Why RWAs Won't Become a $16tn Market until 2030

A look at why RWA’s won’t deliver their promise of bringing trillions of dollars worth of value to the crypto space if the current trajectory continues.

In the blockchain sphere, the spotlight is now on Real World Assets (RWAs)—traditional assets such as stocks, bonds, real estate, and financial products brought to life digitally on-chain. As major financial institutions amplify the hype, one must ask: Do the lofty projections reflect genuine potential? Let's navigate the RWA terrain to discern whether this excitement is well-founded or merely a transient buzz.

1. From Hype

The potential impact of RWAs on the crypto industry is enormous. Global assets are estimated to be worth $1,000 trillion. Global equities listed on a stock exchange alone account for $101.17 trillion, and virtually zero of these assets are tokenized. The logic goes that if only a portion of these assets move on-chain, the current crypto market would explode.

This simple rationale prompted Citi to declare RWAs tokenization the foremost catalyst for crypto adoption. In a report released in March, Citicorp forecasted that by 2030, we could see $1.9 trillion in non-financial debt, $1.5 trillion in real estate funds, $0.7 trillion in private equity, $1 trillion in securities financing, and another $1 trillion in trade finance volumes tokenized.

This estimate seems almost conservative compared with Boston Consulting Group, which anticipates a valuation nearing $16 trillion by 2030. Compare these figures with the crypto industry's current market cap of $1 trillion, and it's clear where the hype is coming from.

2. To the (sobering) Reality

Since the beginning of the year, the RWA market has expanded from a modest $757.16 million to a significant $6.04 billion. While this growth initially appears impressive, a deeper look offers more nuance. A major portion of this increase — specifically $3.37 billion — can be traced back to a single protocol, MakerDAO, the third-largest DeFi protocol, which started accepting RWAs as collateral earlier this year.

Excluding stablecoins, private credits, which represent the largest RWA category, saw a decline from $1.45 billion at their peak on June 5, 2022, to $563.73 million (source: rwa.xyz). Given this trend, Deloitte's forecast of RWAs hitting $544 billion by 2025 might seem overly ambitious.

3. Why RWAs have not lived up to their expectations

The key reason why tokenization has not lived up to its expectations is that the advantages mentioned in these reports only provide marginal improvements to the status quo:

• Fractionalization: Proponents argue that tokenization allows assets to be "sliced up," leading to the democratization of more financial products.

• Increased Efficiency: Advocates maintain that blockchain enables faster and more cost-effective post-trading.

• Increased Transparency: According to this perspective, blockchain provides market participants with richer information.

  
  

Upon closer examination, it becomes clear that these are only marginal gains, at best. Consider fractionalization: Bank of America emphasized it as a key advantage of tokenization in its report, mentioning it more than 29 times. The reality is you can already fractionalize shares in traditional finance; this has been happening for centuries. So why should you even tokenize it?

Another frequently cited benefit is cost reduction. Roland Berger's analysis suggests that tokenizing equity could result in post-trading savings amounting to EUR 4.6 bn by 2030. Sounds like a lot, but it is not. The costs of switching the system far exceed these marginal cost savings.

These marginal improvements won’t cause people to switch systems. The costs are too high, the benefits to low.

4. Searching for the 10x

The true potential of tokenization is providing liquidity for low-traded assets. Currently, most of the existing assets are literally illiquid, meaning investors cannot trade them. Think of real estate, private equity, art, etc. The illiquidity costs are staggering: according to research, the illiquidity discount amounts to 30% of the value of an asset (source: Damodaran @ SSRN),

So, why has traditional finance (TradFi) fallen short in offering liquidity to these RWAs? Today, the only venue where you can trade RWA is a stock exchange. Yet, stock exchanges operate on a complex framework filled with a myriad of financial intermediaries, as illustrated below, leading to substantial costs. As a result, only assets with a market cap of >$500mn can be traded on a stock exchange. The rest is illiquid.

If you compare this infrastructure with decentralized exchanges, the advantages are clear. Decentralized exchanges (DEXs) run entirely on code, don’t require any human intervention, and have already handled billions in trading volumes. They offer exactly the same functionality as stock exchanges but don’t charge any listing fees. In combination with liquidity pools, these platforms have the potential to provide for the first time liquidity to low-traded assets.

Making low-traded assets liquid is the game-changer in tokenization. This is the 10x which will drive people to the system.

5. A real example

To illustrate the power of tokenization, let’s take the asset class I am currently working on - startup shares. Today, if you want to invest in a startup, you need at least USD 50k per startup, and then you need to wait 10 years until you can finally sell your shares. As a result, 97% of the population is excluded from startup investments, although this has historically been a successful asset class.

Since 2021, the Swiss DLT Bill has allowed the tokenization of startup shares. Through tokenization, the investment threshold can be reduced to as little as USD 100 per share. However, for that, you don’t need a blockchain; you can also do that in TradFi. What you can't achieve in TradFi is making startup shares tradable. This is only feasible via decentralized exchanges, which is why we are integrating startup shares via our partner Camelot - a leading DEX.

Without blockchain, investors are typically locked into their startup investments for up to ten years. With blockchain, they can trade their shares 24/7 for the first time. Thus, tokenization permits the trading of startup shares for the very first time—a transformative 10x improvement compelling enough to make people switch systems.

While startup shares serve as one example, they represent just one asset class. The same principle could apply to any other illiquid asset.

6. Conclusion

If we continue on the current trajectory, RWAs will never reach the $16tn market cap until 2030. The real magic of blockchain and tokenization doesn't lie in incremental gains. Instead, it's about bringing liquidity to a largely illiquid world. That is the "10x improvement" that could compel a significant shift from the traditional to the tokenized world. As with all technological revolutions, the key will be identifying and harnessing this core strength while navigating the surrounding noise.