Solana RWA Market Landscape and Future Opportunities

Solana RWA Market Landscape & Future Opportunities

Get an in-depth understanding of the infrastructure status of Solana RWA, the necessity of RWA standards, and RWA projects such as Credix, Homebase, LianGuaircl, Maple, and Baxus!

Original title: State of Real World Assets on Solana — The Opportunities

Original author: Yash Agarwal

Original source: Medium

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Translation: Lynn

“By 2030, the tokenization of illiquid assets will reach $16 trillion” – BCG

In 2023, the tokenization of real-world assets has gained widespread attention, earning the title of “TradFi Killer App” from JPMorgan and being hailed as the “next generation of the market” by BlackRock CEO Larry Fink. According to data from DeFiLlama, RWA has become the eighth largest field in DeFi, with a TVL of $2.4 billion.

In short, Real World Assets bring any off-chain financial assets onto the chain. These assets can be anything from real estate to credit, treasuries, green bonds, and even commodities like whiskey!

But why do we need to bring real-world assets onto the chain?

Although current solutions may seem like “putting lipstick on a pig” by adding unnecessary cryptographic rails, tokenization does help create:

• Global financial infrastructure – cryptocurrencies are inherently global.

• 24/7 – always online, unlike traditional finance.

• Programmability – once tokenized, assets can be tracked and programmed, automating clauses in financial contracts.

• Composability – this makes DeFi powerful, able to interact with over 10 protocols simultaneously.

In this article, we will delve into the Solana RWA market, explore various RWA categories, identify top Solana projects in each category, and discuss the future prospects of RWA on Solana, with a particular focus on the need for RWA standards.

Why use Solana for RWA?

Like any other public blockchain, Solana enhances transparency, automates payment calculations, enables self-custody of assets, and provides a global 24/7 settlement infrastructure for tokenized assets. However, in addition to public blockchains, Solana offers the following advantages:

1. Low gas fees and high speed: For high-frequency use cases such as tokenized forex and stocks, Solana is able to transact at extremely low fees, faster settlement, and high TPS – all with a single shared global state.

2. Standards and ecosystem: A robust ecosystem of proven DEXs, as well as powerful standards like cNFTs (compressed NFTs), pNFTs (programmable NFTs), and Token 2022, provide the fundamental building blocks for creating and launching RWA products. We will delve into the infrastructure available for RWA projects on Solana later in this article.

A Multi-chain Future with Solana as the Execution Layer:

DeFi protocols such as lending or spot DEX benefit from single chains like Solana due to advantages such as shared liquidity, composability, strong chain community support, and infrastructure development tailored to the chain. However, it is worth noting that for RWAs, partnering with a single chain may not be the most strategically significant choice. Given that most infrastructure components are off-chain, this approach will only limit your Total Addressable Market (TAM). Embracing a multi-chain strategy is a wiser approach. Consider how most stablecoins achieve multi-chain functionality, with USDC currently usable on 14 blockchains.

The path forward involves accepting deposits from multiple chains while executing transactions on a single chain, as demonstrated by examples like Credix, which accepts deposits from Ethereum and Solana and executes on Solana.

RWA Projects on Solana:

Despite the vast space for tokenized assets, the real-world asset (RWA) scene on Solana is often overlooked.

Unlike other DeFi categories, adoption won’t happen overnight and may take 5 to 10 years. However, this is an exponential market with no TAM limit!

Approaches and different categories adopting RWAs

Let’s explore various Solana projects in each category:

Stablecoins:

Although stablecoins are not typically classified as real-world assets, they are the first real-world asset with significant appeal, backed by reserves in US dollars and treasury bonds. It can also be said that stablecoins exhibit the highest product-market fit in the RWA category. Solana has the following stablecoins:

USD-denominated:

• USDC, backed by US dollars and treasury bonds held by US banks, custodied by BlackRock.

• USDT, reportedly backed by US dollars, treasury bonds, and other assets.

• UXD, partially collateralized by RWA such as private credits.

• The bridge Wormhole DAI, backed by DAI, which is partially supported by RWAs.

Non-USD-denominated:

• QCAD, a CAD stablecoin backed by Canadian dollars.

• EUROE, a Euro stablecoin backed by euros.

• ISC, backed by a basket of real-world assets.

We expect to see a significant number of non-USD stablecoins on Solana in the coming months, along with innovations in yield stablecoins.

Real Estate:

Two major real estate companies on Solana, LianGuaircl and Homebase, have gone live and have performed exceptionally well. Although they may appear similar on the surface, they are actually quite different. Homebase represents on-chain real estate, while LianGuaircl focuses on tokenizing real estate price indices:

1. Homebase: Tokenizing US Real Estate

Homebase allows anyone to invest in real estate for as low as $100 and is currently tokenizing real estate in the United States. It has sold two tokenized properties worth over $400,000 and is still in the early stages!

Here’s how Homebase works:

• Homebase SPV entity acquires properties, and NFT represents ownership of the SPV.

• Users use USDC to purchase listed properties on Homebase.

• USDC is pooled and converted to USD to purchase properties represented by the SPV.

• Rental income is converted from USD to USDC, and users automatically receive monthly rental income in their wallets.

• Users can buy and sell Home NFTs through the Homebase marketplace.

The best part is that Homebase is fully compliant, its tokens are registered with the SEC, and it has established a process for token recovery in case of wallet hacks. However, it is currently only available to US residents.

2. LianGuaircl: Long/Short Real Estate Index

LianGuaircl allows anyone to invest in global real estate markets through index-like offerings similar to REITs, with investments in real estate assets for as low as $1. Think of LianGuaircl as a company that creates real estate indices and provides price feedback services. It has also developed a perpetual AMM platform to assist users in trading these indices, whether they want to go long or short. Currently, its Total Value Locked (TVL) has exceeded $1 million. The service is currently operational in major US cities such as Brooklyn, Las Vegas, and Paris, with exciting new additions like London, Jakarta, and Hong Kong coming soon.

Liquidprop is another emerging player in the real estate space on Solana, following the Homebase model. It enables users to invest in tokenized residential real estate across the United States. While it has not yet gone live, it will surely be interesting to watch when they launch.

The best part is that this market is not a winner-takes-all situation. There can be over 100 real estate tokenization markets on Solana, without the need for direct competition, as they can serve different regions and enter a massive industry worth over $33 trillion!

Private Credit:

In the TradFi world, loans not originated from banking sectors are categorized as “private credit.” These loans are typically short-term (30-90 days) floating rate loans between investment funds and corporate borrowers, usually small to medium-sized companies. It is already a significant industry with over $800 billion in assets managed by traditional financial institutions.

On-chain private credit is very similar to traditional finance (TradFi). However, it is different because it represents on-chain loans (real-world assets) that allow anyone to invest using stablecoins. To illustrate the concept of on-chain private credit, let’s take a look at the case of Credix Finance:

Credix Finance: A major participant in private credit on Solana

In short, Credix is a credit marketplace that connects investors with fintech companies in emerging markets. They are addressing the core problem of accessing untapped credit opportunities.

Here’s how it works:

1. Investors: Invest stablecoins such as USDC in a liquidity pool or specific portions of the market.

2. Borrowers: Credix primarily collaborates with fintech borrowers in emerging markets who borrow USDC and convert it into local currency. They then lend the local currency (e.g., Brazilian Real) to various types of businesses. The types of credit provided through fintech can be highly diversified:

3. – Trade receivables (through Clave).

4. – Asset-backed auto loans (through Atria).

5. – Income-based financing (through Brazil and Mexico).

Credix Finance has been growing rapidly and has issued over $40 million in private credit, generating over $4.9 million in interest. The current 90-day trailing APY is approximately 12.9%. To enhance attractiveness to investors, parts of its investment portfolio are also insured and reinsured.

AlloyX is another project that aggregates private credit protocols for lenders seeking entry into Solana.

Challenges and Opportunities for Private Credit:

While tokenizing private credit presents a huge untapped opportunity, solving the desperate problem of access and reducing operational and monetary costs, they also face their own challenges:

1. Challenges of defaults: For example, recently, a platform similar to Credix on Ethereum called Goldfinch had a funding pool from a fintech company named “Tugende” that provides loans to motorcycle taxi operators in Kenya. They borrowed funds under the name “Tugende Kenya” and transferred the funds to their subsidiary “Tugende Uganda” to address business issues. This breach of loan agreements was discovered through quarterly reports, highlighting the ongoing challenges in the private credit sector that RWA has yet to address. Additionally, enforcement in emerging market jurisdictions like Kenya poses challenges, making the collection of defaulted loans difficult.

2. Tracking off-chain data: In emerging markets, due to the lack of on-chain credit risk data or means to verify off-chain data and the absence of robust credit underwriting infrastructure, RWA protocols can only rely on data provided by borrowers. It can be easily manipulated. After the loan is disbursed, tracking the loan and the financial condition of the borrower becomes impossible as it is completely off-chain, potentially leading to mishandling (as in the Tugende-Goldfinch case).

To address these challenges, innovative credit structures are needed, including:

1. More proactive risk tracking and mitigation frameworks, such as more diversified underwriting involving multiple stakeholders in risk assessment. Coordination can also be conducted on the blockchain.

2. Proactive post-lending payment tracking through integration with open banking APIs, insurance/reinsurance (like Credix).

US Treasuries:

US Treasuries are the most popular RWAs on the blockchain, with over $660 million issued on all blockchains, and many participants are still actively developing. This is primarily due to the high-interest rate environment as US dollar-denominated Treasuries offer risk-free returns of 4-5%.

Solana is still in the early stages of tokenized Treasuries, with only one player, Maple, alive.

Maple Finance: First Tokenized Treasuries on Solana

Maple Finance is one of the largest institutional capital markets in the cryptocurrency space and has announced its return to Solana with a cash management product. Within a few days of launching the cash management product on Solana, it attracted over $4.2 million and is expected to continue to grow.

Here’s how Maple’s cash management product works:

1. Lenders provide USDC-SPL to the pool and receive LP tokens in exchange.

2. The pool issues USDC-SPL loans to Room40 Capital’s Solana wallet, with USDC converted to USD through Circle. USD is connected with major brokerages.

3. Room40 acts as the borrower and manages the Treasuries.

Thus, Maple Finance acts as the market between lenders like Solana and borrowers like Room40 Capital.

With tokenized financial participants like Ondo, Open Eden, and MatrixDock experiencing explosive growth in Ethereum, we should expect to see many participants expand into Solana in the coming months.

Physical Goods:

Any physical goods, from artworks, trading cards, to sneakers, can be tokenized and brought onto the blockchain. The process of tokenizing physical goods is as follows:

1. Vault: Physical goods are authenticated and securely stored in a vault, represented on the blockchain as NFTs or fungible tokens.

2. Marketplace: Users can buy, sell, and transfer tokens on the marketplace.

3. DeFi: These on-chain assets can also serve as collateral for loans.

In addition, similar to stablecoins, you can deposit your physical goods to tokenize them or redeem tokenized physical goods for the actual physical items. However, unlike stablecoins where the US dollar is tokenized, physical delivery is involved here as it deals with physical goods.

There are two fascinating players on Solana:

1. BAXUS – BAXUS is a secure marketplace for the identification, storage, purchase, and sale of wines and spirits, founded by a whiskey trader and a software engineer. These bottles are tokenized and securely stored in a vault in the United States.

2. CollectorCrypt – Collector is a unique tokenization service that brings real-world collectibles to Solana. It’s like Courtyard but for Solana. People can also deposit physical cards and tokenize them.

Another interesting participant on Solana is Blockride, which is tokenizing bus fleets and is still in the early stages. It allows users to purchase a small portion of revenue-generating bus fleets for as low as $50 and directly receive a percentage share of daily earnings in their wallets.

RWA Infrastructure on Solana:

While most DeFi infrastructure may not be suitable for RWA tokenization, some may argue that the infrastructure being built currently is undergoing rigorous testing for the future financial system!

We can categorize the infrastructure as follows:

1. RWA-specific like Bridgesplit: Bridgesplit is an infrastructure platform on Solana that allows asset custodians and markets to offer financing products to businesses and individuals. It was initially built as a platform to tokenize off-chain assets into NFTs but later shifted focus to RWA. However, the Bridgesplit team has not released any significant updates or versions recently. Another key infrastructure related to RWA financial management is Squads

2. Multi-signature, which helps safeguard their on-chain collateral assets, and Streamflow for streaming payments like bond yields.

3. DEX (AMM and Order book): While not immediately apparent, the ultimate goal for RWA is to trade on DEX. DEXs are not just designed for meme coin trading; they are undergoing rigorous testing to facilitate the trading of tokenized assets in the near future.

4. AMM – The main obstacle to free trading of RWA is the lack of a “permissioned pool.” For example, individuals should be able to exchange their tokenized credit positions for stablecoins through AMM pools.

5. Order book – Order books are particularly suitable for frequent trading of RWAs such as tokenized stocks and forex markets because these assets already exist in traditional financial systems that use order books. Additionally, in more liquid markets, order books can result in narrower spreads. Order books are preferred by most market makers as they provide flexibility for liquidity providers (LPs) and more precise control over the prices at which traders buy or sell.

6. When it comes to order flow, who better than Solana? Solana is the only blockchain supported by Openbook and Phoenix, processing over $2 million in daily volume.

7. Oracles: Oracles are crucial sources of off-chain asset data and ensure proof of reserves for real-world assets. Solana has two main oracles – Pyth (permissioned) and Switchboard (permissionless) – that can be used to stream off-chain data to the Solana blockchain.

8. On-ramps/Off-ramps: Conversion between fiat currency <> cryptocurrencies, especially specific fiat currency and its stablecoin pairs (e.g., USD <> USDC), is crucial for reducing payment costs associated with RWA operations. Most major on-ramp/off-ramp providers support Solana; you can find a complete list of Solana on-ramp/off-ramp gateways here.

9. Bridges: Looking ahead, bridges will play a crucial role in RWAs, as most RWAs will be multi-chain (natively executed on multiple chains) and some may even be cross-chain (deposits on multiple chains, with execution happening on a single chain). While Solana has a wide range of bridges supported by Wormhole and DeBridge, having more bridges and cross-chain token standards is crucial. I have also written an article on cross-chain RWA using Wormhole – learn more about cross-chain RWA thesis here.

One example of bridging real-world assets is Wormhole bridging CHAI (the tokenized version of DAI savings rate), which allows investors on Solana to earn DAI rewards.

Token Standards:

Token standards play a crucial role as they enable “tokenization” in a secure and standardized manner:

1. SPL Tokens: The primary token standard on Solana, representing interchangeable tokens. Like any stablecoin, any RWA player can issue their assets as SPL tokens, with features such as dynamic supply, minting, freezing, and burning.

2. Token 2022: Extending the original standard, Token 2022 enables additional functionalities related to RWA:

3. – Confidential Transfers: Allows private token transfers, relevant for institutions seeking to hide transactions.

4. – Transfer Fees: Issuers can configure transfer fees or taxes for transactions.

5. – Interest-bearing Tokens: Tokens that accumulate interest over time, similar to bonds.

6. – Non-Transferable Tokens: Tokens that cannot be transferred once issued.

7. NFT Metaplex Standard: Metaplex has a set of NFT standards, such as compressed NFTs and programmable NFTs, which also allow RWA players to represent unique assets.

While the current standards cover a wide range of cases, the lack of RWA standards hinders the adoption of RWA on Solana.

Solana Needs RWA Standards:

The Solana ecosystem lacks a unified and widely accepted standard for tokenizing RWAs. Just as standards like JPEG and PDF format standardized files across different devices and facilitated content sharing on the internet, standardized RWA standards can help enhance RWAs on Solana. Think of it this way: Just as Metaplex made it easy to create NFTs, standardized RWA tokens can simplify the process of creating tokenized RWAs.

Dom, the founder of Homebase, initiated this much-needed discussion on the Solana forum, coincidentally, I also had this idea and prepared a flowchart for “Permissioned RWA Tokens”. Here’s my vision:

Flowchart I created (also shared at Solana Developer Conference)

Some considerations for creating RWA standards:

1. Asset-level Tokenization instead of Pool-level: For example, each loan from an Argentine businessman would be tokenized as individual assets rather than tokenizing a pool of loans issued by a fintech company, where each token represents a portion of that fund. Asset-level tokenization can represent ownership more transparently, allowing for real-time tracking of the performance of all assets on-chain. For example, if Circle’s deposit balances across different banks were available on-chain at the asset level, rather than simply being represented as “an $8.4 billion capital exposure to multiple banks,” the risk exposure of Circle to SVB Bank could be tracked in real-time at an aggregated level.

2. Existing RWA Standards on other chains: It’s also important to consider existing standards such as ERC-3643 (used by Tokeny), ERC-1400 (used by Matrixport), ERC-6065 (real estate), and ERC-4626 (used by TrueFi) and incorporate best practices from them.

3. BD Push: It’s worth noting that RWA token standards require initial BD push and iterative reiterations based on institutional needs to achieve initial adoption. The initial adopters of the standard can range from fintech companies to RWA projects to traditional financial giants. This also requires building custom solutions and providing “hooks” type functionalities for anyone to build upon.

4. Flexible and Upgradable: All contracts must be inherently upgradable to accommodate the evolving compliance requirements of asset issuers. Any asset issuer should be able to easily implement additional smart contracts to safeguard investor rights (e.g., voting, dividends, announcements). It should also enable token recovery in the case of wallet key loss and maintain a transparent history of token recovery on the blockchain. The components of the standard should be as modular as possible for easy plug-and-play by any player.

The best part is that the Solana Foundation has an RFP (Request for Proposal) to apply for funding (up to $250,000) to build an RWA standard program! This can serve as a reference implementation for anyone working on RWA and serve as the foundation for a leading ecosystem RWA project alliance, ensuring adoption, maintenance, and long-term sustainability.

What does Solana lack compared to other ecosystems?

Although the RWA field in Solana is thriving, there are still some shortcomings compared to other ecosystems. Here are the comparisons with other ecosystems:

1. Ethereum: Setting aside the technology, the RWA protocols desire one thing: capital. Ethereum has the largest capital leverage to date, which is why almost every RWA protocol considers Ethereum as one of its main chains. Attracting funds from Ethereum while retaining Solana as the execution layer could be a viable option for Solana RWA.

2. Avalanche: The core mission of Ava Labs, the company behind the Avalanche blockchain, is to “digitize all assets in the world.” They rightly focus on RWA and have launched initiatives such as the $50 million Vista Fund to purchase tokenized assets, attracting KKR and others. The RWA Fund established by the Solana Foundation (similar to the $10 million AI Fund) can play an important role in attracting RWAs to Solana.

Opportunities and trend predictions for Solana RWA:

1. Explosive growth in tokenized government bonds: Although Solana lags behind in the trend of tokenizing government bonds, we may see a large amount of Solana capital being locked in due to high bond yields. If tokenized government bonds truly take off, considering the relatively shallow lending market on Solana, it could also lead to an increase in DeFi rates, which I believe would be a healthy sign – the convergence of TradFi and DeFi.

2. Projects worth attention from other ecosystems as they “may” expand to Solana in the near future: Ondo, Matrixport, Backed.Fi, OpenEden, etc.

3. Stablecoins backed by tokenized government bonds: Although the total market value of stablecoins on all chains has reached $125 billion, stablecoins within the Solana ecosystem alone exceed $1.6 billion, but currently, their yield is 0% in this high-yield environment.

4. An optimistic path to enhance stablecoins to better serve users is to use RWA as a means to generate stable value token yields, providing returns to holders. A rising star in this category on Ethereum is Mountain Protocol, which has built yield-bearing stablecoins.

3. Tokenized US stocks and synthetic stocks: While tokenizing US stocks may pose legal challenges, projects like Swarm are tokenizing stocks on Polygon. While fully backed assets are more robust, people can also create permanent markets for real-world assets like LianGuaircl – Solana Labs also has a similar reference implementation.

4. Specialized DEX for RWA: Considering the demand for permissioned DEX, specialized DEX for RWA can facilitate compliant interaction of permissioned assets. For example, Muave, a branch of Uniswap v3 based on EVM, requires KYC through VioletID to use the DEX. Meteora, one of the Solana DEX, is also launching DLMM, which focuses on use cases such as foreign exchange and RWA.

5. DeFi composability: The next step for RWA will involve making it composable with DeFi, which will enhance the productivity of underlying assets. For example, holders may have the opportunity to tokenize US Treasury bonds, provide them as collateral on DeFi lending markets, borrow stablecoins, purchase more bonds, and repeat this cycle to achieve higher yields. This is just a simple example: integrating RWA into the Solana DeFi ecosystem can create valuable new products, some of which can only exist in the crypto space through native cryptographic mechanisms.

6. Integration between DePIN and RWA: Thanks to projects like Helium and Hivemapper, Solana is undoubtedly the leading chain for DePIN. These DePIN networks possess assets such as sensors, drones, and wearable devices, which will provide real-time and highly reliable data when RWA resolves their financing issues. We are witnessing the creation of a brand-new supply chain that encompasses physical, financial, and legal aspects, all driven by DePIN and RWA. An interesting project, Entheos, has taken the first step in DePIN x RWA, allowing investors to fund the decentralized network of physical infrastructure (smart battery assets), which may also utilize Solana in the near future.

7. Credit protocols: Circle Research recently released Perimeter Protocol, which allows developers and builders to access audited open-source protocols that they can freely use to build unique credit applications suitable for RWA. However, this is only applicable to EVM; building this for Solana presents a huge opportunity similar to the RWA token standard.

8. More assets and more markets: It is evident that we need more on-chain assets, such as solar power plants (e.g., Plural Energy), precious metals (e.g., xMetals), carbon credits, corporate bonds, and possibly even uranium (Uranium308). Additionally, identifying tokenization-friendly jurisdictions like Switzerland, the United Arab Emirates, Singapore, Germany, and Hong Kong may be a key advantage for RWA participants.

Conclusion: Tokenization is the endgame

We all know that tokenization of all assets will eventually happen; the question is, what will be the catalyst and when will it occur? Market transitions often happen slower than sudden shifts, but if you overlook these signs, you will suddenly fall behind. The standards and infrastructure of tomorrow are being built today.

We also need a better term to describe “RWA” because TradFi refers to “RWA” as “risk-weighted assets,” which can be confusing if we expect TradFi to enter the tokenization space. The dam of institutional interests is waiting to burst. Tokenization will be the catalyst!

We will continue to update Blocking; if you have any questions or suggestions, please contact us!