Real World Assets Can Deliver DeFi's Promise

In DeFi, “real-world assets” means many things to many people. It’s a buzzword of the future, the last bastion of hope in an apocalyptic bear market, and certainly the best way to set up your VC ticket for the next cycle. RWA has become jargon that can mean everything, nothing, and whatever it needs to mean for marketing purposes.

What are real-world assets really about? What really matters here? And, maybe most importantly, what does it mean for investors in the market?

New Rails

Real-world assets are about creating new rails from which the most important markets in finance can function without friction. This doesn’t mean speculative betting markets or the make-the-rich-richer markets, but economic markets.

These are the markets that encompass real businesses, most of which are classified as “small”. Is there a better financial method for facilitating their everyday regular needs more efficiently? Efficient financing of economic business needs — that’s what real-world assets are really all about.

There are three critical components to real-world assets: credit, security, and transformation.

Let’s take a closer look at these components – and the critical role they will play in a frictionless future.

Credit

The world — the real world, not the one that Elon Musk lives in— runs on credit (Elon’s credit runs on overinflated equity, but that’s another story).

Credit can seem confusing, but it’s really quite simple. Credit is defined by promises, promises to pay back debt on certain terms and time periods. The beauty of credit is that it supports trillions of dollars worth of business, and indeed, most of the global economy. It’s that simple. One party offers cash, the other party offers risk, and a TI-84 worth of calculations can determine what the cash to risk ratio should be for each side.

As much as we disdain old-school finance in crypto I think we can all agree that nothing kills financial innovation faster than losing someone else’s money.

Now it can get more complex than that, yes. The greater the amount of money, and the longer the promise to pay it back, the higher the risk.

But that’s the art of finance. Taking a simple concept, such as one party promising to pay back another party, and turning it into a global market worth $100T.

Security

Credit isn’t a magical instrument. In fact, the only thing more annoying than accountants is listening to the number of ways a financier can tell you how many things can go wrong in a deal.

As a sage of old-school finance might say, “the first rule of investing is not to lose your money”. And as much as we disdain old-school finance in crypto, we can all agree nothing kills financial innovation faster than losing someone else’s money.

So how do you avoid this and still remain a sexy (and effective) DeFi protocol? Simple: security. The presence of collateral, senior capital structures, an airtight legal framework, and only the very best for partners. All of these things are used in the world of finance to provide security to the lender. In fact, financial professionals are so obsessed with the term they created a whole technical practice named after it.

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If you’re not tokenizing real world collateral and using it as part of an on-chain credit arrangement, you’re not doing real-world assets. And don’t even think about leaving the collateral behind. Only secured lending for this, none of that other stuff. Securitization techniques, rock solid legal structures, and some high-quality open source code – and now we’re really talking about an RWA protocol.

All this to say, while we can all appreciate what a promise to pay can offer, we all appreciate that cold hard cash offers just a bit more.

Transformation

Credit and security aren’t what makes RWA special. We have more than 2,000 years of financial history to lean upon when it comes to making credit instruments work – that ain’t the problem. It’s the last couple decades of modern finance that we’re really focused on.

See, somewhere along the way, finance went from a tool that the people used to express and coordinate their economic obligations, to a tool that only the really rich people can use to express and coordinate their economic obligations.

For the unfortunate many, we take our marching orders from our financial overlords and simply move on with our day. Maybe a bit hyperbolic? Sure, but it’s 22 years into the information age and my money still doesn’t move like my email, so sue me for being upset.

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Real-world assets are about truly building the infrastructure that powers the future of finance. Credit and its many derivatives are already useful instruments, we don’t intend to reinvent the wheel here, nor do we need to.

It’s the piping under the floors that we want to rip out. What we intend to do is to replace the slow, manual, and aging intermediaries that pollute our financial transaction chains and result in far too many hands in the cookie jar.

RWA seeks to right these wrongs. Rather than relying on excel sheets and handshakes to define our credit arrangements, we believe in using smart contracts, blockchains, and cryptographic keys.

‘Put revenge in the Creator’s hands… with RWA.’

That automates the easy tasks, more effectively connects to those willing to do the hard tasks, and does so in a way that leaves a transparent, yet private, trail of exactly what happened and why. Like Leo in The Revenant, RWA is about putting “revenge in the Creator’s hands” and unleashing hell on the useless intermediaries that raise the price on every penny that comes in and takes a nickel from every dime they give.

So, in the end, I don’t really care what you want to call real-world assets. If you’re not building solid financial instruments, with sound financial arrangements, and with the intent of unlocking economic opportunity for all – you’re not really doing RWA. I mean sure, you can call it that, but we all know better.

Asad Khan is the DeFi Politician at Centrifuge.