RWA Talk: Compliance, Segmented Tracks, and Prospects

Original Title: "RWA Talk: Compliance, Segmented Tracks, and Prospects"

Original Source: Mint Ventures

Hello, welcome to WEB3 Mint To Be initiated by Mint Ventures. Here, we have been continuously questioning and deeply thinking, clarifying facts, exploring reality, and seeking consensus in the WEB3 world. I am Colin, a researcher at Mint Ventures. Today, we have invited Mr. Mindao to discuss the current hot topic in the cryptocurrency industry - RWA, from the perspectives of compliance, segmented tracks, and future prospects.

RWA and STO: Differences in Narrative

Teacher Mindao: It's been over a year since the last bull market turned bearish. We know that in the past, the main source of income for Defi or crypto was from trading, leverage, and new coin offerings. After the DeFi Summer, from the second half of 2020 to the peak of 2021, there was also a boom in various governance tokens. At that time, the returns were very high, with DeFi reaching up to 20%, over 100%, and even over 1000% for some dog-themed mining. At that time, the US bond yields had not yet entered the interest rate hike cycle and were close to 0% returns, which meant that people did not pay much attention to asset categories other than crypto. However, after the cryptocurrency market entered a bear market, the US dollar entered an interest rate hike cycle, resulting in an inverted yield curve. If Defi has a risk-free interest rate, such as the trading APY in the Curve pool and the lending APY in Compound, objectively speaking, they are relatively close to the risk-free interest rate in Defi. The current return is about 0.5 points, which is less than 1 point, and I am referring to non-subsidized returns.

Looking at the US Treasury bonds, they have already reached 5.5 points and may continue for quite some time. This inverted yield curve has caused many funds to stay in the US dollar world and buy government bonds instead of staying in Defi. This is because Defi has many contract risks, asset risks, counterparty risks, etc., which add multiple layers of risk compared to government bonds. The narrative of RWA is different from before because it is real. In addition to the inverted yield curve we just mentioned, RWA assets, especially US Treasury bonds and tokenized US Treasury assets, have grown from basically zero last year to about 1.5 billion US dollars now. MakerDao has also converted a large amount of stablecoin reserves into US Treasury bonds.

During the previous cycle, around 2017-2018, when the concept of DeFi did not yet exist, the STO industry was relatively empty and focused more on equity-related topics, such as issuing company stocks or equity assets. There was not much involvement in bond-related assets. However, today when discussing RWA, the focus is more on US Treasury bonds or fixed-income assets. Therefore, I believe that there is a significant difference in the narrative and background between these two eras and cycles.

Colin: I think there is one more point to consider. Many investors or users now hold a large amount of U-based assets such as USDT and USDC, and their investment needs are for low-risk financial management. However, in around 2017 and 2018, many projects were still invested in using BTC or Ethereum, so the user structure has also undergone significant changes.

Mr. Mindao: This is particularly true. In fact, the changes in the entire market structure are quite significant. I remember that at the beginning of 2020, the stablecoin market was about 1 billion US dollars, and during the peak of DeFi Summer, it reached nearly 200 billion US dollars, with very rapid growth, forming a very steep curve. However, at the time of STO, these things did not exist yet, and everyone was playing with native tokens on the chain without stablecoins. From the previous bull market cycle to the current bear market, although the amount of stablecoin minting has declined, the amount of minting on the chain is still 130 billion US dollars, of which stablecoins used for interest are estimated to be less than 10%.

So this is a huge market, which means that there are nearly 120 billion US dollars of stablecoins on the chain doing nothing, basically belonging to zero-yield state. The demand for income-type funds in this area is definitely very large. We can imagine that if this part of the funds can obtain the income of national debt, according to the calculation of four or five points, it is nearly 5-6 billion US dollars. These money are earned by USDC's Circle and USDT's Teather, and they can earn about 4-5 billion US dollars in profits every year. This is why RWA is so popular, because everyone sees a particularly dry demand, which has nothing to do with the cycle of the currency circle, but with the risk-free income demand of US bonds. Including the recent pressure on the interest rates of the US dollar and the RMB, it is also because many RMB holders exchanged US dollars within the limit of 50,000 US dollars and deposited them in US dollar deposits.

Therefore, the People's Bank of China intervened in commercial banks and these state-owned banks to stop or limit the highest returns. This indicates that in the traditional world, there is a very high demand for the US dollar and US bonds. In terms of the cryptocurrency industry, there is currently over 100 billion US dollars without returns, which is very attractive to the asset issuers of US bonds. At the same time, this is also very good for the cryptocurrency industry because we are always worried about the outflow of funds from the industry. However, with the interest market, it is like having returns in Yu'ebao, and funds will not leave the blockchain. I think this is also the reason why RWA, especially tokens dominated by US bonds, have been in high demand in recent months.

Colin: Yes, we can see from some data that the growth of stablecoins, especially fiat stablecoins, in the past was mostly due to traditional finance professionals entering the crypto market for arbitrage. However, now there is a relatively large interest rate inversion on both sides, and naturally some people will also want to arbitrage on that side. If we can put the yield of the US dollar on the chain, these people may not be so willing to leave the market, and the liquidity pressure on the entire market will not be so great.

Teacher Mindao: Yes, I think this is a particularly interesting phenomenon. When we talk about the RWA issue, in the currency circle, including many Crypto natives, they believe that it is a betrayal of the revolution. I think this has nothing to do with betraying the revolution. The reason is simple. If this more than 100 billion US dollars does not generate profits, it will run away and let traditional financial banks make money. Keeping funds in the currency circle and distributing profits more democratically and on-chain is a very good and very crypto thing.

Most non-Americans who hold US dollars in the world cannot enjoy the benefits of US dollars and US bonds, but bear the pressure of US dollar inflation, which is very unfair. If US bonds can be tokenized and democratized, for example, by bringing yield to the Crypto chain through DeFi, or by bringing T-Bill's TOKEN to the chain, non-Americans holding US dollars can also have the opportunity to obtain benefits while bearing the pressure of US dollar inflation. This kind of fairness is very important.

Colin: Yes. A few years ago, the benchmark interest rate for the US dollar was around 0.25%, and even very close to 0. Now it's 5.5. If you don't give it to me, the opportunity cost for users is too high.

Mr. Mindao: Yes. And an important point is that the stablecoin can actually be considered a huge RWA. Now, with the introduction of US bonds, these two are already complete twin brothers, which means that the assets and income priced in US dollars are completely moved to the chain. This is a very important milestone for the technical infrastructure of crypto. And this will drive a lot of traditional financial applications, such as the realization of combinable fixed-income products on the chain, and the source of fixed-income may not be related to the cycle of the currency circle itself. These products may be able to do a lot of combinations on the chain. I think that achieving this is expanding the application ecology of crypto.

Key factors for the success of the US Treasury RWA project

Colin: You mentioned earlier that the core of RWA narrative is currently focused on US Treasuries. What do you think are the key factors for success in RWA projects with US Treasury as the RWA type?

Teacher Mindao: We have looked at four or five projects that are running relatively fast in the market, including Ondo Finance, Asia's Matrixdock, and Open Eden, which are basically concentrated at the level of US bonds. I think there are several key points here. One is compliance, that is, whether it can really do well in the isolation of bankruptcy risk from a structural point of view. Various so-called compliant CeFi have basically exploded in the past year or so, so at this point in time, everyone's trust in CeFi can be said to be negative, even large groups like DCG have problems with insolvency.

Another key point is that in the asset issuance of RWA's national debt, they are actually facing competition from Defi projects, although they have a cooperative relationship. For example, these asset issuers also hope that we will accept their assets as collateral or underlying reserves. However, I think that to some extent, there is still a certain competitive relationship with Defi. For example, MakerDao did not use these platforms for its RWA, mainly using its own trust structure and legal structure to tokenize RWA assets. However, its tokenization is not in circulation in the market, and can be understood as purely off-chain. After exchanging stablecoins for US dollars, it buys national debt and realizes profits through chain and trust methods, which can be reflected at the level of Dai holders. Therefore, it did not cooperate with several partners currently in the market.

MakerDao can now be seen as the holder of the largest RWA assets, and there is actually some competition between Defi project parties. For Defi project parties, the most critical issue is how to distribute profits in tokenized form. There are several issues facing RWA issuers now. The first is that KYC must be done for all asset issuances, whether it is for trading or buying assets with T-Bill. This is the same structure as stablecoin issuance. Everyone knows USDC and USDT. If you want to participate in its minting and burning, you must do KYC, which is a basic requirement. However, this requirement is no longer necessary when entering secondary circulation. RWA assets are actually stricter than stablecoins, and even at the secondary circulation level, they still need to go through a whitelist system. For example, Matrixdock's T-Bill Token, which also has a pool on Curve that matches stablecoins, requires a whitelist account to trade in the Curve pool. From this point of view, I think it will greatly limit the issuance scale of T-Bill tokens by the issuer.

However, for DeFi projects, there are actually many ways to solve this problem. For example, Ondo Finance has created Flux Finance, which uses a pool model to use Ondo's T-Bill tokens as underlying collateral. This can be done through market makers or by the project itself, without allowing other retail investors to operate the collateral. However, they can use the collateral to borrow stablecoins from Flux Finance, which can then be exchanged for US dollars and used to buy government bonds, creating a cycle. This way, they indirectly provide the returns from T-Bill to the depositors of stablecoins through the lending agreement.

This is also what I think is relatively smart. Going back to your previous question about how RWA project parties can capture a larger market, it's really hard to say. Because as I just mentioned, if a DeFi project party becomes too big, it may directly skip the issuer and set up its own structure, or the DeFi project may become a very strong distribution channel. Under this distribution channel, the underlying issuers of these so-called KYC national bonds may become weaker.

KYC and Non-KYC Solutions Comparison

Colin: Your answer just mentioned two very important factors. One is KYC, and the other is its architecture. Let's talk about KYC first. Currently, there is an architecture in the market where you set up a wallet yourself, and users need to upload their passport and other information when using the wallet. It will mint an SBT, which is equivalent to a KYC token, and implement a relatively low-threshold KYC solution through this architecture. From the perspective of market practitioners, do you think such a solution will be promoted in the future?

Teacher Mindao: Yes, I posted on Twitter before, and some KOLs also mentioned the RWA thing. In fact, buying US Treasury bonds is not that simple. Even for Americans, it is not easy to buy directly, let alone non-Americans. It requires various KYC and account opening processes, and the threshold is very high. If there are a hundred people, maybe only one or two can cross this threshold. Just now, it was mentioned that if we use the SBT identity token or do KYC on the chain, or do distribution through the exchange, I think this threshold will also screen out many people. This is a bit like our IB (interactive broker) US stock account, and now they also provide a 4.5-point interest service for US dollars.

However, we can imagine that opening an IB account is not easy, and the fact that there is no overseas USD account has already limited 99.9% of people. I believe that as long as you have completed KYC, whether it is on-chain or on an exchange, it may not be a problem for existing users in the currency circle. I think that as long as you have been in the currency circle for one or two years, you will have gone through KYC accounts of all sizes on various exchanges. So for this group of people, the difficulty may not be great. But if we really want to consider users outside the currency circle, KYC itself is a very difficult problem. For example, taking passports as an example, most Chinese people do not have passports, so how to authenticate this group of people is a difficult issue.

Colin: I think this is a compromise solution, which may be relatively easy to implement in some developed countries because they have a wider passport coverage and identity information. But once it comes to developing countries, there may be difficulties.

Teacher Mindao: But I think one advantage is that it is convenient for CeFi and centralized exchanges to distribute. Like Binance, it can push such fully compliant national debt products to users who meet KYC qualifications. Although it is currently in the midst of controversy and dare not do so, theoretically it is feasible. I think the most interesting or revolutionary aspect is not that centralized exchanges provide a service for people who have passed KYC to trade, I don't think this is the key point.

The key point is that, after such a long time, we have experienced a particularly large mind storm, that is, the tokenization of the US dollar. The US dollar has been heavily tokenized and has been applied, but the native interest of the US dollar has not been tokenized, which is a regret. If a currency does not have its own interest, it cannot become a real currency. Therefore, I believe that the most important thinking brought by RWA is that the US dollar has been tokenized, and we need to consider how to tokenize the interest of the US dollar. When these two are combined, it means that we truly tokenize the US dollar currency completely onto the chain, which is of great significance. Of course, this is a natural promotion for the US dollar.

Imagine if you hold US dollars, stablecoins have excellent liquidity that surpasses cash and bank deposits, bringing greater liquidity premiums. If you add interest, capital costs, and opportunity costs that can be compensated on the chain, what reason is there to deposit money in a bank? I think there is none. Currently, including JPMorgan, there are over $2 trillion in deposits with zero interest, all of which are used to buy government bonds. However, for many ordinary people, this threshold is too high. As I mentioned earlier, the threshold for buying government bonds is also high. Especially for those who hold US dollar assets but are not Americans, many overseas people hold US dollar assets, how do you buy government bonds? This is itself a high threshold.

However, if we tokenize the US national debt on the chain, holders of stablecoins can directly access the returns of US bonds. This not only allows the crypto industry to retain $130 billion in funds, but also attracts more M1 funds from traditional financial markets. This is a larger scale and more significant impact. In the past few cycles, we have always been concerned about these funds leaving the crypto industry, and we always want to retain these funds. In fact, US bonds are the best way to retain US dollar funds. As long as the funds remain on the chain, they will have the opportunity to use various DeFi products and enjoy various crypto services. This will create a virtuous cycle for the entire ecosystem. If there are US bonds on the chain, I believe these people will stay, which is much better than in the past few cycles.

Colin: Many people also left because the market turned bearish, and they may have chosen higher-yielding investments in the traditional world to capture interest rate differentials. This group of people may not have the motivation to leave the market again because they can already obtain more benefits here.

Teacher Mindao: That's right. I think RWA US Treasury bonds are just the first step. In addition to US Treasury bonds, there are other bonds. Because bonds have fixed income, they are very important to the currency market. If we can put most of the attractive high-quality bonds in the traditional financial market on the chain, it will be the most organic growth for the funds retention and new application development in the currency circle. It does not rely on the cycle of the currency circle to drive demand. This means a paradigm shift.

Colin: Yes, it may lead to deposit migration from traditional finance and the crypto market.

Teacher Mindao: Yes, at least for these people, the reasons for not converting funds from stablecoins to US dollars and depositing them in banks have decreased. Some of the people I come into contact with will cash out into stablecoins, but not many are willing to deposit them into banks. If we have US Treasury bond yields on the chain, these people are more likely to stay on the chain because there are more composability and opportunities on the chain than in banks.

Colin: Yes. Just now you mentioned another way that does not require KYC, which can be seen as a sandwich that maps the income up. Currently, there are similar practices in the market, where users lend funds to an institution, and the institution acts as an intermediary to perform the next step of operation, isolating the KYC. Compared with the architecture of users holding (US bonds) directly, do you prefer the way that does not require KYC?

Mr. Mindao: I believe the most crucial aspect is to examine the legal framework of the underlying assets when holding US Treasury bonds. This includes the stablecoin USDC, and we need to pay attention to the USD custody method of USDC. When it comes to government bonds, I think the issue is essentially the same as stablecoins. The underlying architecture risks and compliance risks of the centralized issuer of stablecoins, whether they follow the KYC or non-KYC path, will ultimately be reflected on the chain, which is the underlying risk of aggregation.

Therefore, if T-Bill assets can be issued in a compliant manner like USDC, the non-KYC version can be seen as an experimental solution for DeFi. Currently, KYC and non-KYC can be understood as the relationship between the front store and the back factory. The factory refers to KYC, which forms T-Bill assets and issues them. This requires going through KYC. If KYC is not followed, it will be difficult to ensure compliance, asset deposit and withdrawal anchoring, and liquidity. Therefore, the factory needs to be completed by a centralized and compliant institution.

On the stablecoin side, Circle is responsible for all coin issuance, user KYC, and compliance of its own architecture. Personally, I think it would be more reasonable for the front-end to adopt the Permissionless approach of DeFi without KYC. Here I talk about two different ways, one is through the lending pool, and the other is similar to MakerDao's currency policy mapping. In addition to these, some people use Rebase Token, such as using stETH as Rebase Token. But I think Rebase Token may be closely linked to the underlying T-Bill yield, and there is a certain compliance risk. So I think the ideal situation is that each has its own responsibilities. In centralized institutions, there may be several strong institutions that can perform well in T-Bill asset issuance, while others distribute US bond interest through DeFi projects on the front end.

Colin: This may lead to relatively higher regulatory requirements for the supervision of semi-centralized institutions. (Semi-centralized institutions) I mean, in the DeFi field, a funding pool has been formed, and everyone can lend money to an institution without the need for KYC. The institution will then complete the subsequent operations, which is a front-shop and back-factory model.

Teacher Mindao: I believe that for on-chain protocols, putting stablecoins into the pool and allowing users to borrow against collateral is essentially a lending relationship. Of course, different places may have different views on this matter. If this project were carried out in the United States, it might be considered an attempt to penetrate US bond assets, so whether the borrowing interest reflects the stablecoin as a security token is questionable.

However, I believe that there are many things that can be done on the chain, and many interesting structures can be implemented. The advantage of these structures is that they are upgradable and programmable. For example, when MakerDao was first launched, it had a lawsuit with Gemini and DCG, which could lead to bankruptcy risks, so it was removed and completely replaced. And USDC Depeg also lowered its share later on. I believe that it is precisely because everything on the chain is programmable that decentralized stablecoin projects have a huge advantage. If a certain scheme has too much legal or compliance risk exposure, it can be slowly removed.

How to view MakerDao's configuration of US debt and the possibility of triggering regulatory seizures

Colin: You just mentioned the very important MakerDao project. What is your opinion on the configuration of national debt assets for the MakerDao project? Is there a high possibility of regulatory seizure of such assets? What situations may trigger seizure of such assets?

Teacher Mindao: I believe that MakerDao's RWA architecture has existed for at least 5 years. Previously, their RWA strategy did not focus on US Treasury bonds, but instead focused on the solar energy and real estate industries. The earliest projects were real estate projects and solar power plants. As Rune himself is an environmentalist, he particularly hopes to transform MakerDao into green finance and use solar energy as MakerDao's core asset allocation.

However, this proposal has caused some disdainful reactions in the community. There are also many issues in reality. If you have ever invested in infrastructure projects, you will understand that the biggest problem facing assets such as solar power plants is scalability. It is difficult to achieve large-scale operation because these assets face a lot of operational and counterparty risks. If you open a solar power plant in China, you will face the risk of market regulation in China. In the past 10 years, China's solar energy regulatory policies have undergone significant changes, and subsidy policies and various loan policies are constantly being adjusted. Therefore, this type of risk is not suitable for a scalable asset.

MakerDao has gone through a lot of twists and turns. Previously, it collaborated with Centrifuge to invest in assets such as real estate and solar power plants. However, these assets did not reach a large scale, mostly only tens of millions of dollars, because the community found that such asset investments were impossible to scale and were prone to default loans. With the rise of US Treasury bond interest rates, MakerDao gradually realized that US bonds are a good thing. Its RWA strategy is also based on this historical continuity, rather than a sudden decision to invest in government bonds. Now, I think there are several good points for MakerDao or other stablecoin projects to invest in government bonds.

First of all, to create a stablecoin, you can think of it as a debt denominated in US dollars, and Dai itself is a debt. The highest quality US dollar-denominated debt is US Treasury bonds. If you don't believe in US Treasury bonds, then I don't think there is any debt in the world that you can trust. This is the most basic truth. If you don't believe in US Treasury bonds, then why would you trust a debt from a solar power plant? Why would you trust a debt from a real estate company? Not to mention others. Therefore, when many people discuss RWA, I think they are missing a point. They will say, do crypto instead of going back to traditional finance.

But my point is, first of all, if you are doing a decentralized US dollar stablecoin, you cannot avoid assets like US Treasury bonds. Logically, this cannot be ignored because US Treasury bonds are the most important risk-free interest source among all US dollar assets. If you are doing other stablecoins, such as non-mainstream currencies like ETH or BTC, there is nothing to say. If you are doing a US dollar stablecoin, it is logically inconsistent not to allocate risk-free income like US bonds. One of the important reasons why MakerDao later made a large number of US bond allocations is that a large amount of MakerDao's later minting was stored through stablecoins in the PSM (Primary Stablecoin Module) stablecoin module, of which nearly 70% were USDC. If you are a stablecoin project party holding USDC, the risk remains the same, but you do not receive corresponding income.

The USDC anchor problem is a big warning for MakerDao. In fact, the risk is not the US dollar or the Federal Reserve, but the risk of Circle, but Circle did not provide a risk premium. So MakerDao will convert all USDC to US bonds. In terms of regulatory risk, the risk is the same. For example, if the regulatory agency seizes the US bonds in the MakerDao trust, the risk is the same as seizing the underlying US dollars and cash of USDC. But for MakerDao, the benefit of the former is profitability. With profitability, they are naturally willing to take on corresponding risks. In fact, I believe that if MakerDao sets up a trust to hold US bond assets, it will be at least one less layer of operational risk than the indirect approach through Circle.

As a practitioner in the encryption industry, I will translate the following Chinese text into English without considering the context and industry-specific terms. English words and phrases, as well as capitalized English words and phrases, will not be translated or abbreviated, such as ZKS, STARK, and SCROLL. English characters in hyperlink tags will not be translated and will be returned directly. When the content contains only punctuation marks, the punctuation marks will be returned as they are. HTML tags in the content, such as

, , , and

, will not be translated. If an HTML tag contains English characters, the translation will be omitted and the tag will be returned directly. The content in hyperlink tags will be preserved and not translated. All Chinese characters will be translated. Here is the text to be translated:

Because Circle itself as a company has operational risks, we do not know if it is engaged in other activities. However, if it only sets up a trust to hold US Treasury bonds, I personally think that this risk is relatively small. Why are regulators keeping an eye on Circle and Binance? Because they are not only asset custodians, but also have complex issues such as trading, derivatives, lending, and anti-money laundering. Companies like Circle and Binance that have proprietary trading need to worry about whether they have proprietary trading departments and whether they are trading against their customers.

Circle is also suspected, including Tether's USDT self-lending, and even holding commercial notes of Chinese real estate developers. In fact, if you hold USDT or USDC, the risk for decentralized project parties is greater. You might as well set up a trust institution and hold US Treasury bonds cleanly. So the several issues you mentioned earlier, in fact, if they don't do this, they face the same risks, or even greater risks. I think that MakerDao now uses a trust to establish bankruptcy isolation, only helping MakerDao, this Dao, to hold US Treasury assets, without retail investors or other user interactions. From this point of view, I personally think that the regulatory risk is smaller.

Colin: And they can achieve something that cannot be achieved with either USDT or USDC, which is to disclose asset information every day. However, Tether and USDC cannot actually achieve such disclosure.

Teacher Mindao: Yes, to be honest, I think there is one thing that maybe everyone doesn't understand. If MakerDao has $4 billion USDC, and it exchanges $3.5 billion US dollars for US bonds, to some extent, its actual credit for Dai has been improved. This approach is actually shorting USDC, which theoretically benefits Dai. Suppose I exchange all USDC for US bonds, and USDC has already gone bankrupt, it is beneficial to me. So, for stablecoin projects, using reserves to buy national bonds is, to some extent, a shorting behavior against USDT and USDC, or hedging their own risks.

We assume that MakerDao can eventually convert its on-chain USD reserves into only one or two hundred million US dollars, which is enough to meet the on-chain exchange and liquidity needs. If most of the reserves become US bonds, the risk for them may be even lower than that of USDC and USDT. This is my opinion. Interestingly, decentralized stablecoin transactions will then become directly related to the Federal Reserve, without the need for intermediaries. Previously, people thought that fiat-backed stablecoins were more stable and less risky than decentralized stablecoins. However, if we manage to convert most of the reserves into US bonds, the opposite may be true, and decentralized stablecoins may be even better in terms of risk than centralized and fiat-backed stablecoins.

Colin: You just mentioned that stablecoins like Circle and Tether actually involve two layers of risk, operational risk and counterparty risk for asset allocation, but they are not priced into the assets themselves.

Teacher Mindao: Yes, in addition to the issues mentioned above, there are also high operational risks such as the management of contract-side tokens and the management of cross-chain minting and burning. In addition, for USDC and USDT, the regulatory risks they face are not limited to one country, but are global. For example, MakerDao's trust may be established in the United States or in an offshore company, and regulatory risks exist only in a few countries. The regulatory risks of USDC and USDT cover as many as 20 governments worldwide. The Chinese government also has the ability to freeze assets as long as it knows which bank the account is opened in China.

The Chinese government can completely execute this operation through Hong Kong. The reason why Circle and Tether did not open accounts in Hong Kong is because they may be frozen by regulatory authorities in other countries. The stablecoin operators have a very large number of users, involving various types of users. Unlike MakerDao's Dai, this protocol isolates users through contract layers, and assets are only a DAO, without involving various types of users. USDC and USDT face many retail users, corporate users, and various types of users such as hackers, and the regulatory risks involved are much greater.

Colin: So do you think that after the US Treasury bonds are put on the chain, there may be a significant change in the overall stablecoin market? Is it possible to understand it this way?

Teacher Mindao: In my opinion, the decentralized stablecoin faced a problem in the past, that is, we saw various hype and speculation behaviors in the entire decentralized stablecoin field, including various token models and Ponzi models changes since DeFi summer. And I think US Treasury bonds can provide very powerful empowerment for decentralized stablecoins. What is the concept of this empowerment? Previously, I thought it was difficult for decentralized stablecoins to compete with fiat stablecoins because I believed that fiat stablecoins first have a very strong platform advantage in deposits and withdrawals.

In addition, it also has regulatory advantages. However, if there is a lot of friction in the slippage area, I think it is difficult for decentralized stablecoins to compare with fiat stablecoins. But now I think that if US bond interest is introduced into DeFi decentralized stablecoins, decentralized stablecoins may have greater appeal compared to centralized stablecoins. Whether in profitability or programmability, it can adjust the risk composition of underlying assets more flexibly. In addition, it has a very important point, which is that it removes the issuance risk to some extent. So now it seems that decentralized stablecoins have the potential to overtake on the curve.

Colin: In other words, using US Treasury bonds as the underlying asset for RWA, issuing a new decentralized stablecoin based on US Treasury bonds, and then integrating it with external legal frameworks through the architecture of Dao. This approach will result in much lower risks in both asset and operational aspects compared to Circle.

Teacher Mindao: Yes, I think it is much lower than them. In addition, there is an important point that the competition faced by both Circle and USDT is not only from the competition of stablecoin issuers, but also from the future national digital currency. Therefore, the competition pattern is difficult to see clearly, and they rely on a large amount of actual infrastructure deployment, which requires a huge cost investment. DeFi project parties actually borrow a lot of traditional fiat stablecoin deposit and withdrawal channels to some extent.

However, I also believe that in the future, projects like MakerDao, which already have their own national debt holding accounts, have actually opened up another channel for deposits and withdrawals. It is entirely possible to exchange for US dollars through it. Of course, this cannot be targeted at retail investors. It can trade with institutions, form the deposit and withdrawal channels of the Dao itself, and can also bypass the so-called fiat stablecoin channel.

Colin: It seems that the next major narrative will be the change in the landscape of decentralized stablecoins.

Teacher Mindao: Yes, a topic we often discussed in the past is real yield. I believe that real yield refers to RWA, which is the most genuine yield, isn't it? The concept of real yield that I mentioned refers to not needing subsidies and being able to expand infinitely in scale. DeFi currently has a problem where many yields cannot achieve scale expansion. For example, if you have tens of millions of dollars with a yield of 10%, but when you have a billion dollars, the yield may drop to zero.

There is no such problem with US Treasury bonds because they have a special nature that is fundamentally different from other assets and corporate bonds. They have a risk-free interest rate, a large capacity for accommodation, and predictable interest rates, which distinguishes them from other government and corporate bonds.

Valuable RWA Project Assets and Corresponding Risks to Watch Out For

Colin: In addition to RWA assets such as US Treasuries, what other types of RWA assets do you favor? Are there any new risks associated with the assets you favor compared to US Treasuries?

Teacher Mindao: My personal view on RWA is that its implementation and application will be prioritized based on the degree of standardization. Those with high standardization and homogeneity will be the first to be implemented, and fungibility is also part of standardization. For example, why is the stablecoin of the US dollar the largest RWA and can be implemented first? Because the US dollar has high standardization and homogeneity. Whether it is your one dollar or my one dollar, they are exactly the same, have the same function, and can be replaced without any difference.

Secondly, USD stablecoins can be centrally managed, with only one bank or issuer needed for issuance and management. It is also highly standardized. Apart from USD stablecoins, to some extent, T-Bills also have these characteristics. However, compared to USD stablecoins, there is a bad feature that it is more like a security in terms of regulation. USD stablecoins are not seen as securities by many people, but as currency. However, for US Treasuries, most people now believe that they are debt. In addition to US Treasuries, personally, I think the next step that is easier to introduce is bonds, which are fixed-income products. The risks and returns of fixed-income products are relatively standardized, and bonds with different ratings have relatively standardized pricing markets. Equity is different, the value of equity is different for everyone, and there are different valuation models, unlike debt, which has a high degree of consensus. This is also why I think the next step for RWA may be other bonds, such as Tier 1 capital gain bonds for banks, like HSBC, although they cannot be called quasi-government bonds, they can at least be seen as better liabilities, especially for systemically important banks in the United States, which will pull away from the yield of US Treasuries to some extent.

Other than these, there may be some bonds issued by financial institutions, and next, there may be gradually introduced bonds issued by listed companies or enterprises. Another category is stocks, which may be a bit awkward because the threshold for stock trading on traditional financial channels is not high. For those who really want to buy stocks, they can always find a way to buy them, and for those who are not interested, stocks are not their assets. Therefore, I believe that assets similar to stocks may not be as fast in application as bonds. In the past, there were many tokenized stocks, including DeFi types, such as Mirror, which did mapping, and synthesized assets to do Tesla or Apple's stocks, but it was found that the demand for trading was not particularly high.

FTX has previously issued some tokenized stocks, which have high compliance risks, but the demand may not be as high as imagined. As for real estate assets, I think it is more similar to fixed income products, but real estate is an NFT, and each place is different, and the risks in each country are also different. We previously had a discussion in a space about converting real estate assets into RWA. It may be necessary to first transform real estate into standardized traditional financial products such as REITs, and then tokenize them to become a better RWA asset. However, I think real estate may be applied faster than stocks because of its huge scale, rental income, and closer resemblance to fixed income or fixed income products, despite its equity attributes. I think these types of RWA assets are relatively good assets.

There is another type of receivable in the supply chain that we talked about a lot in the previous cycle, and we also discussed the tokenization of the supply chain. In fact, the tokenization of the supply chain is a category of fixed income assets. It packages and grades different assets, with each package corresponding to a different fixed income pricing. Therefore, to some extent, it can also be considered a fixed income asset. Therefore, I believe that bond assets may be easier to apply than equity assets. According to the risk in the standardization level and capital structure, I think we should start from low-risk and gradually move towards high-risk, such as equity and stocks. In addition, fixed income assets have already reached a very large scale, with fixed income and real estate already reaching trillions of dollars. If tokenization is to be realized, these two parts are already large enough.

RWA Can Promote the Development of DeFi Niche?

Colin: Looking back at this year's development, if we compare RWA and LSD, there are some similarities between the two, namely, both hope to introduce new underlying assets to DeFi. In the LSD track, we see that the emergence of LSD has made previously marginalized tracks, such as yield tokenization, also begin to receive market attention. From your perspective, if US Treasury RWA can become a large-scale underlying asset on the chain, could it also promote the outbreak of some small-scale DeFi tracks?

Teacher Mindao: This is inevitable. There are very important similarities between the nationalization of LSD and the US dollar's national debt. We can think of the national debt of the US dollar as the LSD of the US dollar, which is the staked US dollar. They are the same at the root, both of which are about how to bring the risk-free interest rates of different assets onto the chain. For example, the largest ETH LSD can actually be seen as an approximation of the risk-free interest rate in the currency circle, with Ethereum as the base currency, because many DeFi coins are actually based on Ethereum, including various LP pools such as Uniswap and Curve, which are paired with Ethereum. Although Bitcoin has played a so-called mainstream role in the basic currency exchange, in practical applications, Ethereum is more like a native currency. Its stacking yield can be understood as the risk-free interest rate of the native currency.

In the traditional finance industry, most assets are priced based on risk-free rates. For example, the pricing of corporate bonds, banks, and real estate is based on risk-free rates, which are then transformed into various other types of bond assets. The stock value of different companies in different industries is then calculated based on the cost of funds for different bonds. Therefore, risk-free rates are the bottom-level foundation for pricing various types of assets. Now, many LP tokens have started using ETH's LSD instead of native ETH. At the same time, various products such as Pendle, which are layered and prioritized, have also emerged.

Similarly, if the risk-free interest rate of the US dollar is introduced into the chain, it may also give rise to various products. Recently, we have considered using the stablecoin sDai instead of traditional stablecoins such as USDT, USDC, and USX. By using sDai, we can obtain the income of US Treasury RWA and high liquidity without any subsidies. Therefore, using sDai as a pair has great advantages. In the future, we may consider replacing all assets with sDai or assets similar to T-Bill income, and even have our own token similar to sDai with underlying income, which others can also use. Therefore, we can be seen as the liquidity replacement of the entire DeFi infrastructure, gradually replacing non-income with income.

I believe that this change will be significant, similar to the emphasis on the US dollar interest rate in the traditional financial sector, as the US dollar's interest rate hike or cut will affect the pricing of other fixed income and equity assets, including all assets priced in US dollars. Similarly, if the US dollar's interest rate is introduced onto the chain, the transmission of US dollar interest rate hikes will be faster on the chain, as it will be strengthened through various combinations of DeFi. This is why the US dollar is a very good thing for the chain, just as LSD is a very good thing for Ethereum. It can not only form its own use case on the chain, but also act as restaking, turning itself into a mercenary to provide security for other chains, thereby expanding its application scenarios.

Colin: At the beginning of this year, I held a similar view to yours. I believe that the yield of LSD actually represents the risk-free rate of return of Ether. Based on this yield, the Ether-based bond market may gradually emerge. This year, we can see the growth trend of TVL in markets such as Pendle. Therefore, I am optimistic about the RWA of US bonds, because with its emergence, there may be explosive growth in the new DeFi track denominated in US dollars.

Teacher Mindao: Yes. Returning to what I said earlier, an interesting thing is that the ultimate beneficiaries of RWA applications may not necessarily be the issuers of RWA assets, but may be DeFi protocols like MakerDao or us. Due to the composability relationship, DeFi stakeholders become the ultimate beneficiaries who reap the fruits of the revolution.

RWA vs. LSD Comparison

Colin: The next question I want to ask you is, compared to LSD, the market is now very focused on first-tier asset issuers such as Lido, Rocket pool, and Frax. In the RWA track, these issuers exist, but the captured value is not high. Can this be understood in this way?

Teacher Mindao: RWA, there is a question related to the issuer of US Treasury bonds. Going back to what we talked about earlier, there is a KYC admission requirement, which makes it difficult for the issuer to establish network effects. In contrast, we previously mentioned Lido's LSD, and you can see how they successfully established network effects because Lido's LSD can circulate directly, just like ERC20, and can be traded in the market. Its network effect is established through circulation.

However, for the issuers of RWA, circulation is achieved through DeFi projects. For example, Dai distributes your interest to Dai holders, and USX distributes your interest to USX holders. These interests become the dowry of these distribution parties. This is where I think the issuers of RWA differ from projects like Lido. Because Lido is essentially a DeFi project that further tokenizes native on-chain returns and directly enters a completely non-permissioned circulation environment. I think many people may compare these two, but I think there is a big difference between them. You can think of it this way, the issuer of T-Bill is a bit like the node operator of Lido.

The node operators in the LSD field are struggling to make ends meet and cannot reap the benefits. Node operation is a difficult task that involves dealing with various security and design issues. Even after earning hard-earned money, 50% of the 10% share in the revenue still goes to the protocol party, and the network effects also benefit the protocol party. Therefore, in my understanding, the RWA T-Bill issuer is more like a node operator from the perspective of staking.

Colin: Yes, I understand better when you put it that way. Nodes are also part of the communication chain and require device maintenance and various other requirements.

Teacher Mindao: Yes, the node itself also has admission requirements and compliance requirements.

How to view regulatory intervention

Colin: We just discussed a lot of issues, including new risks on the RWA link and user concerns. The next question is, in the past two years, we have seen more users introduced. This year, RWA narratives are becoming more popular, and we hope to introduce more assets. As a practitioner, how do you view the issue of regulatory intervention?

Teacher Mindao: I believe that if you are involved in financial products, regulation is definitely necessary. However, I think the attractiveness of RWA lies in the fact that it is detached from the sources of income in the entire currency circle. Previously, the main source of income came from trading, whether it was contract trading, spot trading, speculation, or issuing coins. You will find that these income methods are facing high regulatory risks, such as opening leverage of 100 times or 1000 times. The attractiveness of RWA lies in the fact that it is not related to those sources of income in the currency circle.

This makes me feel very interesting. You can think of RWA as very non-crypto, but the advantage is that its logic is very easy for regulatory agencies to understand. When you issue a T-Bill token, its logic for malicious behavior and rugpull is not as direct as issuing a coin. From a regulatory perspective, this logic is very clear. There is also a very important point, especially for US regulation. The SEC may be more inclined to politicize, but from the perspective of the Federal Reserve and the US government, if they want to consolidate the international reserve role of the US dollar, they should promote the tokenization of government bonds. For example, as a wild institution, Tether's scale in holding government bonds may already be in the top ten globally and can enter the top five or six at the national level. This is a very powerful thing and very helpful for achieving dollarization or promoting the US dollar.

I believe that such things should not be prevented from happening. Of course, there are many different interests and disputes among different departments in the United States. Therefore, I think that the logic of RWA is relatively easier to meet regulatory requirements, and it is clear at a glance what it wants to do. Issuing coins or NFTs is more direct and easier to deceive or speculate. However, as a underlying asset, government bonds still have something tangible. For regulatory agencies, it is easier to intervene in RWA. Of course, the regulatory agencies that intervene may be limited to core institutions like the United States, and not all regulatory agencies around the world will intervene. Another point is that I think that compared to issuing coins or doing contract transactions, RWA does not involve as many retail investors from the asset delivery crowd. In fact, we have seen in the past few years that the reason why there is such a negative view of cryptocurrencies is partly due to investor protection.

Indeed, the cryptocurrency industry has caused significant harm, with each explosion affecting tens of thousands of users. For example, FTX has tens of thousands of users, while some ICO projects have thousands of users. From a regulatory perspective, the main focus is still on protecting investors. However, I personally believe that RWA assets are not easily accessible to retail investors, at least not at the asset level. In theory, I don't think it will cause too much harm to retail investors. This is actually a simpler issue for regulators to handle.

More likely regions for RWA narrative landing

Colin: I can feel that you are more accepting of regulatory intervention, Mingdao. Based on the new regulatory direction and strategy that we are seeing, which regions do you think are likely to see the implementation of the RWA narrative? Also, from your understanding, what specific policies in these regions may be more friendly to asset on-chain and user adoption?

民道老师：It seems that these new US bond issuers are mostly based in Asia, with several in Singapore and some in Hong Kong. Most of them operate with teams in Hong Kong or Singapore, but their structure may actually be based in BVI or the Cayman Islands. On the other hand, the US may be more concerned about regulatory risks. I think that in this area, the development path may follow a similar route to Tether's early development, starting with offshore operations.

But I believe there will also be institutions in the US doing this, just like Circle. I haven't seen the structure of Ondo Finance, but I remember their team is mainly in the US, so they may be more cautious. Recently, I heard that Robert from Compound has also come out to do Superstate, because he used to work in the US Treasury Department. When we communicated with him about DeFi before, he may not have been in the federal Treasury Department, but the state-level Treasury Department in the US has also done it, so he should be very familiar with regulation. I believe their team's operation is probably also in the US. So I think Asian countries may have some advantages in policy, and from a regulatory perspective, the risks are not as high as in the US.

However, I believe that the US market cannot be ignored. Many traditional financial institutions in the US are slowly entering the market, and their approach may differ from the RWA asset projects that have emerged from the crypto industry. Therefore, I think that the US is also an indispensable market, and the traditional approach may have some new attempts in the US. We have recently seen projects starting from Singapore and Hong Kong. In addition, a very important point in the Asian region is the high demand for the US dollar. Offshore US dollars are in high demand in the Southeast Asian and Northeast Asian markets, so I think it is highly likely that these regions will also not be absent.

Colin: So, can we understand that if we want to do a US Treasury RWA project, we should focus on project teams in Hong Kong and Singapore? If they have projects that can correspond to local marketing strategies, it will be easier to achieve project growth.

Mr. Mindao: Yes. However, from the perspective of retail investors, most of these projects do not issue coins. Therefore, to capture the value of this opportunity, you need to find some proxies, not necessarily the project itself, because they may not issue coins. So how do you capture the value of this opportunity? As I said before, I think the composable income of RWA will gradually spread to the entire DeFi protocol. So in this regard, I personally think it is good for the issuers of decentralized stablecoins.

Except for Dai, we see many stablecoins considering how to introduce RWA. In addition to LUSD's crypto-native approach, there are also projects like Frax recently discussing opening a so-called master account at the Federal Reserve to directly hold US T-Bills. I don't think it's that easy, but you see they are all starting to consider how to introduce it. Another simple reason is that if a decentralized stablecoin has already integrated the yield of RWA T-Bills on-chain, many stablecoin projects only need to integrate it. For example, we can integrate it twice. In addition to Dai, we can also directly purchase T-Bills as another strategy. Actually, both can be done.

This is one of the flexibilities of DeFi. For example, I can hold the entire DAI, even though the yield may be slightly lower, it doesn't matter because the important thing is to be able to quickly launch and attract liquidity and trading volume. If it's not enough, I can configure the underlying T-Bill stuff again. I think composability is a very important part of DeFi. After another year, US Treasury T-Bill assets may begin to penetrate various levels, even if they don't necessarily hold T-Bills directly, they can already penetrate the income of T-Bills held by DAI itself through holding Dai and sDai, and give this part to the holders. This is the interesting part of DeFi's composability. Its propagation method is not to wait for each DeFi project to directly access assets such as T-Bills, but to penetrate the income layer by layer through various combinations.

Colin: Is the current narrative also Web3? If the US bonds of interest-bearing assets denominated in U or fiat currency can flow smoothly, I think it will have a very significant promotional effect on Web3.

Teacher Mindao: Yes, in the past year or so, funds in the cryptocurrency industry have been flowing outwards. How can we achieve the return of funds? I believe this is a very important measure, at least to prevent funds from continuing to flow outwards.

Colin: Currently, we can see that more and more projects, whether they have already issued coins or are in the primary market, are starting to enter the US bond and RWA track. In addition, there are other projects that may involve other types of debt. It is possible that in the next six months, we will see a rapid growth of the entire track.

Teacher Mindao: Yes, the channel is very important in it. That's why DeFi's on-chain projects or centralized exchanges have become the dominant players.

Colin: Today we talked about US Treasury RWA, discussing the development direction of underlying assets, business architecture, and the potential impact on DeFi, including some suggestions for investors' future layout in the primary and secondary markets. That's all for today, thank you very much, Mr. Mindao.

Original article link

Welcome to join the official BlockBeats community:

Telegram Subscription Group: https://t.me/theblockbeats

Telegram Discussion Group: https://t.me/BlockBeats_App

Official Twitter Account: https://twitter.com/BlockBeatsAsia