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Real World Assets: How to Get Traditional Investors on the Blockchain

Lincoln Murr

Summary: A lack of institutional adoption from traditional finance and banking corporations has always been one of the metrics holding blockchain back from mass legitimization and adoption. For TradFi companies, there is simply too much risk and too little regulation to justify risking their perfectly profitable business on a venture like DeFi. Fortunately, blockchain-based real-world assets ...

A lack of institutional adoption from traditional finance and banking corporations has always been one of the metrics holding blockchain back from mass legitimization and adoption. For TradFi companies, there is simply too much risk and too little regulation to justify risking their perfectly profitable business on a venture like DeFi. Fortunately, blockchain-based real-world assets offer a solution that gives investors the security, scalability, and transparency of blockchain along with the safety, regulatory compliance, and yield of real-world financial assets. Let’s explore RWAs, Coinbase’s plan to enter the space, and what could happen with them in the future. 

Up until now, the cryptocurrency industry has ballooned in market capitalization to over $1.5 trillion and created a flourishing DeFi ecosystem while not having access to one of the most catalyzing tools in finance: credit. Indeed, every activity Coinbdone on-chain is done with money not directly taken from something like an on-chain undercollateralized loan, which, while certainly impressive, means there is lots of room for more growth and the introduction of the true builder of economies. 

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Additionally, nearly every asset on blockchains besides stablecoins is a blockchain-native asset like cryptocurrencies or NFTs. This makes sense, as it is easier to represent a digital asset on-chain than it is a real-world item, but there is still a massive opportunity to introduce these objects to the benefits of Web3. This is the goal of real-world assets: to take traditional financial instruments, tokenize them, and make them available to investors.

Several projects are already dabbling in the RWA space, including Chainlink, Maker, and DeFi protocol Goldfinch. Chainlink is building solutions to track RWAs on-chain accurately, Maker is using RWAs to create billions in real protocol yield by holding assets like U.S. Treasury Bills and bonds, and Goldfinch is creating a lending protocol for various ventures, including Carbon FinTech and African Innovation. Many other smaller projects focus solely on tokenizing real estate and allowing buyers to buy fractionalized versions of residential and commercial properties that come with monthly rent. 

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Coinbase, one of the world’s largest Web3 companies that started as an exchange but now has numerous business ventures, recently announced Project Diamond, their attempt to get involved with the RWA space. In a blog post from December 12th, they introduced the smart contract platform that will allow investors to create, buy, and sell RWAs. About one month ago, a trial run was done with a discount note denominated in USDC to appease regulators, namely the United Arab Emirates Financial Services Regulated Activity of the Abu Dhabi Global Market. Under this framework, Project Diamond will be initially opened to non-US institutional investors, typically those with a large network or salary. Though this is unfortunate, it is entirely expected, as regulators typically do not approve of retail investors getting into riskier or more illiquid assets. Hopefully, this status quo will change or, at the very least, be reduced since RWAs have more liquidity opportunities, but there are still several challenges to overcome before RWAs can be a common retail investor purchase.

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What makes Project Diamond so significant is that it is the first time a major, publicly traded company in the cryptocurrency space has entered the market. The reputation and legitimization of Coinbase through being a publicly traded entity will certainly open more doors and increase the trust that traditional corporations have in RWAs. Additionally, Project Diamond takes an innovative tokenization approach: instead of taking an asset and creating a tokenized version of it, their USDC-base debt was done entirely on-chain, allowing for an unparalleled level of automation that is typically not possible with RWAs. 

With RWAs projected to be a multi-trillion dollar industry by the end of the decade, it is still incredibly early and the lack of adoption is to be expected. That being said, given the excitement surrounding this asset class, it is probable that a clear leader in RWA will eventually be crowned. Until then, several solutions, each with their own approach and area of focus, will compete for market share and adoption. Though Project Diamond initially seems like an incredibly promising solution, only time will tell if it is the key to institutional adoption.

By Lincoln Murr

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