2024: 10 Predictions for RWA & Stablecoins

To the surprise of many, 2023 shaped up to be a remarkable resurgence for the crypto market, especially as it relates to the Real World Assets (RWA) & tokenization sector.

The market-wide revival in demand and interest marked a significant departure from turbulent 2022, characterized by the downfall of major players like Three Arrows Capital and FTX - which had previously cast a shadow over crypto's future. However, the downturn did not stall the industry's innovation and development pace. Much like the post-2018 recovery that catalyzed the meteoric rise of Decentralized Finance (DeFi), the 2022 bear market catalyzed the resetting of industry expectations and laid the groundwork for groundbreaking advancements in 2023. These developments are now seen as pivotal in driving mass adoption in the ensuing years.

Crypto, known for its rapid shifts in focus towards sectors demonstrating head-turning innovation and potential, finished 2023 at a crossroads yet again. A particular emphasis has been on stablecoins and RWA, primarily identified as critical factors propelling crypto adoption. In lieu of the rise of RWA and persistent growth related to stablecoins, we've crafted 10 predictions for 2024 that offer our insights into the future direction and underlying macro trends of both sectors. After reading, expect to understand why market participants see RWA and stablecoin innovation as a key theme for the year. As we've said once before, stablecoins and RWA are sleeping giants, and 2024 is the year that the broader market will unanimously wake up to their potential.

Prediction #1: RWA TVL to Surpass $5B

Notwithstanding a modest drawdown in 2022, which can largely be explained by the collapse of under-collateralized lenders amid the downfall of key industry players like Alameda Research, FTX, and Three Arrows Capital, RWA TVL has remained in a persistent uptrend since 2020. Although TVL growth was strongest in 2020 and 2021 when the sector rose to prominence in its early innings, 2023's growth was nothing to write off. When all was said and done, RWA TVL advanced a whopping +92% to an all-time high of $2.4B as of year-end. Between the sector remaining a relatively small share of the total DeFi market, which has a collective TVL of $57B, innovation & adoption having ramped up to an unprecedented pace, and the broader cryptoasset market unanimously well positioned for its next bull market in 2024 and potentially even 2025, it's of our belief that 2024 could most certainly mimic 2023's growth in terms of TVL. That is to say, we predict that RWA TVL will surpass $5B in 2024 as the sector continues to attract both crypto natives and institutions.

Prediction #2: New Verticals To Fuel RWA Growth

Last year, unprecedented hawkish monetary policy enacted by central banks across the globe was front and center for all market participants, irrespective of the asset class. While rising interest rates were largely a headwind for the broader cryptoasset market for the bulk of the year, they proved to be a substantial tailwind for the RWA & tokenization sector. With U.S. treasury yields climbing as high as 5.3% and surpassing that of the stablecoin lending rates on the largest DeFi platforms, an unforeseen demand by crypto market participants for tokenized treasuries emerged and helped catapult the vertical’s TVL, a mind-blowing +680% to $811M.

At the time of publication, government securities were the second largest RWA category by TVL, second to commodities. Although we believe tokenized treasuries will continue to see meaningful adoption in 2024, an increasing expectation of the U.S. Federal Reserve and other central banks cutting interest rates in 2024 opens up the opportunity for other tokenized asset classes. As shown in Figure 2, Fed Fund Futures, a financial futures contract based on the federal funds rate and traded on the Chicago Mercantile Exchange, indicates that the market expects interest rates to fall 1.5 percentage points next year to 4%.

Assuming such to be the case, we expect other tokenized assets to steal the spotlight away from tokenized treasuries while their growth persists and remains strong, while market participants also develop a renewed taste for risk. Additionally, we anticipate said shift as the market demands higher yields and greater onchain in DeFi protocols. This dynamic, coupled with nonstop innovation within the RWA sector, leaves us to believe that new and or existing tokenization verticals will begin to emerge as the category leaders in terms of TVL expansion. For instance, one could argue that private credit could see meaningful growth in 2024 as traditional lenders hold tight lending standards given a relatively high cost of capital and non-bank lenders capitalize on the opportunity to lend to businesses and high-net-worth individuals.

Prediction #3: L2s & Alt L1s to See Outsized RWA Growth

With Ethereum having been the first widely successful smart contract platform since the rise of Layer-1 blockchains in 2016 and 2017, it is no surprise that the vast majority of RWA development and success has occurred on Ethereum. As of year-end, nearly 80% of all RWA TVL resides on Ethereum, and Ethereum alone accounted for 62% of the sector’s TVL growth in 2023. Although Ethereum remains the largest blockchain by RWA TVL, or what is a broader measure of the dollar value of assets in RWA protocols deployed on Ethereum, a new trend emerged in 2023.

As shown in Figure 4, the aggregate TVL of RWA protocols deployed on blockchains separate from Ethereum has soared from nearly $65M to $560M since January 1, 2023. This growth can be attributed to the rise of Layer-2 blockchains built on top of Ethereum that enable more transactions at a lower fee and alternative Layer-1 blockchains that offer users more competitive transaction fees and faster transaction throughput. Given the incentives to deploy and grow on newly scalable Layer-2 blockchains and other Ethereum-compatible chains, as well as recent innovative alternative Layer-1 blockchains, we believe that said blockchains would see considerable growth in 2024 and will ultimately be, in the aggregate, the needle mover of further RWA adoption and TVL growth. In particular, we anticipate outsized growth on blockchains such as Canto, Berachain, Blast, Monad, Arbitrum, and Polygon.

Prediction #4: TradFi Institutions Begin Tokenizing Assets in SIZE

Since the dawn of crypto's existence, market participants have long proclaimed that it's "a matter of time until the institutions come." While we've undoubtedly seen institutions dip their toes into the broader cryptoasset ecosystem and slowly but surely embrace the technology, it wasn't until 2023 that we started to see some of the world's largest institutions finally start to dabble. Such can be seen in Figure 5, which lists 15 of the most notable examples of institutional adoption of RWA & tokenization in 2023. The aforementioned adoption not only marked a significant milestone for RWA and the entire cryptoasset ecosystem but marked a meaningful redemption arc for the sector, as market participants first began championing the potential and usefulness of tokenization in 2017 and 2018 - which failed to materialize.

While we saw institutions dabble into RWA & tokenization via promises to tokenize assets, performing test pilots and/or tokenizing a small number of traditional assets, and/or building out the technology to enable the tokenization and subsequent trading of RWA, we believe the 2024 will bring a whole new level of adoption on behalf of institutions. That is to say, 2023 was merely the start of institutions laying the foundation to begin getting their hands dirty, and 2024 will be the year whereby we see traditional financial institutions tokenize assets in considerable size.

We believe institutions will ramp up their involvement in RWA & tokenization also because of the broader mass adoption of crypto as a whole, as evidenced by Blackrock CEO Larry Fink recently stating that crypto ETFs are “just stepping stones towards tokenization” and “the next step is the tokenization of financial assets, and that means every stock, every bond.” Furthermore, we believe builders in the ecosystem will continue to build and deploy highly scalable and useful platforms and protocols that will enable and accelerate adoption, such as Polygon’s latest release of Libre - an institutional web3 protocol designed for the regulatory-compliant issuance and management of alternative investments.

Prediction #5: Regulatory Guidance To Ramp Up Amid Institutional Involvement

The ascent of tokenization and RWA marks a significant stride in the modernization and disruption of traditional financial markets. The growth witnessed to date, especially in 2023, has undoubtedly been highly influenced by institutional adoption. Said trend is not just a testament to the growing confidence of major players in the potential of tokenization but also highlights the pivotal role of an accommodating regulatory environment for this new technology. Some of the more recent regulatory developments that indicate favorable regulations are powering tokenization adoption include the following:

• February 7, 2023: News breaks that a new initiative, Tokenise Europe 2025, is being spearheaded by the European Commission (EC) and the German Banking Association to tap into the potential of asset tokenization and distributed ledger technology (DLT) to strengthen the bloc’s competitiveness.
  

• April 17, 2023: Enterprise blockchain company R3 and the Qatar Financial Centre Authority (QFCA) unveiled a comprehensive partnership that aims to potentially establish a lab setting, which will assist commercial banks and fintech companies in exploring and experimenting with distributed ledger technology (DLT).
  

• March 9, 2023: Luxembourg updated its Financial Collateral Law to incorporate electronic Distributed Ledger Technology (DLT) for managing collateral over financial instruments. The update, part of the new Blockchain III Law, is aligned with EU regulations and redefines financial instruments to include those under the DLT Pilot Regime Regulation.
  

• October 16, 2023: The Financial Conduct Authority (FCA) in the U.K., under the leadership of Chair Ashley Alder, announced that it is developing a framework for fund tokenization. In February, the FCA published a discussion paper focusing on the modernization of the asset management regime in the U.K. The paper highlighted the potential use of distributed ledger technology by fund managers to offer fully digitized funds to the public and indicated its ongoing engagement with various firms and trade associations to refine its approach to fund tokenization and consider necessary rule changes.
  

• October 30, 2023: Regulators from Singapore, Japan, the U.K., and Switzerland, led by the Monetary Authority of Singapore (MAS), launched Project Guardian to conduct asset tokenization tests for various financial products. This project involves collaboration with Japan's Financial Services Agency (FSA), the U.K's Financial Conduct Authority (FCA), and the Swiss Financial Market Supervisory Authority (FINMA). The focus was on using blockchain technology to digitize RWA while also discussing the legal and accounting aspects of digital assets.
  

• November 2, 2023: Hong Kong's Securities and Futures Commission (SFC) released two circulars to govern the city's digital asset tokenization activities, aligning with its goal to become a web3 hub in Asia. The circulars offer guidance for intermediaries involved in tokenized securities and outline the requirements for tokenizing SFC-authorized investment products. The move is part of the regulator's acknowledgment that there is a growing interest in tokenization due to its benefits, such as increased efficiency, transparency, and reduced costs. The initiative followed the Hong Kong Monetary Authority's issuance of the world's first tokenized green bond in February 2023, demonstrating the city's active interest in exploring tokenization.

The facts remain that many of the largest regulators worldwide have spent the last few years putting in place accommodative regulations that will enable their respective financial markets to prosper from the technological advantages of blockchain. Although the United States remains relatively far behind, we predict that regulators worldwide will enhance their regulatory guidance as it relates to RWA and tokenization, the United States included, in 2024 and ultimately pave a clearer path for market participants and builders alike. We see regulatory guidance in 2024 to only intensify alongside institutional adoption and, in turn, RWA to have an even bigger year than last.

Prediction #6: Tokenized BTC ETF to Threaten Wrapped BTC Market Dominance

The start of 2024 has brought forth a plethora of new interest in crypto, largely thanks to the approval of several bitcoin (BTC) exchange-traded fund (ETF) products. This isn't just a MAJOR tailwind for all of crypto, but the world of tokenized assets. As we see it, this opens up the issuance of tokenized BTC ETFs, thereby unlocking new opportunities and markets on blockchains with robust DeFi and RWA protocols. For years, market participants seeking exposure to BTC on Layer-1 and Layer-2 blockchains have had to rely on Wrapped BTC (WBTC), a token pegged to BTC that's backed one-to-one with BTC that a custodian holds.

Although proven useful, WBTC presents several risks and frictions that limit its usefulness and demand. For the benefits of WBTC to be fully realized, it must be capable of being bridged between blockchains. This creates an operational and technical hurdle for custodians issuing WBTC and the risk of something going wrong with the bridge. Time and time again, market participants have fallen victim to bridge hacks (more than $2B worth in 2022) and malfunctions where funds are either stolen, lost, or stuck. Aside from WBTC's bridging risk, it is also susceptible to custodian risk (the custodian is hacked, goes bankrupt, commits fraud, etc.) and the risk of the underlying smart contract wrapping BTC having a potentially catastrophic bug or exploit.

A tokenized BTC ETF not only allows for builders to issue exposure on chains where a vibrant tokenization issuance platform and DeFi ecosystem exists but doesn't assume the WBTC's bridging risk, custodian risk, and smart contract risk. Part of what makes a tokenized BTC ETF more attractive than WBTC can also be explained its underlying transfer restrictions; when there is a limitation on what wallet a tokenized version of an BTC ETF can be sent, there is no longer a “honey pot” for hackers in the same way as their is with WBTC. As we see it, this makes a tokenized BTC ETF much more appealing to a greater audience, thereby presenting an opportunity for superior liquidity, greater utility, and more integrations than WBTC.

Prediction #7: Stablecoin Total Market Cap To Hit $200B

In 2024, we predict the total market capitalization of stablecoins will unlock a new major milestone of $200B, eclipsing its previous all-time high of approximately $187 billion set in May 2022. This growth that we anticipate to come throughout 2024 will be, in our opinion, attributed to the increasingly widespread adoption of stablecoins globally, buoyed by a more favorable regulatory environment. Additionally, the continuation of what many believe to be a new crypto bull market will help further fuel the expansion of the total stablecoin market cap - as evidenced by the broader market's stellar 4Q2023 performance and coinciding +$8B increase in the stablecoin market cap.

Prediction #8: New Stablecoins Will Emerge, Steal Market Share, and Prove to Be Superior

As we discussed in our report, The Stablecoin Trilemma, we believe that stablecoins that are merely decentralized, capital efficient, and stable have a limited future; future stablecoins must also offer their users superior scalability and utility - two features that we believe do not currently exist in the stablecoin ecosystem. Given the ripe opportunities in the stablecoin market, we anticipate the arrival of new stablecoins in 2024 that will help set a new industry standard and unlock new opportunities for the broader market. We see these newcomers capturing significant market share, outperforming their peers in various aspects, further highlighting that RWA presents a multi-trillion-dollar opportunity.

Prediction #9: Tron to Become #1 Chain by Stablecoins Issued

Looking back over the past 18 months, one will find that the Tron blockchain has witnessed a remarkable surge in stablecoin demand, especially in the Asian markets where its presence is most pronounced. For instance, in Figure 9, we can see that Tron has gone from having 18% of all stablecoins in circulation issued on its network to nearly 35% between June 2022 and January 2024, ranking it as second place. Meanwhile, Ethereum's share has slipped from 55% to 48.7% over the same period. This increased interest is primarily driven by the growing popularity of stablecoins, especially in parts of Asia, and Tron's relatively high transaction speeds and low fees compared to Ethereum. The trend above has significantly contributed to Tron's rising prominence in the stablecoin sector. All things considered, we predict that Tron will become the #1 chain by stablecoins issued.

Prediction #10: Major Banks & Institutions Issue Stablecoins

In 2024, plenty of traditional financial institutions ramped up their exposure, experimentation, and acceptance of stablecoins. The most notable was PayPal, which launched its PYUSD in August 2023, a stablecoin backed by U.S. dollar deposits, short-term U.S. treasuries, and similar cash equivalents. With regulators worldwide warming up to the acceptance of stablecoins and said institutions finally accepting the market opportunity of stablecoins, few were surprised to see institutions dabble into stablecoins in the way they did. 

But while institutional adoption was present in 2023, we believe 2024 will consist of central banks and institutions diving headfirst into the ecosystem and issuing their stablecoins. For instance, consider that Tether, who notoriously earned more than $1 billion operational profit in 3Q2023, is in the same business as traditional banks; much like banks, Tether uses its reserves to earn a yield while also ensuring its stablecoin redemptions remain sufficiently liquid and its business well capitalized. As USDT, USDC, and others grow increasingly bigger and the world sees Tether report billions of dollars of annual profit and Circle going public, it’s impossible to write off the potential for banks and traditional institutions to throw their hat into the ring.

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Sources‎

1. https://defillama.com/

2. https://dune.com/21co/tokenization-overview 

3. https://www.cnbc.com/2024/01/12/blackrocks-larry-fink-says-bitcoin-etfs-are-just-the-first-step-in-the-technological-revolution-of-finance.html

4. https://polygon.technology/blog/introducing-libre-polygon-cdk-powered-institutional-web3-chain-for-alternative-assets

5. https://fintechnews.ch/blockchain_bitcoin/eu-tokenise-europe-2025-initiative-aims-to-boosts-asset-tokenization

6. https://www.ledgerinsights.com/blockchain-r3-partners-qatar-financial-centre/

7. https://www.dechert.com/knowledge/onpoint/2023/4/blockchain-iii-law--luxembourg-implements-the-eu-dlt-pilot-regim.html

8. https://www.coindesk.com/policy/2023/10/12/uk-fca-working-on-blue-print-for-fund-tokenization-due-this-year/

9. https://www.coindesk.com/policy/2023/10/30/singapore-japan-uk-swiss-regulators-plan-asset-tokenization-pilots/

10. https://www.theblock.co/post/260621/hong-kong-sets-out-requirements-for-asset-tokenization-in-light-of-market-demand

11. https://www.chainalysis.com/blog/cross-chain-bridge-hacks-2022/

12. https://www.reuters.com/markets/deals/stablecoin-firm-circle-confidentially-files-us-ipo-2024-01-11/

Disclaimer: The information contained herein is general information, intended for educational purposes only, and is not intended to constitute legal, tax, accounting, or investment advice. Information, opinions, and views are solely of Fortunafi, and none of the information contained should be used as the basis for any investment decisions. To ensure suitability, contact a licensed investment professional when making any investment decisions and do your own research.