As the bull market kicks off, we are seeing exciting new trends taking over the market from DePINs, tokenized RWA, and AI tokens supporting AI use cases. Decentralized AI tokens are booming, increasing in value by up to 50 times in just a few days. With Restaking introduced by EigenLayer in 2023, similar solutions are popping up everywhere. But one trend stands out: tokenizing Real World Assets (RWAs). While stablecoins were one of the first successful use cases of tokenized RWA (US dollar), now we’re seeing the industry moving forward with protocols bringing different RWAs onto the blockchain, like government bills, stocks, and real estate.

However, these protocols are operating in their isolated environments, which makes it tough for investors to navigate and for protocols to grow sustainably. That’s why we were exploring the idea of an RWA Marketplace—a simple dApp that brings together tokenized RWAs from different protocols. Our goal was to make it easier for investors to get involved in tokenized RWAs and to help these protocols grow. Here, we’ll share what we’ve learned on this journey.

STATE OF THE INDUSTRY

Let’s examine the data that supports our interest in tokenized RWAs:

• Since January 2021, the number of RWA token holders has grown significantly, from just over 2,000 to now over 40,000 holders as of July 2023.
• According to DeFiLlama Categories, Liquid staking holds the largest Total Value Locked (TVL) with an average of $398 million per protocol, followed by Lending protocols with an average of $99 million per protocol, and DEXs in third place with an average of $18 million locked per protocol. Tokenized RWAs rank eleventh, with an average TVL of over $76 million per protocol. This indicates that RWA protocols are adding significant value, creating demand for financial products that require quality service.
• Comparing the TVLs of major RWA platforms like Goldfinch and Centrifuge to the largest protocol, Aave reveals a stark difference—RWA platforms are over 3,000 times smaller in TVL. This suggests enormous growth potential, driven by both existing and new players entering the field.

Based on this data, we anticipate a substantial increase in the number of new protocols, an influx of new users, and the introduction of new financial products. However, with growth comes confusion, as individuals struggle to keep track of new opportunities and interact with various protocols unless it’s their full-time job. Moreover, as tokenized RWA protocols grow, achieving diversification and visibility becomes increasingly challenging. All these factors led us to the decision to create a tokenized RWA marketplace, where we can bring order to this space and offer additional products due to the interoperability of our offerings.

INITIAL ASSUMPTIONS

Before proceeding with testing out our Business Idea, it was crucial to identify key stakeholders and understand their pain points and potential opportunities. We’ve consolidated these into assumptions ready for validation.

For our marketplace idea, we recognized two main user groups.

• Supply Side – RWA Tokenisation Protocols

These are the RWA protocols that tokenize assets and bring them onto the blockchain. For them we have defined the following assumptions:

• Tokenized RWA Protocols require assistance in promoting their financial products to increase exposure.
• They seek to attract new customers beyond traditional digital asset investors.
• Education is seen as essential for the mainstream adoption of tokenized RWAs.

• Demand Side – Tokenized RWA Investors

These are the investors interested in investing in tokenized RWAs. For them we have defined the following assumptions:

• The majority of investors interested in tokenized RWAs are retail investors.
• Repetitive Know Your Customer (KYC) procedures are a significant pain point for investors.
• Investors face challenges in benchmarking available tokenized RWA investments due to the fragmented ecosystem.

These assumptions serve as the foundation for our business model and will guide our efforts in addressing the needs and pain points of both the supply and demand sides of the marketplace.

TESTING PLAN

To validate our assumptions for both the demand side (investors purchasing tokenized RWAs) and the supply side (tokenized RWA protocols), we employed different methodologies.

For testing the demand side:

We utilized a fake door test, a consumer insights method that gathers behavioral data through landing pages. Our landing page highlighted benefits such as having all RWA investment opportunities in one place, completing KYC just once, monitoring the performance of RWA investments, and enhanced returns with our platform’s native tokenomics. We also included a roadmap to show users our development plans, expected RWA categories on the platform, and an FAQ section to address common questions. To measure validation, we offered users the option to get notified upon the launch of Beta dApp by providing their email. Each submitted email was considered a successful conversion, indicating user interest. Additionally, we ran online ads to drive traffic to our landing page.

For testing the supply side:

We conducted interviews with various protocols tokenizing different types of assets (government bonds, real estate, stocks). Our approach involved defining research questions and assumptions to validate during these interviews. This allowed us to gain insights directly from the protocols themselves, ensuring a comprehensive understanding of their needs and pain points.

LEARNINGS

Tokenized RWA Demand Is Not There Yet …

Since the inception of Bitcoin, the cryptocurrency landscape has evolved, with the narrative around tokenized RWAs gaining prominence alongside the introduction of stablecoins. This current bull cycle has been notably driven by the narratives surrounding RWAs and AI, indicating a potential shift towards the actual adoption of tokenized RWAs as part of investment portfolios.

In our exploration, we sought to gauge whether there is sufficient demand to establish a viable business model for a tokenized RWA marketplace. Through our discovery sessions, we uncovered valuable insights. We learned that simply creating a tokenized RWA Marketplace may not be enough at this time, as there isn’t significant demand for such products yet. Even protocols focusing on tokenizing RWAs face hurdles in achieving widespread adoption, as they navigate the complexities of creating appealing financial products within regulatory frameworks.

Furthermore, we observed that native Web3 users are content with native digital assets and the yields they offer through activities like HODLing, staking, restaking, and lending. Consequently, they exhibit less interest in diversifying into different asset classes, despite the potential for reduced risk exposure. This conservative approach may limit profit opportunities.

The key takeaway from our findings is that a successful tokenized RWA marketplace must encompass not only tokenized RWAs but also native digital assets and other investment opportunities that deviate from RWAs. By offering a range of investment options, we can cater to the diverse preferences and risk appetites of investors, ensuring the marketplace’s relevance and appeal in the evolving crypto landscape.

Marketplaces Demand Listing of Highly-Diversified Products

During our interview with a real estate tokenization protocol, we delved into the question of which products would be most suitable for integration into an RWA Marketplace. Our primary conclusion was that marketplaces should prioritize aggregating products that exhibit significant diversification among themselves. For example, tokenized real estate presents an attractive option because the underlying assets vary considerably, offering investors a wide range of choices. In contrast, tokenized government bonds tend to offer similar products with consistent yields, unless the protocol achieves operational efficiency, which ultimately impacts the value of the underlying asset.

We would advise anyone considering a similar venture to include as many offerings as possible in their marketplace. This approach aligns with investor preferences, as they often prefer to benchmark different investment opportunities against one another. Additionally, it streamlines the decision-making process for investors, reducing the time spent comparing and selecting investments.

For products with less differentiation, we recommend establishing strategic partnerships with trusted entities. These partnerships can provide a significant boost in visibility both within and outside the industry, enhancing the marketplace’s credibility and attractiveness to investors. By incorporating a diverse array of offerings and strategic partnerships, an RWA Marketplace can effectively meet the needs of investors and foster growth within the industry.

Tokenized RWA Protocols Are In Need For Additional Exposure

Ultimately, aggregating products not only aids investors in discovering their next investment opportunity but also benefits protocols that tokenize these assets by enhancing their exposure. Our research aimed to determine if tokenized RWA protocols recognize this potential, and we conclude that marketplaces align closely with the needs of tokenization protocols.

In addition to the benefits outlined in the previous paragraph, one of the main pain points for tokenization protocols is community building. This involves various activities such as community management, content creation, events, and advertising. By aggregating their products and conducting our marketing campaigns, we indirectly bolster their exposure, providing tangible value that encourages collaboration with marketplaces in various capacities.

In essence, marketplaces serve as symbiotic partners to tokenization protocols, offering them a platform to showcase their offerings to a wider audience while simultaneously fulfilling the needs of investors. This alignment of interests fosters collaboration and mutual growth within the ecosystem.

One KYC Umbrella Imposes Significant Challenges

As previously discussed, one of the most significant challenges in navigating the tokenized RWA space is the repetitive Know Your Customer (KYC) procedure. We sought to explore the possibility of allowing users to undergo KYC once on our platform and share it with other protocols to streamline investor activities.

We conclude that, due to regulatory requirements, KYC procedures primarily need to be conducted by the protocols themselves. While some argue that aggregated KYC might be legally feasible, the ultimate approval still rests with the compliant officers of the protocol. This inevitably leads to longer waiting times before users can finalize their investments.

Furthermore, during our interviews, one participant mentioned plans to enable the purchase of tokenized RWAs in a completely decentralized manner without the need for KYC. However, the redemption of these digital representations of tokenized RWAs would be conditioned upon fully completing the KYC/AML procedure.

As of now, it appears that KYC/AML procedures may remain unchanged, with limited opportunities for improvement in the near future. This underscores the importance of protocols ensuring compliance with regulatory requirements while also exploring innovative solutions to enhance the user experience within legal boundaries.

Business Model Applicability

To establish a sustainable project on-chain, it’s imperative to meet the same criteria as in the traditional business world: a well-defined and functioning underlying business model. Throughout our research, we focused on defining and validating what we term the “2S – Serve & Survive” model.

Serve

Understanding the target audience is crucial for any business, and in our case, we serve both the Supply side (tokenized RWA protocols) and the Demand side, which consists of Retail and Institutional Investors. However, serving both Retail and Institutional Investors presents unique challenges and considerations, as their interests and investment preferences may differ significantly.

If we choose to focus on serving retail investors, we must integrate a broader range of digital assets beyond tokenized RWAs. Retail investors are typically attracted to high APYs, which are already available with native digital assets. This may make lower-yield investments in tokenized real estate less appealing. Additionally, catering to retail investors may limit our product offering, as some investments require a substantial minimum investment, such as $100,000 for tokenized government bonds.

Moreover, focusing on retail investors is essential for mainstream adoption of DeFi products, as there is still a gap between traditional and on-chain investors. For example, as highlighted by Robert Leshner in a recent episode of the Bankless podcast, skepticism persists in traditional finance circles within Wall Street where key players are still not fully convinced of the benefits of decentralized trading.

On the other hand, serving institutional investors requires providing a predictable environment and meeting regulatory requirements. While this may limit innovation to some extent, it can also attract larger investments and enhance credibility within the industry.

Finding common ground between both investor groups is possible but can pose challenges due to their differing needs and preferences. Ultimately, there is no one-size-fits-all answer to who to serve first. It depends on the goals and vision of the project’s builders. Institutions demand stability, while retail investors need to be convinced to embrace on-chain trading of tokenized RWAs and generate demand for such business models to thrive. Striking a balance between the two groups is key to creating a successful marketplace that serves the needs of all stakeholders.

Survive

When considering how to ensure the long-term survival of a tokenized RWA marketplace, it’s crucial to establish sustainable revenue streams. We’ve identified two potential revenue streams and weighed their implications:

• Taking a Percentage of the APY

This approach involves offering financial products on the marketplace with a slightly lower APY than the original provider, with the difference serving as a fee for managing the marketplace. While this revenue stream is straightforward, it carries the risk of deterring user adoption. Investors may opt to invest directly with the original provider if they perceive the slight decrease in APY as not justifying the fee. This strategy requires careful consideration of price elasticity, as investors are more sensitive to decreases in APY if they don’t perceive added value from the marketplace.

• Success Fee

Alternatively, charging a success fee to tokenized RWA protocols each time an investment is successfully made through the marketplace aligns incentives more effectively. This approach ensures that tokenized platforms are charged only for successful investments, while investors receive full proceeds from their investments. Through our interviews, we found that this approach resonates well with tokenized RWA protocols seeking additional exposure for their products. Starting with this approach allows the marketplace to establish a revenue model that is fair and transparent, avoiding potential backlash from the community. As the marketplace matures and provides unique user experiences, adjustments to revenue sharing may be more readily accepted.

In conclusion, while both revenue streams have their merits, starting with a success fee approach may be more conducive to building trust and fostering growth within the tokenized RWA marketplace ecosystem. It aligns incentives and ensures that revenue is generated based on successful outcomes for all parties involved.

We Notice Modest Demand

It’s evident from the results of our demand side testing that despite budget constraints and platform limitations, we were able to generate positive traction for our marketplace.

With an advertising budget of 200 EUR, we achieved an impressive 501,000 impressions and attracted 1,051 visitors to our website. Out of these visitors, 61 potential users applied to participate in the beta testing phase by providing their email addresses. However, it’s worth noting that our reach was limited due to budget constraints, and we primarily appeared on lower-value websites, such as faucets.

One of the major challenges we encountered was navigating the strict restrictions imposed by traditional advertising platforms like X & Reddit, which hindered our ability to conduct rapid product testing. Despite these obstacles, we managed to achieve significant engagement and interest in our marketplace.

CONCLUSION

In conclusion, our journey to explore the creation of a tokenized RWA marketplace has provided valuable insights into the opportunities and challenges within this emerging sector of the crypto industry. Through research, testing, and analysis, we have identified key considerations for building a successful marketplace and validated critical assumptions regarding its viability.

Our investigation into serving both the supply and demand sides of the marketplace revealed the importance of understanding the diverse needs and preferences of stakeholders. While there are challenges in balancing the interests of retail and institutional investors, as well as tokenized RWA protocols, our research indicates that there is significant potential for growth and adoption within this space.

The testing of our demand side through advertising campaigns demonstrated promising traction, despite budget constraints and platform limitations. The positive engagement and interest from potential users underscore the viability of such a business model and suggest that launching similar decentralized applications could yield favorable outcomes.

However, it’s essential to acknowledge that pursuing such ventures requires significant investment in marketing. While we have laid the groundwork and gathered valuable insights, the decision not to proceed with launching our marketplace was driven by the wish to prioritize resources towards building more technically complex products through which we can achieve significant diversification.

Nevertheless, the growing interest and activity observed among other builders in the tokenized RWA marketplace space indicate a vibrant and dynamic ecosystem ripe for innovation and growth. As such, we remain optimistic about the prospects of similar dApps and encourage continued exploration and development within this exciting and transformative sector of the crypto industry.