Real-World Assets (RWAs) are the bridge between DeFi’s efficiency and the tangible value of traditional finance. For products like USD1+, which generate yield from RWAs, credibility depends on one core principle:
Every on-chain token must represent a clear, legally enforceable claim on a real-world asset.
This is not just a technical challenge. It is a legal, procedural, and operational process involving regulated entities, custodians, and transparent on-chain verification.
Let’s break down how proper RWA tokenization actually works.
Phase 1: Establishing the Legal Foundation
Everything starts off-chain.
A legally compliant entity—usually a Special Purpose Vehicle (SPV) or regulated fund—is created in a trusted jurisdiction. This entity:
Purchases and legally owns the underlying assets (Treasury bills, bonds, etc.)
Handles regulatory compliance and investor protections
Undergoes traditional audits and reporting
Protocols like Lorenzo do not directly own these assets. They act as technology partners, maintaining a crucial separation between protocol infrastructure and legal ownership.
This separation is what makes the structure enforceable in the real world.
Phase 2: Creating the Digital Representation
The SPV then partners with a licensed tokenization provider.
Digital tokens—often built using security-token standards like ERC-1400—are minted to represent shares or beneficial ownership in the holding entity.
Key points:
Token supply matches the net asset value (NAV)
Each token acts as a digital twin of off-chain holdings
Ownership rules are embedded at the smart-contract level
This ensures the on-chain supply mirrors real-world reality.
Phase 3: The Critical Attestation Layer
A token existing on-chain is not proof of backing.
Trust is created through regular cryptographic attestations from an independent, regulated custodian—such as BNY Mellon or Citi.
How it works:
The custodian produces a report detailing asset holdings
The report is hashed (creating a unique cryptographic fingerprint)
That hash is published on-chain
The original document is stored in a verifiable repository
Smart contracts can require fresh, valid attestations before operating—creating a live, auditable link between real assets and DeFi.
Phase 4: Integration Into a DeFi Product
In products like USD1+, the protocol treasury holds these verified RWA tokens.
Yield generated off-chain is collected
Converted into stablecoins
Algorithmically distributed to users on-chain
This allows real-world yield to flow transparently into DeFi without breaking trust assumptions.
How Users Can Verify Everything
Any user can independently verify backing by:
Identifying the RWA token used by the protocol
Inspecting the smart contract for issuer and attestation data
Tracing attestations back to custodian disclosures
Confirming vault holdings match published allocations
No blind trust—only verifiable data.
The Shift in Trust
This system doesn’t remove trust.
It restructures it.
Users rely on:
Regulated legal entities
Audited custodians
Cryptographic attestations
Transparent smart contracts
The result is a hybrid model where law + code work together.
A Personal Story: When It Finally Clicked
This became clear to me during a late-night conversation with my friend Alex.
We were talking about BANK and the idea of “real yield.”
“Remember our failed university project?” Alex said.
“The event management app?”
I did. We had ideas—but our partnership with the catering service was built on WhatsApp messages and handshakes. When deliveries failed, we had no proof, no leverage, no enforcement.
“Now imagine,” he said, “if every order was tokenized. Everyone—the supplier, the restaurant, us—could see the same ledger. Payment only releases when delivery is verified.”
That’s when it clicked.
RWA tokenization doesn’t remove traditional players—it makes their obligations visible and enforceable. It turns vague promises into transparent, automated rules.
That’s the real innovation.
