Real World Assets Could Be the Growth Catalyst DeFi Needs, Experts Say

Tokenized real-world assets could be the next big thing for DeFi, a report by CoinBase suggests. Its views echo other crypto experts, including Ethereum founder Vitalik Buterin.

In a report titled 2023 Crypto Market Outlook, Coinbase revealed its view on where the DeFi space will go next.

“Looking ahead, we believe the evolution of the crypto ecosystem is putting subjects like tokenization, permissioned DeFi, and web3 front and center,” the report wrote.

Asset tokenization refers to a process where traditional securities and assets are converted into digital tokens. These tokens can then be bought, sold, transferred, and used in complex financial operations on blockchain networks.

The operation allows users to tokenize and use real-world assets (RWA) such as stocks, bonds, commodities, precious metals, and more in DeFi applications.

“For some institutions, tokenization is a less risky way of having crypto exposure compared to investing directly in tokens,” the report writes.

The idea of tokenizing RWA is not new. However, it has gained significant traction in recent months among financial institutions, according to CoinBase. These institutions view it as a way of dealing with “inefficiencies inherent in traditional securities settlement.”

Non-fungible tokens (NFTs) seem particularly suited for tokenizing non-fungible assets such as real estate and physical collectibles.

“We are seeing a greater variety of use cases for non-fungible tokens outside of art, like using NFTs to certify and authenticate RWA or as ENS domain names,” the report continued.

Ethereum founder Vitalik Buterin recently urged developers to explore integrating real-world assets into DeFi applications. Buterin sees the application of real-world asset tokenization in stablecoins.

Earlier this month, Buterin shared his views on where the Ethereum ecosystem will go. One of the areas he pointed out as exciting was that of stablecoins. Notably, he believes real-world assets will back one segment of stablecoins.

“I see the stablecoin design space as basically being split into three different categories: centralized stablecoins, DAO-governed real-world-asset backed stablecoins and governance-minimized crypto-backed stablecoins,” he said.

These “DAO-governed RWA-backed stablecoins” could offer significant benefits to traders. They will scale better than the underlying assets, and their decentralized nature will boost trust.

“Such stablecoins could combine enough robustness, censorship resistance, scale and economic practicality to satisfy the needs of a large number of real-world crypto users,” Buterin said.

The idea is not without its challenges, however. Buterin added that this would require “real-world legal work to develop robust issuers” and engineering robust DAO protocols.

The industry is moving towards tokenized assets. Confirmation of that trend came with the latest funding round of one RWA-backed token platform.

Earlier this month, the Dubai-based firm LumiShare secured $3.2 million in an investment round led by a Sheik of the Abu Dhabi Royal Family. Sheikh Mohamed Bin Ahmed Bin Hamadan Al Nahyan said he would invest $2.2 million in the venture.  

LumiShare is an asset-backed NFT marketplace for tokenized real assets. Its platform will allow users to tokenize real estate, mines, agriculture, and more.

Tokenization is all about transparency, said Ben Sharon, Co-Founder and CEO of LumiShare. He believes that tokenized assets will be one of the major asset classes going forward.

“The FTX crash really highlighted the need for transparency in the crypto space,” Sharon said. “Transparency was one of the original values of crypto. That’s something the industry has to take seriously going forward,” he added.

H.E Ahmed Elmetwally, CEO of Sheikh Mohamed Bin Ahmed Bin Hamdan Al Nahyan’s private office, said transparency is top of mind when investing in crypto projects.

The $SRG token will be backed by physical gold and technology to demonstrate its commitment to tokenization. LumiShare will use the $3.2 million raised to buy gold reserves stored at a bank in Abu-Dhabi. The company will hold physical gold equivalent to a percentage of the token’s all-time high market cap. The goal is to limit the potential downside for the token, as gold reserves would secure LumiShare’s $SRG token.

On the other hand, the token will feature a burn mechanism and staking. These will allow the token to absorb the potential upside from its asset-backed NFT marketplace. Sharon hopes that this dual approach will attract more risk-averse investors in the space.

Tokenizing real-world assets could help boost the utility of DeFi applications. This could help expand the decentralized technology space.