DEVELOPMENT
Some time ago three of us together with Yura (Crypto Family channel) and Vadim (Coin Metrika channel) recorded a video about trends for 2023 according to Binance, a16z, Pantera Capital. If you have not seen the video, I recommend you to watch it. It turned out interesting!
And now let’s talk in more detail about Real-World Assets and projects related to it.
What are Real-World Assets in DeFi
Real-World Assets (RWAs) are tokens (interchangeable or non-interchangeable) that can be traded online and represent real assets. Examples of RWAs include real estate (houses, for example), loans, bonds, contracts and guarantees, and any high value item.
The financial industry is on the cusp of a transformation. DeFi is slowly moving beyond cryptocurrencies to impact the real world. As more assets are tokenized, traditional capital markets are also moving to blockchain.
Real World Assets (RWAs) offer DeFi investors a unique opportunity to access a variety of off-network debt markets, and allow TradFi institutions to tokenize and issue debt/assets regardless of market geography.
Asset custody
In light of the proliferation of digital assets and the influx of new institutions, the importance of robust institutional custody of digital assets cannot be overstated. DeFi’s authorized custody services, such as Anchorage Digital and Copper, have become widespread in recent years.
Today, storage is largely guaranteed by the legal structure that is created when the pool is created, as well as standard KYC/AML procedures.
In the future, credit protocols hope to integrate more closely with decentralized identifiers (DIDs) such as Kilt to allow asset verification. Then there will be an integrated group of underwriters* who will act as third-party risk assessors.
* An underwriter is an individual or entity that conducts the due diligence process before a transaction is entered into. Its purpose is to help organizations make a profit:
- for banks and other financial companies – to determine the likelihood of repayment/non-repayment of a loan or credit;
- for insurance companies – to calculate the risk of occurrence of an insured event and to calculate the optimal tariff on the basis of this risk;
- for issuers of securities – to place the maximum amount of securities at the highest possible price.
Credit protocols
One of the main reasons for institutional concern about DeFi is the lack of a standardized reputation system, such as a credit rating.
DeFi protocols are forced to ask for liquid tokens as collateral because of the inability to secure future loan repayment in the event of a default. This takes credit risk out of the equation, but it also limits the number of financial products possible. Credit protocols use additional strategies to give loans a reputational component. While some are trying to bring offline reputation into the online world, other initiatives are really focused on building a reputation system online.
“Tokenized RWAs benefit DeFi by allowing it to serve businesses and customers that are not crypto. DeFi’s lending is limited if we only accept Bitcoin or Ethereum as collateral. The ability to accept tokenized real estate or securities against company property reduces risk for crypto lenders and investors by allowing businesses in the real world to use DeFi.” – Sidney Powell, CEO and co-founder of Maple Finance.
Key RWA projects
DeFi must offer higher returns than traditional investments to stay competitive and attract capital. DeFi applications such as Maple, Goldfinch, TrueFi and Centrifuge pool cryptocurrency holders’ funds and lend them to generate income through various strategies.
Maple is a platform for borrowers to leverage the DeFi ecosystem for loans with insufficient collateral. Pool delegates are loan officers who create and manage pools on the platform and find institutional borrowers.
Lenders can then contribute their cryptocurrency to the pools they want to support, lending their assets in exchange for income. To date, Maple has made cumulative loans of nearly $1.8 billion.
Goldfinch is in the business of lending to real businesses in emerging markets. Borrowers must be audited to determine their eligibility. Once approved, they can create pools and determine loan terms, such as interest rate, loan amount, term, and late fees.
Lenders may choose to lend their cryptocurrency to individual pools, thereby earning higher profits. Alternatively, lenders can lend their cryptocurrency, which is distributed to all pools of borrowers, obtaining a lower return with less risk of capital loss.
To become a TrueFi borrower or portfolio manager follows a process similar to most other lending protocols: each incoming applicant must submit a public proposal describing their business and intended use of funds, subject to community approval, and must meet underwriting requirements (such as capital under management, maximum leverage, etc.) set by the TrueFi Credit Committee. Successful applicants are whitelisted for borrowing from TrueFi pools.
While Maple, Goldfinch and TrueFi focus on private lending, Centrifuge allows more forms of real assets, such as real estate loans and freight accounts, to enter the DeFi ecosystem. On Centrifuge’s trading platform, called Tinlake, the borrower converts the real asset into a non-transferable token (NFT) and includes the appropriate legal documentation. Asset pools are created using NFTs as collateral representing RWAs. Lenders can then provide capital to pools that match their risk preferences.
Real asset tokenization allows DeFi to enter some of the largest financial markets. Global real estate was valued at $327 trillion in 2020 and non-financial corporate debt at more than $87 trillion in 2022. These are colossal markets to which tokenization could bring increased liquidity and new investors.
Tokenomics
Unlike traditional cryptocurrency lending protocols such as Aave and Compound, which rely heavily on leverage, RWA protocols offer credit with insufficient collateral.
To recap, there are four main RWA lending protocols: Maple, Goldfinch, TrueFi and Centrifuge.
Currently, all RWA protocol tokens have a market capitalization of less than $100 million. Centrifuge (CFG) has a market capitalization of $95 million, TrueFi (TRU) $71 million, Maple (MPL) $31 million, and Goldfinch (GFI) $30 million.
By comparison, Aave has a market capitalization of $1.1 billion.
% of tokens in circulation Centrifuge (CFG) is 81%, TrueFi (TRU) is 85%, Maple (MPL) is 74%, and Goldfinch (GFI) is 42%.
With the % of circulation above 70% you can no longer think about what the funds were entering at, because they have not only taken the invested, but also long ago xxed out. If we talk about the purchase price, then we need to talk about the lowest price that was relatively recently.
You can see that Maple and TrueFi show good performance on history (the ability to make x’s from MIN price).
Development activity
In terms of development activity*, the Centrifuge project ranks first by a wide margin.
* Development Activity – shows the project’s development activity over time based on a number of purely development-related “events” in the project’s publicly available Github repository. (does not take into account: release comments, forks, stars, etc.).
TrueFi and Maple are at the same level of development and are in second place. Goldfinch is in last place with an extremely low level of development.
Social Metrics
In terms of Social Dominance*, TrueFi and Maple have the lead
*Social Dominance shows the share (or %) of token mentions in crypto-related social networks compared to the pool of more than 50 most discussed projects online.
In terms of Social Volume*, TrueFi and Maple have the lead
* Social Volume shows the number of mentions of the token in more than 1,000 crypto social media channels, including Telegram groups, crypto subreddits, discord groups, private trader charts and more.
Credit Metrics
When it comes to the current state of real asset lending (RWA) at DeFi, one of the key metrics to consider is the active cost of credit.
This metric provides an indication of the amount of capital that is currently being lent through the various RWA protocols.
The current active loan value across the 8 protocols is $474 million.
The top 5 protocols by active credits are Centrifuge, Goldfinch, Credix, Maple, and TrueFi.
Maple leads the way with $1.79 billion in loans, followed by TrueFi with $1.73 billion, Centrifuge with $325 million and Goldfinch with $113 million.
Centrifuge leads with $173 million in active loans, followed by Maple with $135 million, Goldfinch with $103 million and TrueFi with $20 million.
Real Sector
Lenders generate income by investing in private loans for real businesses.
The top 3 sectors of the economy that take loans under the RWA scheme are fintech projects, automotive projects and consumer goods.
If we talk about the geography of the loans, almost all of Goldfinch’s end borrowers are in emerging markets, with Mexico, Kenya, Nigeria and the Philippines being the largest recipients.
RWA Risks
It is important to note that RWA lending has risks associated with insufficient collateral. Maple has had defaults totaling $48 million, Centrifuge $7.5 million, and TrueFi $4.4 million.
Goldfinch has not had a single default since launching in late 2020.
Maple lenders defaulted after the FTX collapse, with funds from market makers Orthogonal and Auros stuck on FTX.
Maple has a 2.7% ratio of defaulted loans to their total loans. Centrifuge has 2.3%, TrueFi has 0.3%, and Goldfinch has 0%.
Defaults will always be a major risk for under-collateralized RWA protocols.
Conclusion
The year 2023 is becoming a trend for tokenization of real assets in the DeFi space.
The move to tokenization of real assets could increase transparency, lower fees, and democratize access to previously inaccessible markets. However, there are still regulatory hurdles and risk management issues that need to be addressed.
If we talk about buying tokens into a portfolio, it is better to distribute investments across all four projects.
If we talk about investing in those projects with higher social metrics and good token performance, choose Maple and TrueFi.
