Why RWAs Will Lead the DeFi Renaissance of 2025

Since the catastrophic collapse of 2022, the decentralized finance (DeFi) market has struggled to regain its former glory.

The total value locked (TVL) in DeFi currently sits at $92 billion – far higher than the rock-bottom level under $40 billion it reached in January 2023, but nowhere near its peak of $179 billion in December 2021, despite the wider crypto market surpassing its previous market cap all-time high months ago.

There are several reasons for this. Many of those who experimented with decentralized lending, borrowing and yield farming got burned pretty badly in 2022, and the yields aren’t what they used to be. Especially not when Treasuries have been yielding 5% per annum. With stablecoins in the DeFi ecosystem offering not much more – typically around 8-10% – the risks and complexity put would-be users many off.

It’s not the only issue with DeFi, of course. Borrowing and lending on the blockchain involves putting up cryptocurrencies like ETH or Bitcoin as collateral, but cryptocurrencies are volatile. This means DeFi loans have to be overcollateralized to avoid a trade being liquidated when the token prices experience extreme movements, as they often do. Even with stablecoins, the risks remain far higher than with traditional assets. And so, while this was worth it for 1,000% yields, it simply isn’t for low double-digit percentage returns.

The promise of RWAs

This is where real world assets (RWAs) come in. While DeFi was languishing in the doldrums, major institutional players like BlackRock, JP Morgan and Fidelity have been quietly experimenting with RWAs – assets from the traditional economy brought on-chain through tokenization. Indeed, last year, BlackRock CEO Larry Fink himself declared tokenization the next big thing in the world of finance – and the world tends to listen to Larry Fink.

One of the most evident markers of the gathering momentum in RWAs can be seen in the tokenized Treasury market, which has expanded at an impressive rate. With the help of platforms like BlackRock’s BUIDL and Franklin Templeton’s FBOXX, the market cap of tokenized Treasury products tripled to $3 billion between March and December last year. With interest rates at a two-decade high, these platforms have offered on-chain investors a stable, government-backed yield that is both accessible and transparent.

But RWA tokenization isn’t just about Treasuries, of course. A growing list of assets are finding new life on the blockchain – from real estate, to commodities like gold and oil, to precious gems like diamonds. In truth, any investment asset from the traditional world can be brought on-chain. And these tokenized assets mark the next evolution of DeFi – one it desperately needs to mend its tarnished image, bring new users into the ecosystem and grow its TVL well past the previous peak.

Breathing new life into DeFi

One of the most exciting things about RWAs is that they solve the major issues with DeFi collateral by providing a stable, reliable alternative to volatile cryptocurrencies. You can’t take out a 100% loan against your Ethereum holding because it could be worth 20% less tomorrow if sentiment shifts or some negative news breaks.

But you can certainly take out a big loan against your house – bigger than the value of that house, in fact. Equally, you can safely use gold or US Treasuries as collateral for a loan in the knowledge that they will almost certainly not drop in value by 20% overnight. These are all common practices in the world of traditional finance, but in the world of DeFi, this is still a nascent area. However, borrowing and lending against RWAs is rapidly gathering steam.

Since 2022, many of the stalwarts of the DeFi market, like MakeDAO, Aave and Maple Finance have been increasingly integrating RWAs to diversify their lending portfolios. For example, MakerDAO steadily increased its exposure to this asset category after 2022 until RWAs reached 25% of its balance sheet. Similarly, Aave’s community approved a proposal to allocate $1 million from its treasury to RWAs in September 2023. Beyond that, more and more new players coming into the DeFi market are exploring the intersection between DeFi and RWAs.

DeFi 2.0

Of course, this isn’t exactly DeFi as it was in 2021: a yield-farming paradise with an allergy to anything remotely centralized. But while 1,000% APYs farms made some people rich, this was never going to be sustainable. Now, it’s time for DeFi to finally grow up. It may seem ironic, but the only way DeFi can have a bright future is by integrating with the traditional financial system, and RWAs offer this opportunity.

With the help of tokenized assets like real estate, commodities and Treasuries, DeFi can facilitate all the use cases we’ve been talking about since its early days, but never quite achieved at scale. On-chain mortgages will be possible by borrowing against houses, oil and gold can be used for borrowing and lending at friendly rates, while tokenized T-bills can mimic traditional repo markets.

And for those who miss the DeFi of old, there are still yield farming opportunities out there. Sure, the APYs aren’t quite as spectacular, but more stable collateral allows experienced traders to take on leverage without having to wake up in a cold sweat every night from nightmares about liquidation. RWAs make DeFi far less intimidating and user-friendly – the two key ingredients for a lasting, sustainable revival. And 2025 is the year RWAs bring DeFi back to life.