RWAs come to DeFi: How DEX derivatives can benefit from asset tokenization

Blockchain technology found a new meaning when asset tokenization bridged traditional finance markets with decentralized finance (DeFi). By turning well-known asset classes like real estate, precious metals and intellectual property into tradeable digital assets on the blockchain, real-world asset (RWA) protocols saw huge volume over the last two years.

RWA category TVL chart from Q4 2021 until August 2023. Source: DefiLlama

DefiLlama charts show that the total value locked (TVL) in DeFi protocols under the RWA category enjoyed a strong jump in summer 2023, going from $200 million in April to well over $800 million in August. Key findings shared in the RWA Report by RedStone Oracles and Chaos Labs highlight that the U.S. dollar leads as the most tokenized asset in terms of market cap in crypto, with gold following it in second place.

📕 "RWA Report: The Deep Dive into 2023 Market" 📕

We're thrilled to co-publish with @chaos_labs the most comprehensive RWA market overview featuring 31 projects, which is the fruit of over 1 month of research 🧐

Here's a glimpse of what's inside🧵👇https://t.co/vP2vzMRatS

— RedStone Oracles ♦️ (@redstone_defi) August 31, 2023

The explosive growth of RWA protocols brought forward new necessities for the DeFi space. First of all, blockchain-based transactions require a live data feed from the real, off-chain world, where assets including gold, silver, oil or the C3M ETF are traded and benchmarks like the Secured Overnight Financing Rate (SOFR) define interest rates.

Historical price chart for C3M ETF. Source: RedStone

In the blockchain world, this can be achieved through oracles, data providers that bring real-time, off-chain info to otherwise closed-circuit distributed ledgers. Launched in 2023, RedStone is a modular oracle that delivers frequently updated, reliable and diverse data feeds for decentralized applications (DApps) and smart contracts on a multitude of blockchain networks.

Modular oracle for lower maintenance costs

By providing tailored data feeds to DApps, RedStone makes it possible for lending protocols, perpetual exchanges and other DeFi platforms that benefit from asset tokenization to build on-chain trading platforms based on crucial real-world information. The platform supports EVM-compatible layer-1 and layer-2 networks, including Ethereum, Avalanche and Polygon.

The number of DeFi tokens is continuously booming, and modern derivative protocols require much lower latency without maintenance costs breaking the bank. So, it’s increasingly expensive and non-scalable to put all data directly into on-chain storage.

Instead, RedStone proposes a new modular design that places data into an availability layer (DDL on the graphics below) before it’s fetched on-chain. This approach enables RedStone’s oracle to broadcast a large number of assets at high frequency to a cheaper layer and put it on the blockchain only when required by the protocol.

How data flows in RedStone’s modular oracle design. Source: RedStone

RedStone’s price discovery mechanism combines off-chain data coming from aggregators and crypto exchanges with on-chain data from DEXs to establish the highest standard of price monitoring for DApps and to offer assets not avaiable by any other incubent in the space, like swETH or ETHx.

Tailor-made models based on DeFi needs

As smart contract architecture and business demands can differ across blockchains and applications, RedStone came up with three different models to deliver oracle data on the blockchain.

The core model, protecting over $100 million in TVL on DeFi protocols across multiple blockchain networks, dynamically injects data into the transaction to achieve maximum efficiency on gas while maintaining security of the destination chain and the user experience. DApps or DeFi protocols need to adjust their smart contracts to include data extraction and verification libraries to use the RedStone Core oracle model.

In the classic model, data is pushed into on-chain storage through a relayer. As the name implies, RedStone Classic is for platforms that need the traditional oracle setup to get off-chain information. One advantage of RedStone’s classic push model is that the modular design allows users to decide when and how the price data is updated.

RedStone X, on the other hand, focuses on more advanced DeFi protocols, including perpetuals, options and derivatives. This model provides robust protection against front running by providing price feeds at the very next block after users’ interactions.

A comprehensive report on the RWA market in 2023

To provide DeFi users valuable insights about the RWA market, RedStone Oracles partnered with Chaos Labs to prepare a comprehensive 30-page report based on extensive research and interviews with 31 protocols building real-world asset solutions. Commenting on the report, Angel Protocol CEO Pablo Veyrat said that the report provides fundamental knowledge for anyone willing to understand what RWA is and what’s on the market to try.

“The true potential of reliable RWA use cases is yet to be fully unlocked, but they are already present on the market,” said Marcin Kazmierczak, co-founder and COO at RedStone. He added:

“RedStone Oracles offer DApps reliable on-chain and off-chain data feeds to ensure diversity and robustness. Our RWA report provides solid fundamentals and highlights potential use cases.”

Audited by DeFi security expert ABDK, RedStone raised close to $8 million from venture capital and angel investors, including Lemniscap, Blockchain Capital, Maven 11, Coinbase Ventures, Stani Kulechov, Sandeep Nailwal, Alex Gluchowski and Emin Gun Sirer.