How Real-World Assets Will Survive (and Evolve) in the Bull Market

The crypto winter of 2022–2023 ushered in a newfound appreciation for real-world assets (RWAs) in decentralized finance. As speculative DeFi platforms with sky-high yields crashed and burned, investors and protocol treasuries sought out the stability offered by exposure to traditional asset classes like U.S. Treasuries and private credit. All of a sudden RWA was interesting and exciting!

But with the return of the crypto bull market, how will RWA protocols remain appealing as DeFi-native yields rise to double-digit levels? What happens if real-world interest rates decline and funds flow out from tokenized U.S. Treasuries?

Based on years of experience in RWA markets with Centrifuge, I think the role of RWAs will evolve beyond just being a safe harbor for yield-seekers. RWA projects that embrace this evolution will define themselves in this next bull cycle as the decentralized financial infrastructure of the future.

What’s different for RWAs this time around

The maturation of the RWA space represents what I see as DeFi's transition from a financial wild west into an open, transparent, and permissioned onchain capital market capable of powering the real economy.

While risks and degeneracy were rampant in the last bull market (and are again reappearing), the bear period gave sophisticated players time to understand key TradFi fundamental concepts such as investor protection, balanced portfolio construction, and risk management.

These sophisticated players include DeFi protocols that are also stablecoin issuers. Stablecoin issuers looking to earn yield on collateral simply cannot put funds into hyper-risky yield protocols — because no one would want to hold stablecoins backed by risky investments.

Real-world assets are ideal for stablecoins: yield-bearing, low-risk, and non-crypto-correlated collateral. This will become increasingly important, particularly as stablecoin issuance blossoms during bull market conditions.

The rails that established RWA protocols put in place during the bear market provide the critical infrastructure to build out new products quickly and safely within existing regulatory parameters. The beauty of RWA is that it does not depend on regulatory change. It uses the rules that are already in place and have been tried and tested over many years. This means that it is also insulated from regulatory risk, which is an important feature for assessing overall portfolio risk.

This will drive significant growth in the adoption of tokenized real-world assets.

Crypto has learned more than a few valuable lessons after seeing the downfall of supposedly “stable” returns from sources of yield with no actual backing, like Anchor Protocol on Terra. It’s time to understand where the yield is coming from.

The evolution of RWAs beyond Treasuries

As macroeconomic conditions shift, we will see new products being brought onchain. We are already seeing RWA issuers explore non-US sovereign debt, investment grade bonds, CMBS and other public debt markets that can offer Treasury plus yields with excellent risk profiles.

One main driver we expect this year is increased demand for non-USD denominated yields. The launch of non-USD stablecoins will provide enormous opportunities for RWA projects offering Euro, Yen, and other non-USD denominated real asset exposure. There will also be significant arbitrage opportunities for carry trade investors.

These dynamics mirror how traditional institutional investors operate. Hedge funds will rotate away from Treasuries and into AA/AAA-rated public debt instruments and non-US sovereign debt when Fed rates fall. These strategies can be replicated even more efficiently onchain through RWA protocols.

RWA protocols that prioritize (horizontal) structure and compliance will succeed

The long-term success of RWA projects in DeFi will depend on their ability to build robust infrastructure protected from regulatory risk. In my experience, the most effective approach is to build horizontal infrastructure that enables entities, such as funds and debt issuers, to build compliant offerings on an open-source platform.

We create the infrastructure but don’t act as fund administrators or issuers. This approach creates a clear separation between the protocol and the entities issuing securities, avoiding inherent conflicts of interest and ensuring the success or failure of any individual offering does not impact the underlying protocol (and everyone else using it). Savvy investors with an understanding of risk demand the ring-fencing commonly required in TradFi markets.

Onchain tokenization protocols can support more than just debt or loan offerings. I've seen firsthand how a tokenized fund can be launched as a properly registered and regulated investment vehicle. By doing things the right way, such a fund demonstrates its commitment to compliance and investor protection.

When looking at RWA projects, do your own due diligence — read the documentation with assistance from legal counsel. Understand the contagion risks you are taking if you are looking into a project with a vertical infrastructure, where both the asset issuer and platform you're using are under one umbrella.

Projects that prioritize structure, compliance, and decentralization will be best positioned to attract institutional capital and drive the long-term growth of the sector. By focusing on these key principles and leveraging horizontal infrastructure models, the RWA ecosystem will develop into a robust, trusted, and sustainable pillar of the DeFi landscape — no matter what the state of the markets.

Eli Cohen is a corporate lawyer with 25+ years of experience in commercial transactions, financial services and regulatory matters. He is the General Counsel for Centrifuge, a real-world asset (RWA) tokenization and securitization platform.