Connection between TradFi and DeFi
As we have seen, the traditional financial market and the crypto financial market have their own problems. RWA is a project that aims to organically connect these two markets to complement each other and create synergies.
So, how does RWA solve the major problems of the traditional financial markets and in what ways? First, let's take a look at the main problems of the traditional financial market.
Excessive transaction costs due to complicated procedures → Minimizing transaction costs using smart contracts
RWA can utilize smart contracts to trade in a pre-designed manner. Transactions are carried out according to the written code without the involvement of third parties, so there is no need to trust stakeholders during the transaction process. This, in turn, minimizes trust costs. Furthermore, transaction history can be checked by anyone, creating a transparent and fair trading environment. If all data and currency are implemented on the blockchain network, most fraudulent cases can be prevented, and unsavory incidents can be blocked in advance through multiple surveillance.
Difficulty in securitizing assets → Securing liquidity through RWA.
By making real-world assets such as real estate and artworks that are not easy to liquidate into RWA, not only traditional asset finance but also crypto finance can be used, and more diverse liquidation methods can be used. For example, you can issue RWAs secured by real estate or bonds and borrow virtual assets such as USDT and USDC based on them, and you can also sell artworks-based RWAs in pieces to generate liquidity.
Lack of autonomy due to control of central institution → Creation of a free investment environment through a decentralized system.
Since RWA is a decentralized system that does not rely on a central authority, there is more freedom in the way it is traded. Since it is traded decentralized on the blockchain, it can be traded freely without time and space constraints. It also operates more flexibly than traditional financial markets in terms of form and method, so it is possible to expand to more diverse products.
On the other hand, RWA can solve the major problems of the virtual asset financial market mentioned above in the following ways.
Value uncertainty and price volatility due to the lack of intrinsic value of cryptocurrency → Securing value stability by linking to the value of real-world assets.
RWA can have intrinsic value because it is based on real-world assets that exist. By tokenizing various real-world assets such as real estate, bonds, artworks, etc., the value of these assets is accurately reflected on the blockchain. Therefore, RWA can objectively assess value and set standards for affordable prices. This provides a predictable and stable investment environment.
Difficulties in expanding market size → Expanding the size of the crypto-financial market through RWA
As of December 2023, the global market capitalization of the virtual asset market is approximately $1.7 trillion. While this may seem substantial at first glance, it is relatively modest when compared to the traditional financial market. As of December 2022, the size of South Korea's real asset market is around $15.4 trillion, more than eight times larger than the global virtual asset market. Naturally, the global real asset market is of an incomparable scale, far exceeding the virtual asset market. By leveraging RWA to seamlessly connect the virtual asset financial market with the traditional financial market, it is possible to channel diverse capital from the traditional financial market into the virtual asset financial market, contributing to its expansion. Through this approach, the virtual asset financial market can rapidly increase in size.
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