Boom or Bust? Tokenized RWAs in the Face of Easing Interest Rates

Boasting $719 million in TVL, tokenization became top of mind for investors amidst the high-interest rate environment of 2023. However, with the outlook of three Fed rate cuts, the booming market is facing an existential question — what will happen if interest rates go back to near zero? 

With evolving macroeconomic circumstances, there are growing doubts about the profitability and sustainability of this asset class given its yield-sensitive design. Yet, a near 0% interest rate scenario might not see a sunset of this niche segment which continues to bring investment opportunities through its design and utility. 

The Zero-Interest Test

There is no doubt that the on-chain feature of tokenized RWAs will continue to be attractive to more discerning investors, who are searching for relatively liquid (“on-chain”) yet modest avenues to manage their portfolios. These investors will also bank on the increased bond prices, despite lowering yield, arising from safe-haven buying. Additionally, as RWAs brought on-chain diversifies, such as on-chain intermediate and long-term treasuries, risk-averse investors will be able to generate competitive returns over time by tapping into a range of maturities.

Beyond passive yield, some point to potential arbitrage opportunities between 0% off-chain rates and potentially rising on-chain rates once stimulus trickles down into the on-chain ecosystem. These views also anticipate a tangible increase in demand from CeFi lending activities, such as trading firms looking to take “free money” from the table as seen during previous bull markets with low interest rates. 

Worth More than Yield 

Another value proposition of tokenized RWA that will secure its future is the ability to serve as a collateral-backing tool commonly found in the TradFi world. Tokenised treasuries are known as a high-quality liquid asset for collateral, i.e. smooth on-ramp and off-ramp channels, and there are potential use cases to be expanded into DeFi and CeFi, such as yield-bearing stablecoins, collateralised loans and margin trading.