Author: Yash Agarwal@yashhsm

Compiled by: Joyce, BlockBeats

"By 2030, the tokenization of illiquid assets will reach $16T" - BCG

In 2023, the tokenization of the real world gained widespread attention, winning the title of "TradFi Killer App" from JPMorgan Chase and being hailed as "the next generation of the market" by BlackRock CEO Larry Fink. According to DeFiLlama data, RWA has become the eighth largest field in DeFi with a TVL of $2.4 billion.

In short, RWA can bring any off-chain financial asset to the chain. These assets can be anything from real estate to credit, treasuries, green bonds, and even commodities like whiskey. While current solutions may seem like "putting lipstick on a pig," that is, adding unnecessary cryptographic measures, tokenization does help create and enable:

Global financial infrastructure - Cryptocurrencies are inherently global;

24/7 - Always online, unlike traditional finance;

Programmable - Once tokenized, assets can be tracked and programmable, automating terms in financial contracts;

Composability - This makes DeFi powerful, able to interact with more than 10 protocols at the same time.

This article will take a deep dive into the Solana RWA market, introduce the various categories of RWAs and the top Solana projects in each category, and explore the future prospects of RWAs on Solana, with a particular focus on the need for RWA standards.

Why use Solana for RWA?

Solana, like any other public chain, enhances transparency, automates payment calculations, enables asset self-custody, and provides a global 24/7 settlement infrastructure for tokenized assets.

In addition, Solana offers the following advantages:

Low Gas Fees and High Speed: For high-frequency use cases such as tokenized FX, stocks, etc., Solana enables transactions with extremely low fees, faster settlement, and high TPS - all with a single shared global state.

Standards and Ecosystem: A healthy ecosystem of proven DEXs, and strong standards such as cNFT (compressed NFT), pNFT (programmable NFT), Token 2022, etc., provide RWA with the basic building blocks to create and launch its product. We will dive deeper into the infrastructure available to the RWA project on Solana later in this article.

A Multi-Chain Future with Solana as the Execution Layer

DeFi protocols such as lending or spot DEX benefit from a single chain like Solana due to shared liquidity, composability, strong chain community support, and centralized infrastructure development for the chain.

However, for RWA, being tied to a single chain may not be the most strategic choice given that most infrastructure components are off-chain, and this approach will limit its TAM (Total Addressable Market). It is wiser to embrace a multi-chain strategy. This can be referenced by the fact that many stablecoins are currently available on multiple blockchains, and USDC is currently available on 14 blockchains.

Strategies that can be explored include accepting user deposit funds on multiple blockchains, but the actual transactions and processing are carried out on a single blockchain. Take Credix as an example, it can accept deposits from multiple blockchains such as Ethereum and Solana, but its actual transactions and processing all occur on the Solana blockchain.

RWA Projects on Solana

Although RWA has a huge space for development, the potential of RWA on Solana is often overlooked. Unlike other DeFi fields, the adoption of RWA will not happen suddenly and may take 5-10 years. In this market, TAM has no clear upper limit and its value has the potential to grow exponentially.

Pathways to RWA Adoption and Different Categories

Stablecoins

While stablecoins are not typically classified as real-world assets, they are the first real-world asset to gain significant traction with underlying reserves in USD and Treasuries. It can also be argued that stablecoins exhibit the highest product-market fit within the RWA category. Solana has the following stablecoins:

Denominated in US dollars:

USDC, backed by dollars and Treasuries held by US banks and custodied by BlackRock;

USDT, purportedly backed by dollars, Treasuries and other assets;

UXD, partially collateralized by RWAs such as private credit;

Bridge Wormhole DAI, backed by DAI, which is in turn partially backed by RWAs.

Non-USD denominated:

QCAD, a CAD stablecoin backed by the Canadian dollar

EUROE, a EUR stablecoin backed by the Euro

ISC, backed by a basket of real-world assets

We expect to see a slew of non-USD stablecoins on Solana in the coming months, along with innovation in yield stablecoins.

Real Estate

Two major real estate companies on Solana, Parcl and Homebase, are already live and performing very well. While the two appear similar on the surface, they are very different. Homebase represents real estate on-chain, while Parcl focuses on tokenizing real estate price indices:

Homebase: Tokenizing US Real Estate

Homebase enables anyone to invest in real estate for as little as $100 and is currently tokenizing real estate in the US. It has sold two tokenized properties worth over $400,000 and is still in the early stages. Here’s how Homebase works:

· The Homebase SPV entity acquires the property, and the NFT represents the ownership of the SPV;

· Users use USDC as NFTs to purchase properties listed on Homebase;

· USDC is pooled and converted to USD to purchase the property represented by the SPV;

· Rental proceeds are converted from USD to USDC, and users automatically receive monthly rental proceeds in their wallets;

· Users can buy and sell Home NFTs through the Homebase marketplace.

The best part is that Homebase is fully compliant, its tokens are registered with the SEC, and a process has been established for token recovery in the event that a user's wallet is hacked. However, it is currently only available to US residents.

Parcl: Long/Short on Real Estate Indices

Parcl allows anyone to invest in real estate assets for as little as $1 through a REIT-like index that provides exposure to real estate markets in cities around the world.

Think of Parcl as a company that creates real estate indices and provides price feed services. It has also developed a perpetual AMM platform to assist users in trading these indices, whether they want to go long or short. It currently has a total value locked (TVL) of over $1 million. Currently, the service is operational in major US cities such as Brooklyn, Las Vegas, and Paris, with exciting new additions such as London, Jakarta, and Hong Kong coming soon.

Liquidprop is another emerging player in the real estate space following Solana's Homebase type model. It enables users to invest in tokenized residential real estate across the United States. While it's not live yet, it will certainly be an interesting landscape when they do.

The best part is that this market is not a winner-take-all situation. There can be 100+ real estate tokenized markets on Solana without having to compete with each other as they can serve different geographies and tap into a massive industry worth over $330 trillion.

Private Credit

In the TradFi world, loans that do not originate from the banking sector are categorized as “private credit.” These loans are typically short-term (30-90 days) floating rate and involve direct lending between investment funds and corporate borrowers (usually small to medium-sized companies). It is already a significant industry with over $800 billion in assets under management in traditional finance. On-chain private credit is very similar to its traditional finance (TradFi) counterpart. However, it is different because it represents on-chain loans (real world assets) allowing anyone to invest using stablecoins.

To illustrate the concept of on-chain private credit, let’s look at the case of Credix Finance:

Credix Finance: A Major Private Credit Player on Solana

In a nutshell, Credix is a credit marketplace that connects investors with fintechs in emerging markets. They are solving the core problem of access to untapped credit opportunities. Here’s how it works:

Investors: Invest stablecoins like USDC in a liquidity pool or a specific portion of a specific deal on the market.

Borrowers: Credix primarily works with fintech borrowers in emerging markets who borrow USDC and convert it to local currency. The local currency (e.g. Brazilian Real) is then loaned out to various types of businesses.

The types of credit provided through fintechs can be very diverse: trade receivables (through Clave), asset-backed auto loans (through Atria), income-based financing (through Brazil and Mexico).

Credix Finance has been growing rapidly and has issued over $40M in private credit, generating over $4.9M in interest. The current 90-day trailing APY is around 12.9%. To make it more attractive to investors, a portion of its portfolio is also insured and reinsured.

AlloyX is another project that aggregates private credit agreements for lenders looking to get on Solana.

Challenges and opportunities in private credit

While private credit tokenization is a huge untapped opportunity, solving much-needed problems of hard access and reducing operational and monetary costs, they also face their own challenges:

Bad debt challenges: For example, recently, Goldfinch, a platform similar to Credix on Ethereum, had a pool of funds from a fintech company called "Tugende" that provided loans to motorcycle taxi operators in Kenya. They borrowed funds under the name of "Tugende Kenya" and transferred the funds to its subsidiary "Tugende Uganda" to solve business problems. This violation of the loan agreement was discovered through quarterly reporting, highlighting the ongoing challenges in the private credit sector that RWA has not yet addressed.

In addition, enforcement in emerging market jurisdictions such as Kenya is challenging, making bad debt recovery difficult.

Tracking off-chain data: In emerging markets, due to the lack of on-chain credit risk data or means to verify off-chain data, and the lack of a strong credit underwriting infrastructure, RWA protocols can only rely on data provided by borrowers. This can be easily manipulated. After the loan is issued, tracking the loan and the borrower's financial status becomes impossible because it is completely off-chain, which can lead to mishandling (such as the Tugende-Goldfinch case).

Solving these challenges requires innovative credit structures, including:

More active risk tracking and mitigation frameworks, such as more decentralized underwriting, involving multiple professional parties (stakeholders) in risk assessment. Coordination can also be done on-chain;

Active post-loan payment tracking through integrations such as open banking APIs. Insurance/reinsurance (like Credix does).

U.S. Treasuries

U.S. Treasuries are the most popular RWA on-chain, with over $660M issued across all chains and still under active development by many participants. This is primarily due to the high interest rate environment, as USD-denominated Treasuries offer a 4-5% risk-free yield. Solana is still in the early stages of Treasuries tokenization, with only one player, Maple.

Maple Finance: The First Tokenized Treasuries on Solana

Maple Finance, one of the largest institutional capital markets in the crypto space, announced its return to Solana with a cash management product. In just a few days of launching its cash management product on Solana, it has attracted over $4.2M and is expected to continue to grow. Here’s how Maple’s cash management product works:

· Lenders supply USDC-SPL to the pool and receive LP tokens in exchange;

· The pool issues a USDC-SPL loan to Room40 Capital’s Solana wallet, and the USDC is converted to USD via Circle, which is connected to a prime brokerage firm;

· Room40 is the borrower and manages the Treasury. Maple Finance therefore acts as a marketplace between lenders on Solana and borrowers like Room40 Capital;

With tokenized finance players like Ondo, Open Eden, and MatrixDock exploding in Ethereum, we should see many of these players expand to Solana in the coming months.

Physical Goods

Any physical good, from art, trading cards, and sneakers, can be tokenized and brought to the blockchain. The process of tokenizing physical goods is as follows:

Vault:Physical goods are authenticated, securely stored in a vault, and represented on-chain as NFTs, or fungible tokens;

Marketplace:Users can buy, sell, and transfer tokens on the marketplace;

DeFi:These on-chain assets can also be used as collateral for loans.

Also, similar to stablecoins, you can deposit your physical commodities to tokenize them, or redeem tokenized physical commodities for actual physical commodities. However, unlike stablecoins where the dollar is tokenized, there are physical commodities involved here, which require physical delivery.

There are two fascinating players on Solana:

BAXUS, founded by a whiskey trader and a software engineer, is a secure marketplace for authenticating, storing, buying, and selling wine and spirits. The bottles are tokenized while being securely stored in vaults in the United States.

CollectorCrypt is a unique tokenization service that brings real-world collectibles to Solana. It’s like Courtyard, but for Solana. People can also deposit physical cards and tokenize them.

Another interesting player on Solana, Blockride, is tokenizing bus fleets and is still in the early stages. It allows users to buy a small portion of a revenue-generating bus fleet for as little as $50 and receive a percentage share of daily revenue directly in their wallet.

RWA Infrastructure on Solana

While most DeFi infrastructure may not be suitable for RWA, they are constantly evolving and developing and will provide important experience and technical foundations for future financial systems.

We can categorize the infrastructure as follows:

RWA-focused like Bridgesplit: Bridgesplit is an infrastructure platform on Solana that allows asset custodians and marketplaces to offer financing products to businesses and individuals. It started out as a platform for tokenizing off-chain assets into NFTs, and later shifted its focus to RWAs. However, the Bridgesplit team has not released any major updates or versions recently. Another key infrastructure related to RWA financial management is multi-signatures such as Squads, which helps protect its on-chain collateral assets, and Streamflow for streaming payments such as bond yields.

DEX (AMM and Order Book):While it may not be immediately apparent, the ultimate goal of RWA is to trade on a DEX. DEXs are not just designed for trading Meme coins; they are undergoing rigorous testing to facilitate the trading of tokenized assets in the near future.

AMM: The main obstacle that prevents RWA from being freely traded is the lack of a "permissioned pool". For example, individuals should be able to exchange their tokenized credit positions for stablecoins through an AMM pool.

Order books: Order books are particularly suitable for frequently traded RWAs, such as tokenized stocks and foreign exchange markets, because these assets already exist in traditional financial systems that use order books. In addition, in markets with greater liquidity, order books can have narrower spreads. Order books are the preferred choice of most market makers because they provide flexibility to LPs (liquidity providers) and more precise control over the prices at which traders buy and sell.

Solana has a strong advantage in order books. Solana is the only blockchain powered by Openbook and Phoenix that processes more than $2 million per day.

Oracles: Oracles are an important source of truth for off-chain asset data and ensure proof of reserves for real-world assets. Solana has two main oracles - Pyth (permissioned) and Switchboard (permissionless) that can be used to stream off-chain data onto the Solana blockchain.

On-/Off-ramps:Fiat Currency <> Conversions between cryptocurrencies, especially between specific fiat currencies and their stablecoin pairs (such as the US dollar <> USDC), are critical to reducing payment costs associated with RWA operations.

Bridges:In the future, bridges will play a critical role in RWAs, as most RWAs will be multi-chain (native execution on multiple chains) and some may even be cross-chain (deposits are on multiple chains, while execution occurs on one chain).

While Solana has a wide range of bridges supported by Wormhole and DeBridge, it is critical to have more bridges and cross-chain token standards. One example of bridging real-world assets is Wormhole bridging CHAI (a tokenized version of the DAI Savings Rate), which allows investors on Solana to earn yield on DAI.

Token Standards

Token standards play a critical role as they enable “tokenization” in a secure and standard way:

SPL Tokens:The primary token standard on Solana, representing fungible tokens. Just like any stablecoin, any RWA player can issue their assets as SPL tokens, with features like dynamic supply, minting, freezing, burning, etc.

Token 2022: Expanding on the original standard, Token 2022 enables additional features relevant to RWA:

Confidential Transfers: Allows tokens to be transferred privately; relevant to institutions seeking to hide transactions

Transfer Fees: Issuers can configure transfer fees or taxes on transactions

Interest-earning Tokens: Tokens that accumulate interest over time, like bonds

Non-transferable Tokens: Tokens cannot be transferred once issued

Metaplex Standards for NFTs: Metaplex has a suite of NFT standards, such as Compressed NFTs and Programmable NFTs, which can also allow RWA players to represent unique assets.

While current standards cover a wide range of scenarios, the lack of RWA standards is hindering the adoption of RWAs on Solana.

Solana Needs RWA Standards

The Solana ecosystem lacks a unified, widely accepted standard for tokenizing RWAs. Just as standards like the JPEG and PDF formats standardize files across different devices and facilitate content sharing on the internet, a standardized RWA standard could help improve RWAs on Solana. Think of it this way: just as Metaplex makes it easy to create NFTs, a standardized RWA token could simplify the process of creating tokenized RWAs.

Homebase founder Dom started this much-needed discussion on the Solana forums, and coincidentally, I also had this idea and prepared a flowchart for a “permissioned RWA token.” Here’s my vision:

Tokenization at the asset level rather than the pool level:For example, instead of tokenizing a pool of loans issued by a fintech company, each loan of an Argentinian merchant would be tokenized as an individual asset, with each token representing a portion of that fund. Tokenization at the asset level allows for a more transparent representation of ownership, allowing the performance of all assets on-chain to be tracked in real time.

For example, if all of Circle’s deposit balances at different banks were available on-chain at the asset level, rather than simply as “$8.4 billion in capital exposure to multiple banks,” Circle’s exposure to SVB Bank could be tracked in real time at an aggregate level.

RWA standards on other chains:It is also necessary to pay attention to existing standards such as ERC-3643 (used by Tokeny), ERC-1400 (used by Matrixport), ERC-6065 (real estate), and ERC-4626 (used by TrueFi) and incorporate best practices from them.

BD push:It is worth noting that the RWA token standard requires an initial BD push and re-iteration based on institutional needs to gain initial adoption.

The initial standard adopters can range from fintech companies to RWA projects to traditional financial giants. This will also require building custom solutions and providing "hook" type functions for anyone to build on.

Flexible and upgradeable:All contracts must be inherently upgradeable to adapt to the changing compliance needs of asset issuers. Any asset issuer should be able to easily implement additional smart contracts to protect investor rights (e.g. voting, dividends, announcements).

It should also enable token recovery in the event of a wallet private key loss, and maintain a transparent history of recovered tokens on the blockchain. The components of the standard should be as modular as possible so that any player can easily plug and play.

The best part is that the Solana Foundation has an RFP (Request for Proposals) to apply for grants (up to $250,000) to build out the RWA standard program. This can serve as a reference implementation for anyone building on RWA, and serve as the basis for a coalition of leading ecosystem RWA projects, ensuring adoption, maintenance, and long-term sustainability.

What is Solana missing compared to other ecosystems?

While Solana’s RWA space is booming, it still falls short compared to other ecosystems. Here’s how it compares to other ecosystems:

Ethereum: Technology aside, RWA protocols crave one thing: capital. Ethereum has by far the most capital leverage, which is why nearly every RWA protocol is targeting Ethereum as one of its main chains.

Attracting capital from Ethereum while retaining Solana as the execution layer could be a viable option for Solana RWA.

Avalanche: Ava Labs, the company behind the Avalanche blockchain, has a core mission to “digitize all of the world’s assets,” and they are rightly focused on RWAs, launching initiatives like the $50 million Vista Fund for buying tokenized assets, which has attracted KKR and Soon.

An RWA fund set up by the Solana Foundation (like the $10 million AI fund) could play a big role in attracting RWAs to Solana.

Solana RWA Opportunities and Trend Forecast

Explosion of Tokenized Treasuries: While Solana is behind the tokenized treasury trend, we may see a lot of Solana capital locked up due to high treasury yields. If tokenized treasuries really take off, it could also lead to higher DeFi rates given the relatively shallow lending market on Solana, which I think would be a healthy sign - the convergence of TradFi and DeFi.

Projects from other ecosystems worth keeping an eye on as they *might* expand to Solana in the near future: Ondo, Matrixport, Backed.Fi, OpenEden, etc.

Stablecoins backed by tokenized treasuries:Despite a total market cap of $125B across all chains, with over $1.6B in stablecoins within the Solana ecosystem alone, they are currently yielding 0% in this high-yield environment. One promising avenue for enhancing stablecoins to better serve their users is to use RWAs as a means to generate yield on stable value tokens, thereby providing returns to holders.

An emerging hot player in this category on Ethereum is Mountain Protocol, which has built a yield-bearing stablecoin.

Tokenized US Stocks and Synthetic Stocks:While tokenizing US stocks may be legally challenging, projects like Swarm are tokenizing stocks on Polygon.

While fully backed assets are more robust, one can also create perpetual markets for real-world assets like Parcl — Solana Labs has a reference implementation for the same.

RWA-specific DEXs:Given the need for permissioned DEXs, RWA-specific DEXs can enable permissioned assets to interact in a compliant manner.

For example, an EVM-based DEX, Muave, a fork of uniswap v3, requires KYC via VioletID to use the DEX. Meteora, one of the Solana DEXs, is also launching DLMM, which focuses on use cases like FX and RWA.

DeFi Composability: The next step for RWA will involve making it composable with DeFi, which will increase the productivity of the underlying asset. For example, holders may have the opportunity to earn higher yields by tokenizing US Treasuries, offering them as collateral on DeFi lending markets, borrowing stablecoins, buying more Treasuries, and repeating the cycle.

A simple example: integrating RWA into the Solana DeFi ecosystem could create valuable new products, some of which can only exist in the crypto space through crypto-native mechanisms.

Convergence between DePIN and RWA: Solana is undoubtedly the leading chain for DePIN, thanks to projects like Helium and Hivemapper. These DePIN networks have assets like sensors, drones, and wearables that will provide real-time, highly reliable data as RWA solves financing problems for them. We are witnessing the creation of an entirely new supply chain, covering physical, financial, and legal aspects, all driven by DePIN and RWA.

An interesting project, Entheos, has taken the first steps in DePIN x RWA, enabling investors to finance a decentralized network of physical infrastructure (smart battery assets), which may also leverage Solana in the near future.

Credit Protocol: Circle Research recently released the Perimeter Protocol, which allows developers and builders access to an audited, open-source protocol that they can freely use to build unique credit applications suitable for RWAs using USDC. However, this only works on the EVM; building this for Solana is a huge opportunity similar to the RWA token standard.

More Assets and More Markets: It goes without saying that we need more and more on-chain assets, such as solar farms (e.g. Plural Energy), precious metals (e.g. xMetals), carbon credits, corporate bonds, and potentially even uranium (Uranium308). Additionally, identifying tokenization-friendly jurisdictions such as Switzerland, UAE, Singapore, Germany, and Hong Kong could be a key advantage for RWA participants.

Tokenization Will Happen

We all know that tokenization of all assets will eventually happen; the question is, what will be the catalytic event and when will it happen? Market shifts tend to be slower than sudden ones, but if you ignore the signs, you’ll suddenly fall behind. We also need a better term to describe “RWA”, TradFi calls “RWA” “risk-weighted assets”, which may be confusing if we expect TradFi to enter the tokenization field.

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia