Integrating traditional real-world assets, or RWA, into blockchain is not a novel discussion topic. Major institutional players from Euroclear to Goldman Sachs have eyed tokenization to reduce transaction fees, execution time, and database management costs and to make provenance and proof-of-ownership procedures much less tedious.

The year 2023 became the year when theory finally began transforming into practice. The private credit market, shattered by the ripple effects of Terra-Luna collapse in 2022, recovered by 60%, and its main beneficiary base shifted from crypto-native finance firms to the automotive sector (42% of tokenized private credit in 2023). Most important for the industry, however, was the emergence of a completely new type of RWA product—tokenized treasuries. Tokenized treasuries aim to dethrone what currently constitutes the largest share of RWA—stablecoins. Sought by retail and institutional investors alike and experiencing a seven-fold growth in volume, Treasuries are bringing to blockchain an integral ingredient for maturity—stability. It seems that we are approaching the most significant year yet for RWA tokenization.

The tech leap forward

The leading blockchain tech advancements of the last few years have been dealing with various kinds of transaction optimization, helping to bring more efficiency, security, and scalability. For instance, the development of layer-2 solutions like zero-knowledge proofs or optimistic rollups helped to increase the primary blockchains’ throughput, reduce the transaction execution time, and significantly lower and stabilize the networks’ gas fees.

While L2 pushed forward the capabilities of individual blockchains, cross-chain communication projects worked towards creating extra network value. Enhancing the ease and security of interoperability brought greater usability to the web3 ecosystem as a whole.

On top of these developments, new services emerged, improving the efficiency of RWA tokenization. Maple, Centrifuge, Backed, and many others took well-explored concepts of defi, liquidity pools, and collateralized lending and applied them to traditional finance. This allowed their users to invest in real-world corporate bonds in different jurisdictions, get a share of the private credit pie, and engage in tokenized borrowing with institutional lenders.

In early 2023, Ondo Finance issued the Ondo Short-Term US Government Bond Fund (OUSG), which offers investors access to a tokenized version of BlackRock’s iShares Short Treasury Bond ETF (NASDAQ: SHV). While OUSG raised only slightly over a $110 million total value locked in a year, this signified the beginning of a new, much more inconspicuous trend—the rise of tokenized US Treasuries.

Tokenized treasuries in 2023: the backbone of growth

According to the Fed’s research and data from DeFi Llama, the total fraction of real-world assets in defi more than doubled over the last year. While this can be partially attributed to releases of institutionalized infrastructure like Goldman Sachs’ Digital Asset Platform (GS DAP) and JPMorgan’s Tokenized Collateral Network, tokenized private credit and digital bonds alone can’t explain the booming dynamic of the overall market. Rather, special attention should be paid to the issuance of tokenized US government short-term debt.

Investors might have been attracted to short-term riskless debt following the ongoing Federal Funds Rate hikes—a natural market dynamic. Another part of the equation is the collapse of abnormal yields across the crypto landscape. According to Coinchange’s defi yield benchmarks, the minimum risk yields in defi fluctuated around 4-5%. Not only did this significantly squeeze the spread with Treasuries, but sometimes it was even pushed into the negative territory.

The future of RWAs on blockchain

While tokenized asset markets have shown some signs of maturation in 2023, several unanswered questions still inhibit the transparent development of the RWA industry. The most important of them is, of course, regulation: until there is an unambiguous prescriptive framework or a bankruptcy precedent in one of the major jurisdictions, it can’t be stated for sure that tokenized assets represent the same seniority claim to the underlying asset from a legal perspective. Another degree of freedom is the way infrastructure will evolve to enable efficient access to tokenized asset markets.

Still, the increase in broader adoption of RWA is expected to continue in 2024, with tokenized treasuries becoming the largest beneficiary of reinvigorated attention. I see this asset class as a perfect product-market fit for risk-averse defi investors: unlike stablecoins, tokenized treasuries are immune from confidence shake-ups, are absolutely safe as long as the underlying smart contract is diligently audited, and generate yield. In fact, we have already seen the beginning of the overhaul. As of April 2024, the capital allocation to tokenized US Treasuries exceeded $1.09 billion—nearly a ten-fold increase from $114 million at the beginning of 2023.

To me, such a warm reception calls to urgently expand the scope further than the most obvious solution—especially since tokenized Treasuries are not a one-size-fits-all instrument. Almost a trillion-dollar market growing at a compound annual rate of 19.1%, Sukuk—the closest analogy to bonds in Islamic Finance—will be the next one to appear on-chain. Islamic Law prohibits investments in interest-bearing securities as they are considered usury—a haram activity, so traditional bonds are not available for religious Muslim market participants. Instead, Sukuk circumvents the ban by providing fractional ownership of the asset and a claim to the part of the generated cash flow. I think that the potential tokenization of Sukuk will give the Muslim community with an opportunity for a safe transnational halal on-chain investment, taking digital Islamic Finance to a new level. With the gradual rise of regional crypto markets in MENA and continued corporate and governmental involvement in infrastructure investment, I consider a potential on-chain Sukuk to have a well-matched target audience.

Alex Malkov is a co-founder of HAQQ, a blockchain platform with an ethics-first approach, emphasizing real-world assets. He brings extensive legal consulting experience from his work with leading blockchain and fintech firms, including AAVE, Bequant, Scalable Solutions, and Nebula. His legal and regulatory knowledge ensures that HAQQ aligns with broader legal frameworks. With over a decade in legal practice, Alex has spent seven years focusing on web3 projects. His expertise is crucial in navigating the complex legal landscape of blockchain technology.