned platforms and are limited in scope, they are among the few asset tokenization methods recognized by regulators. Their development path—embracing regulation and gaining compliance—may point the way forward for RWA.

Overall, RWA is moving from theory to practice. Pioneers like MakerDAO and Centrifuge have demonstrated feasibility. With more traditional financial institutions participating and regulatory frameworks improving, RWA could become a vital bridge connecting traditional finance and digital assets.