RWAs Might Not Hit The Market So Quickly. Here’s Why.

For a long time, blockchain startup founders discussed discovering the world’s first killer app for blockchain. Some argued that Bitcoin was that app. Others argued that services like provenance would be. Today, it appears that, other than Bitcoin, stablecoins are blockchain’s big killer app as the first clearcut example of a Real World Asset being tokenized. That’s why they are today a more than $140 billion market. 

Despite a myriad of attempts to put other assets successfully on blockchain, only the US Dollar has really stuck. Real World Asset (RWA) startups must study stablecoins to successfully place other assets on blockchains. It is rational to assume those RWAs which next find success on blockchain might resemble stablecoins in certain ways, such as T-Bills which have grown to more than a billion dollar market on the backs of funds by BlackRock and others.

One central reason stablecoins have enjoyed such success as the world’s first successful tokenized asset can be attributed to the fact that they generally operate as non-securities, which lowers red tape barriers that other RWAs characterized as securities face. A stablecoins non-security status, however, could change at any given time.   

Stablecoins have mainly enjoyed success due to product market fit. Furthermore, USD’s strong liquidity and velocity helped USD-based stablecoins proliferate. USD is a fungible asset, and blockchain’s work well with this function. There have been many different approaches to stablecoins. USDC and Tether are the best-known examples of tokenized assets. These companies hold US dollars and other assets in bank accounts and mint a token with a constant value of one dollar.

USD stablecoins seem safe from competition by other fiat currencies due to sheer Dollar demand, liquidity, capital, and infrastructure.That is, it’s unlikely euros or yen will unseat USD in this respect. USD stablecoins, moreover, also benefit from first mover advantage, which helped to build up liquidity.

The value of a stablecoin lies in that it can be redeemed for a dollar in one’s bank account. A stablecoin issuer can mint and burn stablecoins to match the amount of dollars in the bank based on supply and demand at any given time in order to maintain a token’s dollar peg.

The ERC-20 USD stablecoins of today often have more uses than old fashioned dollars in a bank account which can only sit there. You can’t even take that dollar out at the ATM, which mostly only allows $20 increments. Contrarily on a blockchain, $1 can be used in dapps or be sent to the other side of the world.

Tether’s main use case at the present time comes from individuals in emerging countries in search of dollar access. This type of user underpinned Tether’s $6.2 billion worth of 2023 profits, which Tether makes by purchasing Treasury Bills for the more than 5% yield and giving users the USD stablecoin.

RWAs beyond stablecoins such as real estate, bonds, and more  haven’t thrived due to a lack of liquidity, fungibility, and for other reasons. Additionally, developers face the challenge of matching real world security issuance tracking with a blockchain ledger. RWA startups must expertly sync these two systems somehow in a reliable manner. 

Moreover, certain low-demand assets might not make sense on blockchain. Take a multi-family residential building in Alaska for which there is presumably too little demand. The fact that it exists on blockchain doesn’t magick liquidity.

When tokenization first appeared on the Ethereum blockchain, developers created new tokens based strictly on computer code and math equations, while others attempted to create a token based on non-blockchain property. Stablecoins proved to have staying power. But, other assets are catching up, especially as major institutions consider ways to build the infrastructure.

Those RWAs which follow USD onto the blockchain will be those which most resemble it. They might share traits such as reasonably stable value, product-market fit, fungibility, USD-peg or others.

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