Introducing the RWA Trilemma

Real World Assets (“RWA”) have yet to reach escape velocity. At US$5 billion of collective TVL across all RWA products, there remains a 20x+ gap to DeFi demand (US$110 billion TVL). No RWA products today have presented solutions that fully address customer pain points.

But why is this the case – isn’t tokenization of financial assets inevitable?

Introducing the RWA Trilemma

Onchain capital held in treasuries or liquid funds prioritize three factors: liquidity, high returns and stability. Simultaneously meeting all three criteria for any offchain financial asset is a difficult proposition. No tokenized assets offered onchain today have solved the equation.

Tokenized treasuries: US Treasuries are highly liquid and stable, yet yields are declining. The Fed is expected to continue cutting rates over the next two years – with Wall Street estimates estimating treasury rates as low as 2% by 2026. Over time, these yields may be seen as too low to attract capital away from onchain savings alternatives such as AAVE or native staking.

At US$2 billion of TVL, tokenized treasuries have seen some traction. But compared to the offchain Treasury market size of US$3.5 trillion, onchain demand for treasuries pales in comparison to that seen in traditional capital markets.

Commodities: Commodities tell a similar story. They are highly liquid and stable. Yet the returns realized are typically much lower than other alternatives. Gold is seen as a safe haven in periods of equity market duress. However, over the past 50 years, gold has averaged annual returns of 8%.

At US$1 billion of TVL, tokenized commodities are in early days of capital formation.

Credit Lending: Credit lending protocols have been a mixed bag. Protocols have historically struggled with stability due to the adverse credit selection problem on underlying portfolios. Beware lending to counterparties which may have only come to Web3 because they would not pass underwriting standards in traditional credit markets. Defaults led to lack of trust and mass capital flight out of such lending pools. Further, these assets have often been illiquid and locked up for periods much longer than DeFi appetite.

Credit lending requires proper asset selection and credit underwriting standards. Transparency is required for users to understand the risk return tradeoff on any investment opportunity.

At US$500 million of TVL, credit lending has yet to find demand escape velocity.

Equities: Equities have high returns and are highly liquid, but they do not offer the stability of principal protection. In fact, the primary reason tokenized equities may be in demand is for 24/7 speculation, unconstrained by trading market hours.

While tokenized representations of equities may provide access to 24/7 trading – there are complications around providing the same level of economic and governance participation as traditional markets. For example, do tokenized equity shareholders have access to attend general shareholder meetings when called, or participate in proxy votes for important corporate matters? 

At US$11 million of TVL, tokenized equities are in very early innings.

Decoding the RWA Trilemma

A new primitive is needed. One that solves all three sides of the RWA Trilemma.

At Mu Digital, we believe that products that decode the RWA trilemma are required to make RWA more competitive with other DeFi solutions. The size of the prize is US$100 billion+ in liquidity that sits in DeFi protocols today.

Follow our blog and our X @MuDigitalHQ to find out how we are looking to crack the code.