TL;DR
The reality of RWA tokenization falls far short of the promised TradFi-DeFi convergence, with most tokenized assets remaining isolated within specific platforms, failing to become mainstream in the DeFi ecosystem. The widespread “dead token” phenomenon reflects only the state at tokenization, unable to track subsequent changes, causing gradual divergence between on-chain tokens and actual assets. The fundamental reason major DeFi protocols don’t accept RWA tokens as collateral lies in unreliable state synchronization and the structural limitations of unidirectional oracles. Achieving true capital efficiency requires moving beyond simple tokenization to complete state synchronization and bidirectional oracle systems.
The tokenized real-world assets (RWA) market has been making headlines for surpassing $8 billion TVL as of 2024, showcasing explosive growth. BlackRock’s BUIDL fund establishing itself as the world’s largest tokenized treasury fund is indeed impressive. However, there’s an uncomfortable truth hidden behind these numbers.
What did RWA tokenization promise? 24/7 liquidity, perfect fusion of TradFi and DeFi, and true capital efficiency usable across all DeFi protocols. But what’s the reality? Let’s ask the core question: “Why don’t major DeFi protocols like Compound or Aave accept RWA tokens as collateral?”
“Dead Token” Problem: Tokenization is Just the Beginning
The most serious issue with current RWA tokens is that they only reflect the asset state at tokenization and cannot track subsequent changes. We call this the “Dead Token” problem.
Consider real estate tokens. At tokenization, they can perfectly represent the asset. But over time, when fires, natural disasters, or legal disputes occur, these changes aren’t reflected on-chain. Even routine changes like rental variations or vacancy rate fluctuations aren’t updated in real-time, causing gradual divergence between token prices and actual real estate values over time.
Bond tokens face even more complex situations. When credit ratings change, early redemptions occur, or worst-case scenarios like default risks materialize, these critical changes aren’t automatically reflected on-chain. Basic corporate actions like interest payments or maturity handling are still processed manually, causing persistent rights misalignment between token holders and actual bond holders.
Equity tokens face similar issues. Important events like dividend payments, stock splits, or extreme cases like delisting aren’t automatically reflected in tokens. Voting rights and other shareholder privileges are even less connected to tokens.
“The tokenization of real-world assets faces a critical challenge: maintaining accurate representation of the underlying asset’s changing state over time. Current solutions often fail to bridge this gap effectively.”Bank for International Settlements, 2023 Report on Tokenisation
Hidden Reality of Current RWA Operations
Many RWA platforms showcase flashy marketing terms like “automated”, “instant”, and “24/7”, but examining actual operations reveals the uncomfortable truth that most rely on manual processes.
This manual processing is unavoidable for several reasons. First, there’s the absence of traditional financial infrastructure APIs. Most financial institutions don’t provide real-time APIs, forcing reliance on manual queries and updates. Additionally, regulatory requirements necessitate Human-in-the-loop processes. Large asset movements require multisig security with multiple signatures, and complex asset state changes need legal review and approval from legal teams.
Looking at realistic processing times makes this problem even clearer. Redemption requests to actual payments typically take 2-5 business days, with processing completely halted on weekends and holidays. The 9-5 operating model still dominates, far from global 24/7 services, and new investor KYC verification takes days to weeks. This is hardly different from traditional financial systems.
Structural Limitations of Unidirectional Oracles
Existing oracle systems specialize only in data transmission from off-chain to on-chain. While suitable for **simple data** like price information, they have fundamental limitations for RWA’s complex state management.
What RWAs truly need is bidirectional state synchronization. Complex legal states must be reflected on-chain, consistency must be maintained across cross-chain environments, and real-time collateral valuation must be possible. Additionally, regulatory actions occurring on-chain should be reflected in actual assets. However, current oracles only provide unidirectional data transmission, simple price feeds, chain-specific independent updates, and periodic price updates.
Another hidden problem with existing oracle systems is Oracle Extractable Value (OEV). This is MEV occurring during oracle updates, imposing hidden costs on DeFi protocols and users.
**OEV’s operation mechanism** is insidious. When oracles prepare price updates, MEV bots detect this and prepare front-running transactions. Consequently, bots capture opportunities like liquidations or arbitrage, causing actual protocols and users to suffer value losses. Analysis shows major protocols like Aave and Compound are each losing over $100M in value to OEV.
Analyzing the Causes of “Isolated Islands” Phenomenon
The Nature of Trust Issues
The fundamental reason DeFi protocols cannot trust RWAs is their inability to definitively answer “Does this token really represent the asset?” Risk of inconsistency between tokens and actual asset states, bankruptcy or fraud risks from issuers, and uncertainty about token holder rights during legal disputes persist.
More importantly, there’s the verification impossibility problem. There’s no way to verify asset state changes in real-time, requiring blind trust in token issuers, with **transparent audit mechanisms** also absent.
Severity of Technical Disconnection
Having **independent token contracts** on each chain means Ethereum’s RWA tokens and Polygon’s identical asset tokens are different entities. There’s an absence of cross-chain state synchronization mechanisms and structural problems preventing cross-chain atomicity guarantees.
The limitations of traditional bridging are also severe. Existing bridges only move tokens themselves, completely losing the asset’s legal state or regulatory context. Compliance at destination chains cannot be guaranteed either.
Complexity of Regulatory Risks
Legal liability issues are even more complex. Legal responsibility attribution when tokens and actual asset states are inconsistent is unclear, with double collateral or double usage risks persisting, and regulatory authority sanction possibilities cannot be excluded.
KYC/AML complexity cannot be overlooked either. Each DeFi protocol has different compliance requirements, composite regulations apply to cross-border transactions, and real-time compliance verification is virtually impossible.
Redefining the True Meaning of Capital Efficiency
Current “Fake” Capital Efficiency
Current RWA tokens demonstrate “fake” capital efficiency trapped within specific platforms. MakerDAO’s RWA is mainly used only for Dai issuance, Centrifuge assets circulate only within the Centrifuge ecosystem, failing to fully utilize DeFi composability.
Capital freezing due to manual processing is also serious. Liquidation requests to actual processing take several days, and capital is completely frozen during weekends and holidays. The structure makes immediate response impossible during urgent market situations.
Conditions for True Capital Efficiency
For true capital efficiency to be realized, RWAs must be usable across all DeFi protocols. This means being usable as collateral in Compound, forming liquidity pools in Uniswap, and being utilized as lending assets in Aave.
Immediate cross-chain movement and utilization are also essential. Atomic asset movement between chains must be possible, movement while maintaining state consistency, and immediate utilization at destination chains.
Above all, 24/7 automated lifecycle management must be implemented. Interest payments or dividend distributions must be automatically processed, events like maturity or redemption must be automatically reflected, and systems that automatically comply with regulatory requirements are necessary.
Technical Requirements for Solutions
Overcoming current RWA tokenization limitations requires a fundamental paradigm shift.
First, bidirectional state synchronization systems must be built. Bidirectional state propagation between off-chain and on-chain must occur, actual asset changes must be reflected on-chain in real-time, and on-chain regulatory actions must be applied to actual assets.
Cross-chain atomic execution mechanisms are also essential. Simultaneous state updates across multiple chains, preventing inconsistencies through All-or-Nothing execution, and preserving regulatory context between chains.
For real-time off-chain state reflection, API integration with traditional financial systems must occur, real-time event detection and processing systems must be built, and automated state verification mechanisms must be introduced.
Automated regulatory compliance systems are absolutely necessary. Built-in KYC/AML verification systems, automatic regulatory application mechanisms by jurisdiction, and real-time compliance monitoring must be implemented.
Finally, oracles as complete state machines must emerge. State management functions beyond simple data transmission, complete asset representation including legal context, and fair value distribution through OEV elimination must be achieved.
“Tokenization is just the beginning. The real challenge is creating ‘living tokens’ – tokens completely synchronized with real assets that can be trusted by all DeFi protocols.”
Conclusion: Paradigm Shift for RWA’s Future
While the current RWA tokenization market’s $8 billion TVL appears impressive, this is merely the tip of the iceberg. Most value remains trapped in isolated pools, failing to achieve true innovation in the DeFi ecosystem.
Tokenization itself isn’t the problem. The issue is failing to maintain a “living” state after tokenization. For RWAs to become mainstream in DeFi, they need complete asset state representation beyond simple digital certificates, transparent verification mechanisms trusted by all DeFi protocols, 24/7 automated lifecycle management, guaranteed state consistency in cross-chain environments, and perfect balance between regulatory compliance and innovation.
When these conditions are met, RWAs can become core infrastructure of the DeFi ecosystem rather than “isolated islands.” The evolution of next-generation oracle technology appears to be the key driver of this change. It remains to be seen whether state synchronization-based oracle systems can overcome current limitations and realize true TradFi-DeFi convergence.
References
[1]. Boston Consulting Group. (2022). Relevance of on-chain asset tokenization in ‘crypto winter’. https://www.bcg.com/publications/2022/relevance-of-on-chain-asset-tokenization
[2]. Bank for International Settlements. (2023). Tokenisation in the context of money and other assets: concepts and implications. https://www.bis.org/publ/arpdf/ar2023e3.htm
