.jpeg)
In the 1980s, a major transformation hit the US financial markets, affecting banks, investment funds, and ordinary people alike. This transformation, known as securitization, turned illiquid financial assets into marketable securities, freeing up trillions of dollars for productive use.
It started with debt, particularly mortgages, and expanded to other debt types like car loans, student loans, credit cards, and other asset-backed securities. It helped spread risk for debt issuers, making credit more accessible to the general population and significantly boosting the global economy.
However, securitization took a dark turn during the 2008 financial crisis. It played a role in concealing the true value of debt assets backed by subprime mortgages, leading to a major market crash and severe global repercussions.
The crisis wasn’t caused by securitization per se. A major role was played by the careless actions of centralized rating agencies like S&P, Moody’s, and Fitch. They gave the highest ratings (AAA) to subprime mortgage-backed securities (MBS), influenced by their relationships with the banks holding these assets, rather than thoroughly investigating and understanding these instruments' complex and opaque nature.
The obscurity of the MBS packages deserves its own focus. These packages comprised bundled subprime home loans divided into tranches to spread the risk. These MBS sets were then repackaged into another complex structure called collateralized debt obligations (CDOs), further divided into tranches based on risk profiles. Ironically, even the "safest" tranches eventually became worthless. This intricate financial engineering completely obscured the true value of these assets.
Despite its mixed legacy, securitization has had a profound impact on financial markets. With the rise of tokenization, we have a unique chance to learn from past mistakes, unlock new opportunities, and create a more secure and transparent financial system. Tokenization offers a modern solution to many of the pitfalls of securitization, presenting a chance to transform the financial landscape once again.
Tokenization of real-world assets (RWAs) is one of the most promising ways to take crypto mainstream. Some of the key use cases for blockchain are based on the most basic RWA: money. Two of the most popular dollar-backed stablecoins—USDT and USDC—currently have a combined USD 150 billion market cap. The entire crypto market is USD 2 trillion at the time of writing, with more than half of it attributable to Bitcoin (USD 1.1 trillion) and slightly more than a fifth to Ethereum (USD 350 billion). While it might not be immediately obvious, stablecoins are a big force in crypto, setting a benchmark for the rest of the industry.
Tokenization of RWAs means transferring partial or full ownership of these assets from opaque web2 databases to blockchain. Almost any asset can be tokenized—real estate, debt instruments, private and public equity, investment funds, other financial assets, works of art, intellectual property, and more. If an asset has value and private ownership can be assigned to it, it can be placed on-chain. This enables the use of these assets as collateral for loans or to enhance liquidity.
And the benefits are plentiful: liquidity boost, fractional ownership, global reach and broad access to investments, reduced transaction costs, and real-time price discovery. Larry Fink, CEO of the world’s largest asset manager, BlackRock, believes tokenization is the future of financial markets and is investing accordingly. Consulting firm BCG predicts a USD 16 trillion capitalization of RWAs by 2030, while data and business intelligence platform Statista estimates it at USD 11 trillion.
Currently, the market for tokenized real-world assets is around USD 0.6 trillion, with USD 0.15 trillion being stablecoins. Centrifuge, one of the leading companies in RWA tokenization, was founded in 2017 but has yet to gain significant traction even within the crypto market. There is a long way to go in the next six years to meet BCG’s predictions. So, what is holding back the acceleration of the RWA tokenization space? Several difficult problems need to be addressed:
These challenges could each be the focus of separate articles, discussions, or… startup ideas, but they share a common denominator—the requirement to trust a centralized third party.
Let’s look closer and see how vlayer can help ease this bottleneck in a trustless and privacy-preserving manner.
Real-world assets are inherently centralized. Whether it's real estate with fixed locations and ownership deeds stored in land and mortgage registers, coins pegged to real-world assets under custodial care, or KYC’d undercollateralized loans issued by banks based on company cash flow, these assets are subject to various local regulations and custodial oversight. They must be monitored and audited to maintain trust in the tokens representing them. Traditionally, this trust is guaranteed by custodians or auditors. However, slow off-chain procedures are challenging in the fast-paced on-chain world. In the XXI century, everything moves at the speed of the internet.. except for money.
This is where vlayer’s trustless verifiable data infrastructure (VDI) comes into play.
With vlayer, you can generate zero-knowledge proof of emails, web2 data, and potentially digitally signed PDFs and deliver them directly to a smart contract as an anonymous on-chain claim, enabling immediate and secure action. Let’s explore a few examples in more detail.
Transparency, with its pros and cons, is a defining feature of public blockchains. Explorers allow for access to transaction history since the genesis block, as well as the state of accounts of private wallets or smart contracts. This transparency ensures there are no non-performing loans—in case of delinquency, the position is simply liquidated.
TradFi markets, on the other hand, are more opaque and rely heavily on inherent trust assumptions. This creates friction between the web2 and web3 worlds, limiting the latter's development. Trustless off-chain proofs of reserves and ownership can bridge this gap.
Imagine an on-chain lending protocol like Maple that pools USDC, which is then used to buy Treasury Bills. An operator of such a pool needs to transfer the assets to an on-chain custodian, who in turn buys the requested T-Bills. Such a custodian is usually a well-respected and regulated entity, like Coinbase, which will exchange USDC for fiat and buy T-Bills, possibly with the help of another party.
Trust in the Coinbase Custody service is high, and their reputation is at stake, so this risk is acceptable for most market participants. However, there needs to be a high level of trust in the operator who manages the funds and represents the pool’s owners in dealings with Coinbase. While smart contracts can restrict addresses where these funds are sent, trust in the operator’s (in)actions is crucial.
Based on the data about the operator’s holdings in custody available in a daily email from Coinbase, vlayer can generate zero-knowledge proof of reserves. This proof confirms that the pooled USDC has been converted into dollars as per the agreement with the operator. The proof is automatically verified on-chain and sent to the lending protocol’s smart contract, which can halt inflows to the pool if any irregularities are discovered.
Similarly, T-Bills or other RWAs can be used as collateral for on-chain borrowing. In this case, proof of reserves would confirm that the collateral backing the loan is sufficient and follows the pool's agreed-upon risk profile. Such proofs of reserves can be generated for other collateralized assets, like stablecoins, commodities, or precious metals.
The same process applies to physical assets, where custodians can share verifiable proof of ownership via email and periodically verify it on-chain through vlayer’s trustless verifiable infrastructure. This is all done in a privacy-preserving manner with selective disclosure of data.
Credit has been a major driver of economic growth by allowing people and businesses to invest in machinery, infrastructure, and technology, increasing production and efficiency. It helps entrepreneurs start new businesses and innovate, funds big public and private projects, and supports international trade. Historically, credit has been crucial during key growth periods like the Industrial Revolution and after World War II.
In decentralized systems, however, credit benefits are limited due to the isolated nature of blockchains. In DeFi, users can only borrow based on the value of their on-chain assets, requiring overcollateralized loans and hindering growth. This limitation exists because there's no way to ensure borrowers repay loans without sufficient collateral. Undercollateralized lending is the holy grail and a significant challenge in DeFi.
To address this, leveraging web2 data is essential. With vlayer’s VDI, lending protocols can use decentralized credit score assessments based on both on-chain activity and off-chain information. Data from sources like emails with bank statements or bank websites can be converted into anonymous on-chain claims. Details about current account balances or regular cash flows contribute to building a decentralized credit score. At the same time, thanks to the power of zero-knowledge proofs, this sensitive information is kept away from the public, allowing for fully privacy-preserving borrowing.
This approach allows for more flexible lending without exposing lenders to excessive risk. Under-collateralized loans could then be used for both on-chain and off-chain activities, fostering growth in various areas.
vlayer also can help meeting KYC (Know Your Customer) requirements with proof of residence.
The current regulatory environment for crypto in the US is, at best, unclear and sometimes directly hostile. This situation is reflected in on-chain apps or infra providers that, to use their solutions, expect you to confirm that you are not a US person or do not live in the United States.
Here, based on an email from a government agency that includes the physical address, one can confirm their US non-residency in a privacy-preserving and trustless manner, guaranteed by zero-knowledge proofs.
Adopting these measures can help DeFi protocols meet regulatory requirements, build trust with users and regulators, and create a safer, more compliant crypto ecosystem.
Many may ask about the difference between vlayer and widely available oracle solutions like Chainlink, which offer what might seem to be similar services. Let’s take a look.
Today, oracle service providers have built a robust infrastructure to access most publicly available data securely. However, getting this data often requires oracles to use APIs from traditional institutions, which are usually reluctant to share it, limiting the oracles' reach.
Even when APIs are available, integrating them requires significant effort. This, combined with the frequent need to access multiple data sources, leads to slow and costly implementation times.
As a result, proof of reserves and ownership provided by oracle networks is rare, leading to additional trust assumptions in the on-chain RWA market. These often include third parties that may not be widely trusted, such as fund operators and other off-chain intermediaries.
In contrast, vlayer uses multiple data sources like email or information available on the web, which enable near-instant availability with almost no implementation overhead. A common integration can be taken off the shelf. At the same time, a custom build requires only a few lines of code per source, avoiding lengthy negotiations with traditional institutions over API access.
We believe this new level of ease and speed in implementation will drive increased adoption in the RWA category, unlocking exciting new opportunities and tools that will eventually surpass purely on-chain assets in all important protocol metrics and provide broader access to financial products to millions around the world.
At the beginning of the article, we emphasized that the crypto industry should learn from the mistakes of traditional finance and avoid repeating them.
By utilizing blockchains’ public ledgers and integrating features like proof of reserves and ownership, we can protect users from the abusive behavior of borrowers and other market participants in nearly real-time. Complexity and obfuscation of financial products no longer have to be a recipe for disaster.
These advancements, powered by zero-knowledge proofs, require strong community support to be effective. It's crucial for the community to push back against protocols that don’t regularly provide proof of reserves or ownership.
vlayer’s trustless verifiable data infrastructure can make the first requirement achievable. The second depends on us, and by not compromising on security, we can finally realize the better future that web3 promises.
If you are building in the RWA space and curious about how vlayer can supercharge your solution, feel free to reach out to us by filling out the form here.
For those interested in diving deeper into this topic, our CEO Hubert Rachwalski von Rejchwald will speak on "Enhancing RWA Securitization Workflows with Verifiable Data Sources" at the RWA Summit in Brussels on July 9th, 2024. Join us to learn more about how vlayer accelerates RWA on-chain adoption!
Join the revolution
.webp)
