The push to marry DeFi with real world assets just got a big boost.
Coinbase, the No. 1 U.S. crypto exchange with a $7.5B market cap, predicts that institutional entities will seek to use permissioned DeFi platforms, and drive innovations in the tokenization of real-world assets (RWAs).
The forecast picks up on the push by DeFi stalwarts MakerDAO and Aave to embrace the burgeoning market for putting bonds, real estate and other traditional assets on-chain.
In its 2023 Crypto Market Outlook report released Tuesday, Coinbase said it expects to see more dApps adapt their platforms for “permissioned DeFi activity as regulated institutional entities seek more involvement in this sector.”
“This could have compelling use cases for settlement and cross-border payments alongside innovations in the tokenization of real-world assets (RWA),” the company said. “Permissioned DeFi would likely target different use cases and solve for different problems (like undercollateralized credit) compared to permissionless DeFi.”
Coinbase highlighted significant RWA projects that are already underway, including a partnership between MakerDAO and Societe Generale, a major French Bank, that is issuing AAA-rated French home loans as collateral to borrow up to 30M DAI.
It also highlighted the project in which JPMorgan Chase, DBS Bank, and SBI Digital Asset Holdings traded tokenized currencies and sovereign bonds on the Polygon network last month.
Coinbase tips that established DeFi protocols may soon launch permissioned liquidity pools that are compliant with anti-money laundering or AML/KYC regulations separate from the permissionless liquidity pools used by non-institutional participants.
Aave, the leading DeFi money market by TVL, launched its permissioned platform, Arc, in January, with 30 institutions initially whitelisted for the platform. It launched on Ethereum’s leading Layer 2 networks Arbitrum and Optimism later that same month.
Colin Cunningham, head of business development at Centrifuge, a DeFi platform for financing real-world assets, told The Defiant Coinbase is “spot on” in their assessment that tokenizing RWAs and other off-chain assets is the next frontier for DeFi.
“Given market conditions, it’s important to acknowledge the necessity of crypto providing real-world value and RWAs represent that,” Cunningham said. “I hope RWAs finally get their due in 2023: crypto liquidity is starving for yield.
Timo Lehes, the co-founder of Swarm, a regulated platform for accessing decentralized finance, agrees that tokenized RWAs will be a major narrative in 2023.
“The digitalization of real-world assets (RWAs) will be a momentum-shifting theme for institutional crypto in the year ahead, with stablecoin technology at its heart,” Lehes told The Defiant “Digital assets exhibit a low correlation with other traditional financial assets such as commodities and bonds. Regulated DeFi projects are actively pursuing the introduction of classes of tokenized collateral from TradFi, as the lack of correlation is a feature not a bug.”
Lehes suggested that RWAs can be brought on-chain using that same structure that is employed for fully fiat-backed stablecoins. “Since stablecoins are already a category of tokenized RWAs with a $100bn+ market cap, it is only natural to extend the same tokenized structure to public stocks, bonds, ETFs, and other assets,” he said.
Making a surprising connection, Coinbase also expects that RWAs will be a proving ground for nonfungible tokens.
The company said that NFTs are increasingly being used to certify and authenticate real-world assets on-chain, including real estate, physical goods, and financial instruments. Coinbase added that RWAs are an opportunity for nonfungible tokens to expand beyond largely speculative use-cases.
“Themes such as digital identity, digital footprint mapping, soulbound tokens, and the tokenization of real-world assets have the ability to strip away the speculative nature of art/collectibles and emphasize the fundamental advantages of non-fungible tokenization,” the report said.
Despite Coinbase’s bullish outlook for RWAs, the firm warned that new forms of real-world assets will be slow to come on-chain due to regulations. “While issuers are resolving the financial and legal hurdles to tokenizing other less liquid real-world assets like real estate, the market for these is still underdeveloped.”
The total value locked in RWAs on Ethereum is $612M, down from an all-time high of $1.75B in Q2, according to Fortunafi.