$16 Trillion — that’s an estimate of illiquid assets that will be tokenized as per BCG by 2030. Bringing Real-World Assets (RWA) like real estate, bonds, equities, and other assets on-chain shows signs of early product-market fit in DeFi.
We are seeing the first wave of the RWA boom, led by private credit on DeFi rails with ~$4.3 billion of loans already issued by these protocols. Private credit is a huge $800 billion+ market where debt is not issued by banks or not traded publicly, hence making it very less accessible and illiquid. This is attracting private credit to come on DeFi rails to:
- Access untapped capital and liquidity of on-chain treasuries.
- Reduce Operational Costs can reduce underwriting and funds’ back office costs significantly.
- Get built-in secondary markets to enhance the liquidity of otherwise illiquid private assets.
In this essay, we will examine some cases of how Real World Assets can leverage Wormhole to go cross-chain from Day 1.
Why should Real World Assets go cross-chain?
The current RWA landscape is quite fragmented across chains like Ethereum, Solana, Polygon, Polkadot, and Avalanche. While Ethereum is still the most dominant chain, its TVL share fell from ~96% in 2021 to ~59% in March 2023. Going cross-chain enables RWA projects to tap into capital and liquidity along with more retail as well as institutional users.
Let’s understand by taking a case study of Credix Finance!
Credix Finance, with over $200 million in committed credit, is building a credit ecosystem that aims to bridge the gap between institutional borrowers and investors by enabling access to liquidity and creating attractive risk-adjusted investment opportunities. In simple terms, Credix Finance enables lenders in emerging markets to raise capital on-chain. The protocol is built on Solana, which means it accepts Solana USDC, represents private credit as an SPL token, and pays out in Solana USDC.
While Solana has good capital to be tapped in order to maximize its capital coverage, going cross-chain makes more sense, There can be a few ways to tap other chains:
1. Go Multi-chain: Fork and Deploy Native Smart Contracts
A simple way to fork their existing protocol structure and deploy native smart contracts on each chain. If Credix wants to launch on Avalanche, it will have to write its smart contract in Avalanche and deploy and launch that to Avalanche C-chain. While this sounds simple, this leads to the following problems:
- Complicated Deployment: It takes significant time and resources to launch a new chain as it involves writing contracts for each chain.
- Split liquidity across all the chains: Deploying on each chain leads to siloed structure, as each chain will have liquidity pools.
- High governance overhead: Any governance changes must be reflected across all chains.
2. Cross-chain Deposits using Wormhole:
A more elegant and less resource-intensive solution would be to enable deposits from all chains. This would enable investors to invest from any chain while the execution layer remains Solana for all assets. Think of the experience as similar to a Centralised Exchange (CEX), where you can simply send money to any address supported by the CEX. This means Credix would be able to scale to more chains quicker and more easily, bringing the Credix pools to even more users.
Here’s how it will work:
- Credix will enable a cross-chain deposit address for each chain using Wormhole. It can be up to 20+ chains, where a wormhole is supported.
- Let’s say a user on Avalanche wants to invest in credix pools; they can simply deposit USDC into the Wormhole’s Avalanche address.
- The Credix Protocol receives a message of the successful deposit and confirms the investment.
- The funds are pooled from each blockchain and sent to Solana via Wormhole Asset Bridging.
- Once the investment starts giving out interest, they will be simply sent via Wormhole back to the user’s address on Avalanche.
This helps in the following:
- Unifying liquidity as everything rests on Solana as the execution layer.
- No complicated deployments.
- Seamless User Experience without dealing with any bridges themselves.
Tokenized Real Estate:
Another interesting similar case can be of an RWA platform, which is tokenizing Real Estate and representing them on-chain via NFTs. These platforms collect crypto from users and then hold real estate via LLCs, and each NFT represents a fractional value to that Real Estate. The Real Estate tokenization platform on Solana can collect funds from various chains like Ethereum or Polygon, bridge them to a single destination chain (Solana) using Wormhole’s liquidity pools, and mint multiple NFTs using those funds. Further, all these transactions from a chain can also be batched to save on gas and bridging fees.
A fair amount of RWA users are first-time crypto users who might have to on-ramp their funds from fiat. While bootstrapped liquidity for the real-world asset-fiat pair isn’t feasible unless there is a significant volume. Wormhole can play a vital role by — enabling users to on-ramp seamlessly via their local currencies on the most liquid asset pairs on any chain. These assets (USDT on the BNB chain) are then swapped to USDC on Solana via Wormhole’s Asset Bridging solutions. All these steps are abstracted away from first-term users in a single step, and they get a seamless UX.
Full Stack Cross-Chain Protocol using Wormhole:
Now, we will look at how any RWA project can leverage Wormhole to go truly cross-chain. It has three major parts:
- Cross-chain Identity (KYC): For most RWA projects, KYC (Know Your Customer) is essential, given they interact with regulated assets. The KYC verification can be done on any chain, while the confirmation of KYC will be passed to the master chain at which the protocol is present. After successful KYC verification, users can be allowed to directly redeem or invest in a pool using any native stablecoin on the chain they prefer. However, there is a limitation: for proper implementation of permissioned token (transfer only to whitelisted address), the respective chains should support the such standard.
- Cross-chain Investments: This will involve simply bridging stablecoins like USDC from one chain to another. The exact amount required for the investment can be fetched through cross-chain price oracles like Pyth.
- Bridged RWAs: To enable users with assets on their interface chain, a bridged asset of the native asset will be transferred to their wallet once the investment is confirmed. The bridged assets can then be used just like the native asset!
This enables users to seamlessly access any Real World Assets with a full-fledged experience via their favorite chains.
While we have briefly looked at some cases where RWA platforms can leverage Wormhole for taking cross-chain, the possibilities are endless. RWA presents a unique opportunity to marry off-chain assets with the on-chain world. We live in a multi-chain world, so making these assets chain-agnostic is critical.
Feel free to contact me at Yash (@yashhsm on Telegram/Twitter) for any suggestions or if you have any opinions. If you find this even slightly insightful, please share — it justifies my weeks of effort and gets more eyeballs :)