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RWA Discussion: Underlying Assets, Business Structure, and Development Pathway.
Summarized by AI
Original Title: "RWA Talk: Underlying Assets, Business Structure, and Development Path"
Original Source: Mint Ventures
Since the beginning of the year, there has been increasing discussion in the market about RWA (real world assets). Some believe that RWA will trigger the next bull market. Some entrepreneurs have also adjusted their direction to focus on RWA-related tracks, hoping to accelerate business growth with the gradually warming narrative.
RWA is a way to map traditional market assets onto the blockchain in the form of tokens for web3.0 users to buy and sell. RWA tokens have the right to receive asset income. A few years ago, STOs mainly focused on corporate bond financing, but now the scope of RWA is broader: any asset circulating in the primary and secondary markets can be mapped onto the blockchain through tokenization, allowing web3.0 users to participate in investment. Therefore, the narrative of RWA includes a wide variety of asset types and a broad range of yield coverage.
RWA is gradually attracting attention from the market, and there may be several reasons for this: first, the current cryptocurrency market lacks low-risk U-based assets, while the risk-free interest rates of major economies in the traditional financial market have risen to 4% or even higher under the wave of interest rate hikes, which is attractive enough for investors in the cryptocurrency native market. Corresponding to this phenomenon, during the bull market period in 2020-2021, many traditional funds also entered the cryptocurrency market and earned low-risk returns through arbitrage and other strategies. Introducing low-risk and high-yield products from the traditional market into the cryptocurrency market through RWA may be welcomed by some investors. Secondly, the cryptocurrency market is not currently in a bull market, and there is a lack of sufficient narratives even in the cryptocurrency native market. RWA is one of the few tracks with solid income support currently seen, and may achieve explosive growth in business. Finally, RWA is one of the bridges connecting the traditional market and the cryptocurrency market. Through RWA, there is also an opportunity to attract incremental users from the traditional market, injecting new liquidity, which is undoubtedly a positive development for the blockchain industry.
However, from the current perspective of some RWA projects, their business indicators such as TVL have not grown rapidly, and the market may have had overly high short-term expectations for RWA. For an RWA project, the following dimensions need to be considered:
Underlying assets. This is the most core issue in the RWA track. Choosing appropriate underlying assets is very helpful for subsequent management. Standardization of underlying assets. Due to the different heterogeneity of different underlying assets, the difficulty of standardizing underlying assets is also different. The stronger the heterogeneity of the assets, the higher the standardization requirements and the more complex the process. Off-chain cooperative institutions and forms of cooperation. High-quality off-chain cooperative institutions can not only fulfill their obligations smoothly, but also fully release the value of underlying assets. Risk management. The maintenance of underlying assets, asset on-chain, income distribution and other links all involve risk management. If it is a debt-type asset, it also involves risk management of asset liquidation, collection and other links after the debtor defaults.
One, underlying assets
The underlying assets are the most core element.
At present, the underlying assets of the RWA track are mainly divided into the following categories:
Bond assets, mainly short-term US Treasury bonds or bond ETFs. Typical representatives include stablecoins such as USDT and USDC. Some lending projects, such as Aave and Maple Finance, have also joined this camp. Treasury bonds/Treasury bond ETFs currently have the largest proportion of RWA; gold, with PAX Gold as a typical representative. It is still under the narrative of "stablecoins", but the development is slow and the market demand is weak; real estate RWA, with typical representatives such as RealT and LABS Group. Similar to packaging real estate into REITs and then putting them on the chain. The source of real estate for this type of project is extensive, and the project team often chooses their own city as the main source of assets; loan assets. Typical types include USDT, Polytrade, etc. The types of assets are relatively diverse, including personal housing mortgage loans, corporate loans, structured financing tools, car mortgage loans, etc.; equity assets, with typical projects including Backed Finance and Sologenic. The trading of this type of asset seeks real existence, but is greatly restricted by legal issues and other factors. An important development direction of native "synthetic assets" in the crypto industry is listed and circulating stocks, which highly overlap with this field; others, including farms, artworks, and other types of assets with large scale (large individual asset amounts) but low standardization.
To determine which assets to use as underlying assets, we need to consider five dimensions: liquidity, standardization, principal safety, scalability, and yield. From these five dimensions, we can roughly define the properties of the above assets.
From the perspective of underlying assets, debt-based assets currently appear to be the most worthwhile category to explore. Based on its own positioning, it can seek differentiated routes: anchoring fiat stablecoins, encrypted market Yu'ebao, etc. Although the stablecoin track anchored to fiat currency is already dominated by a few major players, and the main projects have formed ecological cooperation with a large number of projects, the "encrypted market Yu'ebao" track still needs to be explored.
For real estate assets, although the REITs scheme is already mature, if the project team decides to choose assets and carry out diversified management of regions and properties, it will undoubtedly increase significant costs: for example, if the regional distribution is too scattered, the number of people involved in property management will increase, and the procurement cost and personnel transportation cost of property maintenance will also need to be increased. In the author's view, in the process of reviewing projects, the project team once hoped to control the value of a single property within 100,000 US dollars, distributed in more than 5 countries, and not limited to residential and commercial properties. Although it may achieve sufficient diversification, it is difficult in terms of information disclosure and property management. It is also difficult to achieve rapid growth of underlying assets in the future.
Currently, the author does not recommend focusing too much on "other" types of underlying assets, mainly due to liquidity and standardization issues. For example, for agricultural-related underlying assets, the high degree of non-standardization adds a lot of difficulty in determining the quality of the underlying assets. Taking a single farmland as an example, the quality of the crops produced may also vary, and the warehousing, transportation, and sales processes are relatively specialized. To deliver the returns of agricultural assets to investors, it takes years of deep cultivation within the industry. The production capacity cycle fluctuations and weather factors faced by economic crops are also difficult to predict. There are also significant difficulties in realizing the final returns.
If the project team seeks assets and packages them on their own, the growth of the project itself will also be greatly affected, making it even more difficult for such projects to grow rapidly.
As far as underlying assets are concerned, the current core direction is bond assets, and REITs-like assets may be a more practical and feasible way to increase returns.
二、业务架构
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二、业务架构
If there were significant issues with putting RWA on the chain a few years ago, now there is a clearer path thanks to exploration by leading projects such as MakerDAO.
Firstly, in order to facilitate the on-chain implementation of RWA, the RWA Foundation architecture can be established. Under this architecture, MakerDAO can manage multiple RWAs through the RWA Foundation, and new RWAs can be initiated by the RWA Foundation through SPV (Special Purpose Vehicle).
Source: https://forum.makerdao.com/t/pre-mip-discussion-rwa-foundations/9510
Next, for a single SPV, a management model similar to asset-backed securitization (ABS) can be adopted, where the assets belonging to the ABS project serve as support for securitized financing.
MakerDAO chooses to invest in priority assets for the safety of funds, while other investors can become subordinate investors. For other project parties, they can decide the risk level of holding assets based on the risk preferences of the target user group.
Unlike traditional asset securitization processes, MakerDAO's single SPV does not have roles in settlement or fund custody, but adds a tokenized issuance platform. In the future, settlement and fund custody may still be necessary participants in RWA once regulatory clarity is established.
Three, Risk Management
RWA's risk management mainly consists of three dimensions:
1. Risk management of underlying assets. The lower the standardization level of the assets, the higher the risk management capability required. Compared with forest and farmland, government bonds have a higher degree of standardization, better asset liquidity, and stronger price discovery ability. Therefore, the difficulty of managing government bonds is lower. However, even for the same type of assets, the difficulty of management may vary in different regions and countries. For example, in some developing countries, the level of digitization is low, and debt-based assets may still exist in paper form. This requires the project party to find a place to store the bonds that cannot be destroyed during the holding period of large bonds. Assets in paper form also have a high probability of being "switched" in many regions, and such events have occurred in many large cases.
In short, for the risk management of underlying assets, the most basic requirement is to ensure that the underlying assets are real and effective during the project's existence. Secondly, it is necessary to ensure that the value of the underlying assets will not be lost due to human factors. Thirdly, it should be ensured that the underlying assets can be realized at a fair market price. Finally, it should be ensured that the returns and principal can be safely and smoothly delivered to investors. This type of risk has a high degree of overlap with the attributes of traditional assets, and there are risk management measures that can be referred to.
2. Risk management of on-chain data. As it involves data being put on the chain, there may be a risk of false reporting if the off-chain institution does not have sufficient management. Similar negative cases often occur in traditional financial fields, such as commercial bills, supply chain finance, and bulk commodities, where there have been huge cases of fraud. Even with real-time monitoring through sensors and fixed delivery locations, there is still no way to completely avoid risks.
For the emerging RWA industry, similar situations are likely to occur, especially since there are currently no corresponding regulatory guidelines and the cost of illegal activities is low. The risk of data falsification on the chain should not be underestimated.
3. Risk management for partners. This type of risk still tends to be traditional, but the problem is that there are currently no regulations specifically for RWA supervision. For example, in the custody process, what kind of custody institution is compliant? In the audit process, can the current accounting and financial standards accurately and completely reflect the characteristics of RWA? In the project operation process, if there is a risk event, what kind of risk disposal method and process can better protect investors? There are still no very accurate answers to these questions. Therefore, partners still have the opportunity to act maliciously.
Four, Current User Structure and User Needs
In the previous article "Outlook of the "Native Bond Market" in the Cryptocurrency World", it was mentioned that due to the extreme volatility and cyclicality of the cryptocurrency market, investors with relatively low risk appetite and conservative investment preferences find it difficult to obtain sustained and stable returns in the market. In such a market, a large number of users also exhibit strong risk preferences:
In the survey reports released by teams such as dex.blue in 2020, half of the surveyed cryptocurrency market users invested 50% or more of their entire savings in the cryptocurrency market. Pew Research and Binance also mentioned in their respective survey reports that young people currently make up a higher proportion of cryptocurrency market users. In such a market structure, the risk appetite of cryptocurrency market investors will be higher than that of traditional market investors.
In the current market dominated by "arbitrageurs" and high-risk investors, the volatility also exhibits similar characteristics: according to K33 Research, from early 2017 to October 2022, the volatility of Bitcoin was higher than that of Nasdaq and S&P 500 in most time periods, and only when the market was extremely sluggish did the volatility of the US stock market have a chance to surpass Bitcoin.
In the cryptocurrency market, the two main groups of investors may have different demands for returns: for arbitrageurs, "low-risk" investment opportunities are easier to obtain. For example, the annualized rate of return of Bitcoin perpetual contract funding rate has been between 15% and 20% since the product was introduced, which is far higher than the long-term rate of return of 5% in the global stock market and the long-term rate of return of various types of bonds. For high-risk investors, their expected returns are even higher than those of arbitrage investors.
Therefore, even if stocks are tokenized, it may be difficult to meet the user structure and expected return levels of the current market. In the short term, the risk-return ratio positioning of a large number of RWA products is relatively awkward.
Five, Regulation: Perhaps a Potential Opportunity
In early June of this year, the US SEC announced that it would define multiple tokens, including BNB, BUSD, MATIC, as securities, which raised concerns in the market about regulation. As a result, the corresponding targets also experienced a significant decline.
If the regulatory measures of SEC are recognized by other G20 or more countries, more tokens may be classified as securities and included in the traditional regulatory framework. In the future, issuing tokens on the chain may also be included in the regulatory scope. From the current regulatory policies, we see similar trends: whether it is the United States, Japan, or EU countries, regulatory measures for stablecoins are beginning to converge towards traditional banks. Perhaps in the future, the regulation of tokens will also draw on the regulatory measures of securities to some extent.
If such a situation arises, some practitioners in the traditional financial industry may be more confident in putting assets on the chain: the benefit of this is that the assets are local, but can absorb global liquidity. This idea has been recognized by some RWA project entrepreneurs: although they are limited by geographical factors, they can obtain global investors with blockchain. For these practitioners, asset chaining under regulation will bring two benefits: 1. With the tentacles of obtaining global liquidity, the funding side will not be affected by geographical factors, which may blend into cheaper money; 2. Because it may find investors who require lower yields than local, the project's range of choices may increase.
At the same time, regulatory measures on the user side are also advancing: KYC. Native encryption projects only require a wallet for access, but for some start-up projects that are financed in the primary market, KYC assistance is needed to determine whether users are qualified investors. Some projects that introduce RWA, such as Maple Finance, also consider KYC an indispensable process in the customer acquisition process. If the KYC process is gradually implemented in more new projects, a clearer regulatory environment coexisting with KYC in the blockchain industry may bring an additional benefit: more and more ordinary investors can enter the market with greater confidence.
Users of this type tend to prefer familiar assets and have some interest in emerging native cryptographic assets. At this point, RWA can serve as an important investment direction for this more common type of investor's risk preference.
Six, Possible Development Paths of RWA
Short-term, there are three benefits that RWA brings to investors in the cryptocurrency industry:
1. Low-risk investment targets denominated in fiat currency: Currently, the risk-free interest rate levels of major economies led by the United States have reached over 3%, which is significantly higher than the lending yields of various types of U-based lending agreements in the cryptocurrency market. This brings extremely low-risk investment opportunities to investors without the need for leverage. Currently, projects such as Ondo Finance, Maple Finance, and MakerDAO have launched investment projects based on US Treasury yields, which are extremely attractive to investors denominated in fiat currency. In this race, a "Yu'ebao" project in the cryptocurrency market may emerge.
2. Asset Risk Diversification: Taking Bitcoin as an example, its correlation with gold and US stocks varies in different market stages, resulting in different degrees of fluctuations.
Even after 2020, in the era of macro-driven years, different asset classes still have a certain degree of diversification advantage.
For configuration investors, mixing native encrypted assets with various types of RWA can achieve a greater degree of asset risk diversification.
3. A means for investors in developing countries to hedge against currency volatility: Some developing countries, such as Argentina and Turkey, have persistently high inflation rates. RWA can assist investors in these regions to some extent in hedging against currency volatility and achieving global asset allocation.
From the above three dimensions, the RWA that can be widely accepted in the short to medium term is more likely to be the main economic entity government bond RWA with high yield and low risk caused by interest rate hikes.
Long-term, with clearer regulatory frameworks and more mainstream investors gradually entering the cryptocurrency market, and with more convenient operations in the cryptocurrency industry, RWA has the opportunity to replicate the boom of China's internet finance 10 years ago:
1. Blockchain-based RWA assets provide unprecedented "accessibility" to global retail investors: RWA, as the most familiar asset to retail investors, may become the main on-chain investment target for non-Web3 natives. For them, the borderless nature and permissionless access and operation of on-chain assets open the door to investing in and using a wider range of global assets. Conversely, for entrepreneurs in the field, this also provides them with unprecedented user breadth, scale, and extremely low customer acquisition costs. The rapid development and widespread use of "on-chain dollars" such as USDT and USDC have already preliminarily verified this trend.
2. RWA assets may give rise to new DeFi business models: LSD as a new underlying asset has stimulated the rapid development of LSD-Fi. In addition to the traditional business models such as asset management, spot trading, stablecoins, etc. being revalued, there are also directions that have not been given enough attention in the past, such as volatility-based yield. If RWA becomes an important underlying asset, the introduction of new and large off-chain profits may give birth to new DeFi business models. In the future, RWA can also be combined with native crypto assets and strategies to form hybrid assets, allowing more users who are willing to explore native crypto assets to understand them in a more familiar way. From this perspective, the next high TVL RWA+DeFi project may be the "on-chain Yu'ebao".
3. The game between the industry and regulation will eventually have an answer, and practitioners can seek methods for compliant customer acquisition: whether in Western countries or in Hong Kong in the East, regulation is gradually being implemented as the trend. As the cryptocurrency industry grows to a scale of $10 trillion in the future, regulation will not turn a blind eye to it. With the gradual clarification of regulatory policies, we can see that some regions can land businesses that were previously impossible: stablecoins can now be issued through compliant channels in Hong Kong, and the Middle East is also exploring ways to combine the blockchain industry with traditional industries.
In the long run, one of the important factors driving the booming development of the encryption industry is sufficient liquidity. With the implementation of regulations, RWA, led by fiat collateralized stablecoins, is bound to grow rapidly. Especially under the next round of global liquidity easing, if new players can have strong support in terms of ecology and channels, compliant fiat collateralized stablecoins may also be able to replicate the path of USDT's super high growth.
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