RWA (real-world assets) are tangible assets that exist in the 'real' or off-chain world, tokenized on public blockchains like Ethereum/Solana for various purposes.
Credit protocols allow for easier loan origination and financing agreements between institutions and borrowers.
Any type of asset can be tokenized to represent its RWA for use on blockchain, from real estate, credits, equities and bonds to commodities; their risks are discussed further below. An RWA on Ethereum is simply a token that represents the underlying asset's value in the real world.
Today, the market capitalization of RWA on blockchain is ~$1.1B.
Fiat-backed stablecoins were one of the first real-world assets tokenized, helping to make cryptocurrencies not just speculative assets by providing stability and leading to some adoption; they are no longer only used for leverage, but also as a means of saving/hedging. These are the main connector between blockchain and the off-chain world.
The current trend is clear: custodial stablecoins (USDT, USDC, USDP) are preferred to decentralized stables (for example, 75% of the supply of USDT is held in EOAs).
Centralized stablecoin issuers are subject to legal obligations related to KYC/AML compliance. To maintain compliance with these laws, they hold the power to freeze assets, add addresses to a blacklist, or prevent a particular address from interacting with their stables. Another risk is the possible need for users to complete KYC to perform transactions. So far, together Tether and Circles have blacklisted $464M in 850 addresses.
By extension, other stablecoins (DAI, FRAX) present an implicit risk by maintaining a dependence on USDC as collateral to sustain parity. While they retain some uncensorable properties, such as the lack of power to include addresses in blacklists or add functions that require KYC to transact, they are also susceptible to censorship by these issuers.
Not only that, but the stablecoin providers with the largest market share (Circles, Tether) dominate the Ethereum ecosystem and therefore potentially decide on its future. Imagine if Ethereum decides to carry out a 'B' hard fork, but Circles or Tether decides that the 'honest' chain on which USDC/USDT continue to operate is chain 'A'.
Those who choose stablecoins backed 100% by crypto collateral (RAI, LUSD) do so for external incentives, usually from the issuer, to maintain demand. The issuers of these stablecoins must find a way to balance this situation in which they spend more on incentives than revenue entering the protocol, which is unsustainable over time.
If the goal of 'decentralized' stablecoins is to scale, they must first achieve not being primarily viewed and used as a means of leverage, and find a balance point where users want to use them as a means of exchange, trading, transfers, and for payment of goods and services.
There is a well-known trilemma that states that a stablecoin can only satisfy two of the following three conditions: