er to earn a passive incomeoutput: title: Real World Assets (RWAs) in the Blockchain Sector

Real World Assets (RWAs), in the context of the blockchain sector, refer to tangible and intangible assets such as real estate, art, music, and commodities

them to earn a yield from their assets.

output: Real World Assets (RWAs) are tangible and intangible assets brought to the blockchain through tokenization. This process creates a digital version of a physical asset, such as real estate, art, music, or commodities, on a trustless smart contract. Developers generally create smart contracts that issue a token representing an RWA alongside an off-chain guarantee that the issued token is always redeemable for the underlying asset.

Source: QIDs asset ventures

RWAs have been considered the holy grail amongst crypto investors and product builders. The size of global real estate, carbon credits, gold, art, and music markets, to name a few potentially tokenizable RWAs, is enormous, dwarfing the crypto market itself.

Stablecoins: A Popular RWA

One specific Real World Asset has gained traction and is already incredibly popular. Stablecoins are a form of cryptocurrency and digitized real-world asset designed to offer price stability. They are typically pegged to a stable asset, such as fiat currencies like the US dollar or commodities like gold. It has been reported that the transaction volume of stablecoins has now exceeded Mastercard’s and is catching up with Visa.

Many describe stablecoins as crypto’s “killer app”, a relevant and desirable application that proves the core value of a larger technology. It is one of the emerging reasons why the broader financial market has begun to stand up and pay attention to the digital asset sector.

Mechanics of Stablecoins

Stablecoins are issued on blockchains with the same characteristics as any digital assets, aside from their back-ends. The majority of stablecoins can only be issued when the issuer receives or takes custody of the asset the stablecoin represents. This is known as 1:1 backing because, due to design choices like the ability to redeem stablecoins for the assets they represent, these assets can hold their value.

The most popular stablecoins, by some distance, are 1:1 backed US Dollars, including Tether (USDT) and USD Coin (USDC). Accessible, digital US dollars have been a haven for crypto traders seeking to lock in profitable Bitcoin and altcoin positions. Stablecoins immediately created a solution for the inherent volatility of emerging crypto tokens like Bitcoin and Ethereum, which are investable assets with high upsides but risky.

Bitcoin and Ethereum traders could stay on the blockchain with stablecoins, mitigating tax implications that come with the volatility of crypto price movements, while helping traders stay liquid onchain.

Use Cases and Advantages of Stablecoins

Beyond the trading use case, USD stablecoins are in many ways much easier and cheaper to obtain and transact than highly desirable fiat US Dollars. Holders can earn interest on USD stablecoins without identity restrictions through Web3 platforms, and salaries can be paid to stablecoin blockchain wallets just like they can bank accounts. When combined with tools like a crypto-backed debit card, stablecoin can open up a wide range of banking activities to individuals and businesses that may otherwise be excluded from the traditional banking sector.

Stablecoins help Web3 users onboard to the blockchain and stay onchain. In August 2024, Brave New Coin spoke to Yat Siu, Co-founder and Chairman of Animoca Brands, one of the leading investors and builders of Web3 technology. He explained that — “Users will become accustomed to paying for Web3.0 goods and services with stablecoins – this also means that users will hold stablecoins for longer durations; once money is on-chain, it will stay there.”

This will be aided by Ethereum’s EIP:7702 and the ERC-4337 standard. The implementation of these upgrades will enable blockchain account separation on Ethereum and its connected networks. It is set to abstract away a lot of the complexities of the blockchain backend making the user experience more similar to that of a Web 2.0 experience.

USD Stablecoin wallets in many ways resemble global semi-regulated US Dollar bank accounts. Source: Allium

Risks and Regulatory Concerns surrounding USD stablecoins

While this use case is powerful, it has its problems. If a USD stablecoin were to get large enough and collapse as USD Terra (UST) did, the wider consequences for the global financial sector could be brutal.

It should be noted that UST was an algorithmic stablecoin, not a 1-for-1 backed one like popular incumbent USD stablecoins USDT and USDC. 1-for-1 stablecoins have to be backed by equal cash reserves, whereas algorithmic stablecoins like UST are propped by a volatile secondary digital asset that can swap between undercollaterizing and overcollaterizing the stablecoin it supports. This means its model was much riskier than most USD stablecoins available today.

Banks in the United States are protected and regulated by entities like the FDIC and the US government, meaning they have safety and reassurance in the event of a black swan event.

FDIC which protects consumer bank accounts up to $