Real World Assets

Introduction

RWAs are traditional financial assets represented on a Blockchain by digital tokens. They generally lean towards tangible assets, like real estate and art, but can also include intangible assets like copyright.

The potential scale of RWA is enormous, encompassing perhaps every physical asset in existence. Considering real world relevance, adoption and just sheer scale, it could be the single most important use case for Blockchain technology.

RWA Tokenization

This representation is done by a process called asset tokenization. In this, a digital representation of a real world asset is created, significantly improving how these assets are owned, managed and exchanged.

The Tokenization Process

The steps involved in tokenizing assets roughly include:

• Identifying a viable asset, its value and legal status.

• Creating smart contracts detailing trade and management terms for the asset, in compliance with regulatory standards.

• Listing the tokens on a marketplace for investors to browse and purchase.

The greatest benefit here is that it makes it much easier for retail to buy and own a piece of property that would otherwise have been out of reach. It creates a DeFi use case for the real world while attracting institutional attention, which so far has been considered a good thing for crypto.

On the other hand, it raises legal and regulatory questions that vary from region to region; although this also holds true for much of the Web3 ecosystem. A more peculiar challenge would be proving if a tokenized asset is legitimate and offers real value.

Stablecoins

Cryptocurrencies are largely volatile. And while that is fine for speculative trading, it's not that great as a means of exchange for goods and services. This is where stablecoins come in.

From the name alone, what a stablecoin does is easy to infere. It does not suffer from the often wild swings of a typical cryptocurrency. The principle behind this is that it is built pegged to the price of a specific real world asset, most common being the USD.

This principle by itself is not new. In fact, fiat currency from a certain view can be regarded as an attempt at tokenization of sorts. However, incorporating Blockchain technology brings a level of utility not previously possible.

In recent times, RWA has gained attention and momentum beyond what is offered by stables alone. Projects like Chainlink, Ondo and Plume are notable in this category.

RWA and Education

Beyond stablecoins, real estate, commodities and the likes, there are a few more applications of RWA. And quite frankly, its application is much broader than is obvious at first glance. One such application is education.

According to a report by Onchain.org, RWA plays a role in education by tokenizing courses and other resources. The best example of this is tokenized certificates that are resistant to forgery and tampering while also being easily shareable and verifiable across the world.

New projects with fresh innovations have started making inroads in the area of EduFi. One of these projects is Pencil Finance.

Pencil Finance

Pencil Finance is a student lending protocol built to bring real-world student loans financing onchain. The idea is to leverage Blockchain infrastructure in fixing issues inherent in traditional financing mechanisms.

Why Student Loans?

Pencil Finance aims to bridge the gap between DeFi liquidity and the real world by making it possible to finance education, a high impact sector, while simultaneously presenting a transparent system for accessing and managing loans to students.

Its single greatest benefit lies in creating yield for investors while having a positive impact in an important sector. It also brings transparency and accountability to loan performance.

How it Works

Each loan bundle is created by lending partners using a list of adjustable parameters like total loan amount, interest rate and maturity date. They are split into two tranches:

• Senior - stable yield for conservative investors

• Junior - higher risk, higher yield.

Senior Tranche

Uses a fixed interest rate set by the lending partner at the time of bundle creation. It takes priority in repayments and is best for investors who want stable, predictable returns.

Junior Tranche

Has a variable interest rate that's predicted by the bundle performance, as well as higher yield potential. It receives payouts more frequently but only after all Senior Tranche obligations are fulfilled.

Risk Management

Pencil Finance’s lending partners are verified and whitelisted by the protocol, their lending history and portfolio quality taken into account. This verification process, paired with an extensive risk management framework, will protect investors and ensure protocol integrity.

The Junior Tranche faces risks first in the event of certain situations (like a loan default) so lending partners are mandated to participate in it. This forms part of the protocol’s loss absorption structure and encourages responsible bundle creation and management by lending partners.

Conclusion

Even if facing challenges in adoption—perhaps even more so than the rest of crypto—RWA is still rather early. And it's ability to bridge TradFi and DeFi will most likely remain unmatched.