🎩 The Onchain Observer 🐇 // Issue 1

Hello friends, we’re an independent collective of web3 professionals, technologists and creators who value original + data-informed thinking. We’re happy to embark on a journey of writing & sharing about web3 intel, learnings and emerging trends for an enterprise & institutional-minded audience.

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What’s in this issue:

• Not-so-obvious insights on the budding RWA sector

• web3 x financial institutions: who are building in the space, what they’re building and the value it’ll bring

• A review of a useful data tool - tracking token performance by crypto narrative category

Not-so-obvious insights on the budding RWA sector

The blockchain RWA sector has stepped into the spotlight in recent months as the RWA narrative picked up + TVL growth for that segment grew steadily since the second half of 2023. Considering the growth outlook & TAM potential of this market segment this is a top web3 market segment to watch in our view. In this article we share some early insights and data-driven commentary.

For background, real-world assets (RWAs) represent tangible and intangible assets in the off-chain world, from physical assets like real estate to financial assets spanning bonds and equities. Prior to 1H 2023, DeFi protocols & markets on blockchains have not seen meaningful integration or exposure to off-chain RWA assets. That changed through the course of 2023 as several incumbent DeFi protocols began to integrate off-chain assets into their products & treasury management as we’ll see below.

RWA TVL rose rapidly in 4Q23

Referencing TVL data from DefiLlama (Figure 1 & 2), RWA as a market sector saw one of the highest TVL growth rates in 2H23, going from an aggregated TVL of $1 bn and less in 1H23 to between $5 bn to $6 bn in 4Q23. That’s a 6-fold increase in RWA-relevant TVL in half a year.

RWA as collateral being a key driver for 2023 TVL

Upon a closer look at growth drivers, we see that a meaningful portion of the segment’s RWA TVL growth was driven by MakerDao’s adoption of RWA for its DAI collateral. MakerDAO was one of the first DeFi protocols to integrate RWAs into its stablecoin product at scale in 2023.

Galaxy Research’s latest report on The Impact of RWAs on DeFi go into detail on the benefits and risks of integrating RWA into DeFi, and on how off-chain RWAs are being adopted as a new collateral type for stablecoins in the cases of MakerDao and Frax Finance.

A key insight from this detailed write-up to us is that a few of the largest DeFi & stablecoin protocols have rapidly moved from having around 10-20% of their stablecoin collateral share coming from RWAs to as high as 60% in late 2023. That change in collateral composition for MakerDao represents an increase of as much as $2 billion of RWA exposure in absolute terms in under a year.

Another driver of RWA TVL growth in 2023 came from a rise in tokenized U.S. treasuries & bond products starting in 2Q23. Per data from RWA.xyz the combined market value of issued tokenized treasuries amounted to over $860 million as of early 2024, up by ~$750 million since early 2023. This may be the second most meaningful driver of RWA TVL after stablecoin collateral. Now, what incremental value do tokenized treasuries bring to DeFi on-chain? By investing in tokenized treasury products, DeFi users & investors on-chain can now gain exposure to real-world yields without having to move their capital off-chain.

Pure-play RWA sector’s market cap not tracked cleanly by data providers

In an effort to better track market value for RWA protocols & listed tokens, we found market cap tracking websites such as CoinMarketCap and CoinGecko’s RWA categorization features still lacking. For instance, a number of the largest protocols categorized as RWA by CoinMarketCap are non-RWA focused blockchains and protocols (such as Avalanche and Chainlink, see Fig.5), which obscures the true picture of RWA-pure plays’ market value and how they are changing over-time.

On the other hand, while CoinGecko has a larger number of RWA-specialized protocols under its RWA category, the site has an extensive list of tokens listed under this category which makes it difficult to track performance for a core group of RWA tokens.

Comparing blockchain RWA potential versus the current aggregated RWA market cap

Why should we care to track a cleaner set of RWA-relevant protocols by market cap? Trying to come to a rough estimate of how large the tokenized asset market could become in 5 years gives us an idea of the growth potential of the on-chain RWA market.

An earlier-dated report by Boston Consulting Group on On-chain Asset Tokenization estimates that the tokenization of assets could be a $16 trillion market opportunity globally by 2030, from a global total of only ~$300 billion in 2022. This addressable market estimate is inclusive of both on-chain asset tokenization (relevant to our focus on blockchain RWA) and of prevalent traditional investment vehicles such as ETFs, REITs, Mutual Funds (also referred to as asset fractionalization vehicles).

Considering the above sector tracking constraints, we put together a more focused list of “core” RWA protocols (whose business is primarily in bringing RWAs on-chain). Their combined current market cap sums up to less than $4 billion as of late January 2024.

If our estimate of a “pure-play” sector market cap in Fig 6 for on-chain RWA protocols is closer to reality - being between ~$4 to $5 billion or less as of early 2024 (depending on which and how many RWA-involved protocols one includes in the category), this implies the room for adoption & value appreciation for RWA protocols is massive in the coming few to 5 years.

Disconnect between fundamentals & market valuation for some RWA protocols?

As shown in the below (indexed) price performance chart (indexed to each token’s price in Aug 2023 at 1.0), a good number of RWA protocols saw impressive gains since 4Q2023. With RWAs being a top narrative for this cycle and the estimated “core” RWA sector market cap being still less than $5 bn, we expect to see further valuation upside for this market segment.

With that said, we see some degree of disconnect between fundamental metrics & market valuation for some RWA protocols and hope to dive into more data-informed insights in RWA in the coming issue(s). Stay tuned.

⚡️ Chatter on web3 x institutional markets

In this section Dayna Herling writes about recent developments in institutional adoption & use cases in crypto. Dayna is a DeFi and Web3 professional who has worked across business development, strategy and go-to-market for the past 6 years in the crypto and blockchain space with traditional institutional finance and DeFi focused clients. Connect with her on LinkedIn.

Institutional Adoption of Crypto and DeFi has been discussed for a long time, but many believe it is still a speculative idea instead of today’s reality. While every person on the planet may not be using crypto and DeFi in their daily lives, it is being built into the financial infrastructure of the world economy today. Many consumers and even professionals are unaware of all of the current institutions and applications being built right now that are integrating DeFi and crypto into everything from payments to asset management. We’ll explore the big financial institutions who are building in the space, what they’re building and the value it’ll bring as well as what public and private chains they’re building on.

Institutional Adoption on Ethereum

Bill Pay and Automatic Payments. Visa is experimenting with enabling automatic payments through Ethereum self custodial wallets via account abstraction. Because account abstraction wasn’t yet implemented on Ethereum natively, they implemented automated payments via account abstraction on Starknet, an Ethereum Layer 2. If wallet providers implemented this new type of payments method for blockchains, it would enable self custodial users to set up automatic payments to pay their utilities bills or mortgage without having to individually authorize every monthly payment, requiring effort only to initialize the auto payments at setup similar to bank account auto payments today. This would be a key component in enabling Ethereum users to be their own bank, via storing their value and having sole access to it as well as being able to send this value as needed to pay for daily life needs.

Visa is also experimenting with enabling users to pay gas fees in other ERC-20 tokens than the base blockchain token. For example, being able to use USDC to pay ETH gas fees on Ethereum or using USDT to pay MATIC gas fees on Polygon. They’ve also used account abstraction to create a way for wallets or dApps to pay these fees on behalf of users.

On-chain Mutual Funds. Franklin Templeton launched the first US registered mutual fund to run natively on blockchain. Notably, they picked a public blockchain to run the money market fund, Ethereum via Polygon. Launching this fund directly on Polygon enables the transaction processing for when the mutual fund’s shares trade and the recording of share ownership to be handled solely by Polygon’s decentralized, public blockchain infrastructure instead of a semi-opaque private ledger system controlled by Franklin Templeton or other centralized institution.

Institutional Adoption on Solana

Real-Time Cross-Border & Merchant Payments. Visa, working with Worldpay and Nuvei, have expanded their stablecoin settlement capabilities to Solana for settling USDC payments from consumers to merchants. The pilot enables Visa to send USDC on-chain to merchant acquirers Worldpay and Nuvei so they can then more quickly route the payments to their respective merchants. When consumers use a Visa card to pay a merchant, the payment is authorized automatically, but in reality, the settlement of the payment, especially when routed between international issuers or bank accounts, can take days.

To compensate for the intermediary costs of going through a global network of banks’ centralized payment systems, payment processors typically charge a fee of 1.5-3.5% of the total transaction cost. For example, if a consumer buys items at a merchant for $1,000, the merchant incurs anywhere between a $15-$35 fee to process that $1,000 transaction and receive their money. With USDC, Visa can route and settle the payment on-chain to Worldpay or Nuvei in seconds for a fraction of a penny on the Solana blockchain and then when Worldpay or Nuvei sends the USDC to the respective merchant, it can again be sent and settled in seconds for less than a penny. Shopify has also integrated Solana Pay, the decentralized payments protocol leveraging the Solana blockchain, so that Shopify’s millions of merchants can receive payment in USDC on Solana and do not have to rely solely on credit and debit cards and incur fees or pass those fees on to consumers. This also enables consumers who do not have or do not wish to pay with a credit card to still be able to purchase goods from a merchant online instead with USDC.

While Visa’s blockchain based payments for settlement is only a pilot, and Visa’s production treasury and payment settlement systems are still run on the world’s fiat currencies, the above demonstrates how processing these payments on public blockchain networks could reduce costs and improve settlement times significantly for merchants globally. Further, Shopify’s integration demonstrates the Solana network’s potential to be a direct payment processor between consumers and merchants globally.

Institutional Adoption on Avalanche

Institutional On-chain Trade Execution and Settlement. T. Rowe Price, WisdomTree, Wellington Management and Cumberland among others have partnered to use Avalanche’s Evergreen Subnet, Spruce, to test a variety of applications for on-chain trade execution and settlement. Buy-side and sell-side institutions will be able to tokenize assets including FX and interest rate swaps and then transact them on-chain via Spruce. Additional iterations of the institutional partnership with Avalanche could include bringing tokenized equities, credit, trading and fund management on-chain for trade and settlement. Enabling the trading and settlement of real-world assets such as equities and FX swaps to occur on-chain would not only bring a lot of activity and transactions to the Avalanche blockchain, but would also streamline the trading and settlement of assets for buy-side and sell side institutions. Today’s financial institutions settle trades on centralized infrastructure that add significant costs and time to the settlement process. By settling assets, especially assets that do not trade as frequently and incur higher spreads, on public blockchain via permissioned DeFi infrastructure, significant costs can be mitigated by these financial institutions and spreads can be lowered for investors. This would enable additional value accrual to investors and encourage more investment and trading.

Tokenized Portfolios for Institutions. J.P. Morgan, Apollo and Wisdomtree launched a proof of concept with the Monetary Authority of Singapore to demonstrate how tokenized portfolios could enable fund managers to tokenize their portfolios on various blockchains that are interoperable. The POC used a permissioned subnet of Avalanche, J.P. Morgan’s Onyx Digital Assets blockchain and Provenance Blockchain. The interoperability of these blockchains enables tokenized portfolios on any of these blockchains to be accessible to a portfolio manager managing many discretionary portfolios regardless of which blockchain they originally connect to. This demonstrates the ability for tokenized portfolios to enable portfolio managers access to a wider range of funds than currently available today, because the portfolio manager doesn’t have to work with every single fund manager or blockchain, they just need to connect to one blockchain within the connected and interoperable tokenized portfolio network.

The Big Picture

Large financial institutions, and many of them across various verticals, are clearly beginning to adopt crypto and DeFi. They are also adopting it because of the technology’s advantages over traditional systems and databases, namely speed, modularity and cost. 

To recap: Ethereum’s primary institutional use cases are currently automatic payments and on-chain investment funds due to its large network of users, stablecoin support, and scale from Layer 2’s such as Polygon and their corresponding low cost to use its network. Solana’s primary institutional use cases are cross border and merchant payments due to the networks’ near instantaneous settlement times and near zero fees, making every day and micropayments much more affordable for consumers and merchants. Avalanche’s institutional adoption is currently centered around permissioned tokenization and institutional trade execution and settlement for large institutions due to its ability to help institutions lower their back office costs, provide permissioned access to crypto so that only other KYC clients and institutions can access their services, and expand interoperable networks of investment funds that are currently siloed.

Institutional Adoption of DeFi and cryptocurrency, while still early, is clearly taking hold and will likely continue to see impressive growth, given the current pilots are demonstrating or have already proved out use cases with collectively billions if not trillions of dollars in total addressable market value. Just as every company was not on the internet overnight, and institutional and corporate adoption took time, society seems to be in the beginning of the same type of global adoption with DeFi.

🛠 Review of a web3 data tool - tracking of investment flows by narrative from @cryptokoryo

CryptoKoryo wrote, “Crypto is a game of narratives. But narratives keep changing and narrative trends are continuously evolving. This dashboard will help you follow the latest trends.”

This Dune Analytics dashboard is one of the most useful crypto narrative tracking tool we’ve come across which is why we’d like to highlight it here. Use it to dive into the tokens that make up different narratives in crypto and study how they have performed. The dashboard contains 3 sections:

1. Narratives Overview

2. Narratives Breakdown

3. Ecosystem Breakdown

Things we find useful

• Charts in the first section Narratives Overview provide a helpful birds-eye view of how each narrative category has performed month-to-date or year-to-date.

• The Narrative Index - Last 3 months chart details how each narrative has trended over-time based on an indexed price from 3 months prior.

What it doesn’t do or things to build on

• Tokens/narratives performance data is backward-looking, and backward-looking trends may or may not indicate much about their future trajectories.

• Each category is capturing around 5 or 6 tokens at most, which sometimes may not capture all movements in the market vertical. It would be helpful for users to customize the list of tokens in select categories.

Charts & writing to ponder over

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Stay data-curious 🐇

Disclosures: Content in this publication is for Informational Purposes Only. Nothing in this report should be construed as financial or investment advice. We may have previously held, currently hold, or will in the future hold tokens in some of the projects mentioned in this report.