Since its inception, DeFi has been prone to drastic boom-bust cycles. This volatility has earned the industry its fair share of criticism, often from incumbents in the broader financial services Space. 

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However, as DeFi continues to mature, we have witnessed greater convergence between crypto and traditional financial markets and stronger calls for stabilizing the crypto market to drive mainstream adoption.

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Significant progress has been made on this front in the past few years, and tokenized assets (sometimes referred to as RWAs) have emerged as a tool that could potentially smooth DeFi’s hyperreflexive curves.

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Diversifying Revenue Streams with Tokenized Assets

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Volatility can be destabilizing for individuals and organizations. To protect against volatility, every effort should be made to diversify revenue streams with assets that are uncorrelated—or, in the best-case scenario, inversely correlated. Typically, in DeFi, we have seen hyper-correlated ebbs and flows. When yields are up, trade and lending volume also increases. Unfortunately, the same hyper-correlation exists in downward swings as well.

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Given crypto’s proclivity towards hyper correlation, introducing tokenized assets presents an opportunity for diversification with less correlated assets. Before diversifying with tokenized assets, MakerDAO experienced a series of boom-bust cycles. In 2022, amid favorable monetary policy, MakerDAO began heavily diversifying with US treasury bills and other RWAs. These assets drove about a third of MakerDAO’s revenue within two years. While time will tell the degree to which this diversification smooths out boom-bust curves, there has been unprecedented stability since diversification into tokenized assets.

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The MakerDAO example presents two clear benefits of increasing the onchain availability of traditional assets, such as US Treasury bonds, via tokenization. First, it offered Maker a diversified option for deploying onchain capital. Secondly, and most importantly, it offered access to onchain assets that were inversely correlated with crypto-native assets.

How to Integrate Tokenized Assets (RWAs)

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While integrating tokenized assets presents various opportunities, it does not come without its challenges. By nature, tokenized assets are not crypto-native and don’t have the necessary metadata readily available onchain. To emulate the behavior of crypto-native tokens, specific properties must be considered. While this list is not exhaustive, it provides a framework for considering important properties.

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• Custody - Offchain assets are commonly held by institutions such as banks or trusts. A verifiable mechanism that can validate in real time how much of an asset is in custody is imperative. Without verification that a sufficient amount of an asset is in custody, the tokenized representation of that asset risks becoming worthless.
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• Liquidity - Tokenized assets may or may not have liquid markets, and even when there is a fluid market, such as T-Bills, the liquidity is not onchain. This requires a way to communicate with offchain entities about when and how liquidations should occur.
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• Yield - To maximize investment returns, live data on changing yields must be obtained. Oracles, such as Verified Asset, can report yields on real-world assets, and blockchain protocols can use smart automation to (re)allocate resources to the highest-yielding assets.
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• Counterparty Risk - Data must be collected from every party involved in offchain transactions to establish trust. Only when data from each party is in alignment can there be confidence in the tokenized asset.

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While incorporating tokenized assets (or RWAs) is not an easy solution, they present good opportunities to help bring stability to DeFi and the broader crypto ecosystem.

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Based in Switzerland, Chronicle was the first Oracle on Ethereum in 2017, spearheaded deployment into tokenized assets with MakerDAO in 2020, and continues to set the pace for offchain asset verification with the launch of the Verified Asset Oracle, which is utilized by tokenized asset leaders such as Centrifuge and Superstate.