RWA Research Report: Unpacking the Current Path of RWA Implementation and Exploring the Future Logic of RWA-Fi Development

After the crypto winter of 2022, investors shifted towards risk-free returns, leading to the rise of real-world asset tokenization. This article dissects the path of RWA projects, highlighting the impetus DeFi provides for asset management. Regulatory concerns remain a barrier to the growth of U.S. debt RWAs, but future bidirectional development promises to unlock further potential.

With the onslaught of the crypto winter in 2022, intensified by regulatory crackdowns and explosions in centralized exchanges, the previously lofty APRs of the crypto market vanished. The surviving investors turned their focus to risk-free returns. Coinciding with changes in the macroeconomic environment and rising U.S. bond yields, the tokenization of real-world assets emerged as a pivotal value capture channel for the crypto sector.

By examining major RWA projects that focus on the implementation of underlying assets (such as Compound & Superstate, Franklin Templeton, MakerDAO, Ondo Finance, Matrixdock, Centrifuge), this article aims to clarify the current narrative surrounding RWAs.

Key Takeaways:

1. Over-emphasizing the definition of RWA is counterproductive. Tokens are vessels of value. Understanding the essence of RWA requires examining what rights or values of underlying assets are brought onto the blockchain, as well as their application scenarios.
2. In the short term, the momentum behind RWA primarily comes from the unilateral demand of the crypto-centric DeFi protocols, such as asset management, investment diversification, and new asset categories.
3. DeFi protocols aim to capture the interest value of underlying assets through RWA projects, essentially creating a U-based asset class with real yields, mirroring the approach of establishing ETH-based interest-bearing assets.
4. Thus, the popularity of U.S. debt RWAs is rising. Based on different paths to realizing U.S. bond yields, these can be categorized as: (1) Off-Chain to On-Chain routes represented by traditional compliant funds, and (2) On-Chain to Off-Chain paths led by DeFi protocols. However, regulatory compliance remains a significant hurdle.
5. Mapping interest-bearing assets on-chain is just the first step. How to connect with the composability of DeFi “legos” is worth exploring, likely elevating the ceiling of RWA+DeFi.
6. In the long run, RWA shouldn’t be one-sided. The future will be bidirectional: on one hand, bringing real-world assets onto the blockchain, and on the other, traditional finance (TradFi) leveraging the myriad advantages of DeFi to further unlock its potential.
7. The focus of future exploration should be on how investors can enjoy both the Beta returns from real-world RWA assets and the Alpha returns from the crypto market.

1. The Current RWA Narrative

For the current crypto market worth a trillion USD, investors primarily earn from on-chain activities like trading, lending, staking, derivatives, etc. The market lacks a consistent source of real yield.

Ever since Ethereum transitioned to Proof-of-Stake, liquidity staking based on ETH can be considered a genuine source of yield intrinsic to the crypto market, but it occupies a small share. To genuinely break through the current market bottlenecks, robust external support is required.

A new source of real yield is stepping into reality: off-chain real-world assets (RWAs) brought on-chain through tokenization can serve as an essential source of real yield for U-based crypto assets.

The on-chain entry of RWA holds transformative potential for the crypto market. RWAs can offer the crypto market sustainable, diverse, and traditional asset-backed real yields. Moreover, RWAs can bridge decentralized finance systems with traditional finance, implying that apart from funneling incremental funds into the crypto market, RWAs can tap into the vast liquidity, expansive market opportunities, and significant value capture of traditional financial markets.

According to research by BCG and ADDX, tokenization of illiquid assets globally could result in a market scale of 160 trillion USD (approaching 10% of the global GDP by 2030). Citibank’s RWA report, “Money, Tokens, and Games”, predicts a market scale of 100 trillion USD to be tokenized by 2023.

Source: New BCG report: Asset tokenization projected to grow 50x into a US$16 trillion opportunity by 2030

1.1 What is RWA

RWA stands for “Real World Assets Tokenization,” which is the process of converting the value of rights (be it ownership, profit rights, usage rights, etc.) within tangible or intangible assets into digital tokens. This process allows for the storage and transfer of assets without the need for a central intermediary, mapping their value onto the blockchain for transactional circulation. RWA can represent a wide range of traditional assets, both tangible and intangible, such as commercial real estate, bonds, cars, and virtually any asset that holds value and can be tokenized. Since the early days of blockchain technology, market participants have been eager to introduce RWA onto the chain. Traditional TradFi institutions like Goldman Sachs, Hamilton Lane, Siemens, and KKR are all actively striving to tokenize their real-world assets. Additionally, native crypto DeFi protocols like MakerDAO and Aave are making adjustments to embrace RWA.

Compared to the rather singular token financing narrative of 2018’s ICO/STO (Security Token Offering), today’s RWA narrative covers a broader spectrum. It’s not limited to primary markets in traditional finance; virtually any asset that can be value-tagged can be tokenized. Moreover, the DeFi protocols and numerous infrastructure that didn’t exist back in 2018 now pave the way for limitless possibilities with RWA.

1.2 The Driving Force Behind RWA

The primary motivation for bringing real-world assets (RWA) into the crypto realm currently is the steady risk-free returns real-world assets (especially U.S. Treasuries) can provide to the crypto market in the broader macroeconomic context.

Consequently, the path to realizing most mature RWA projects today is based on the unilateral demand of DeFi protocols for real-world assets. For example:

Asset Management Needs: On-chain profits primarily come from collateralization, trading, and lending activities. However, in the backdrop of a crypto winter, a decline in on-chain activities directly led to a fall in on-chain yield. With U.S. Treasuries currently offering a relatively high yield, seasoned DeFi protocols have started to gradually introduce U.S. Treasury RWAs. For instance, MakerDAO has been gradually converting its vault’s stablecoin assets (which have no or low yield) into interest-bearing U.S. Treasury RWA assets (with a risk-free return of 4%-5%). This ensures the safety of vault assets while securing stable returns.

Portfolio Diversification: In extreme market conditions, the high volatility and high correlation of native crypto assets can lead to asset mismatches and liquidations. Introducing RWA assets, which have lower correlation and are more stable than native crypto assets, can effectively mitigate such issues. Investors can diversify, constructing more robust and efficient portfolios.

Introducing New Asset Classes: Merging RWAs with DeFi functionalities can further unleash the potential of RWA assets. For instance, Flux Finance offers lending for Ondo Finance’s OUSG, Curve allows MatrixDock’s STBT to trade, and Pendle provides AMM pools for interest-bearing assets.

In the short term, this demand is based solely on the one-sided rush of the crypto market. The traditional financial world of the real world hasn’t shown much interest in entering the crypto market, and any ventures are exploratory at best. In the long run, the interaction with RWAs shouldn’t be unilateral, like the current one-sided demand of DeFi for traditional finance (TradFi). The future will see mutual interest, with real-world assets being brought on-chain on one hand, and the real world tapping into the myriad of blockchain technologies and advantages to further unlock its potential on the other.

1.3 How to Capture the Value of Underlying RWA Asset

Depending on the type of underlying RWA (Real World Asset) assets, classifications can vary widely.

In the short term, we narrowly classify RWAs into “Interest-bearing RWAs” and “Non-interest-bearing RWAs.” This is because we observe that most of the current RWA projects aim to capture the interest value of the underlying assets, such as U.S. bonds, government securities, corporate bonds, and REITs, which offer yields.

The essence of interest-bearing RWAs is to establish assets denominated in U that carry the real yield from the underlying assets, aligning with the logic of LSD’s interest-bearing assets denominated in ETH. Although the yield on RWA assets may be modest, they can be further incorporated into the DeFi Lego framework.

Non-interest-bearing RWAs, on the other hand, are more suitable for capturing the commodity value of the underlying assets themselves, such as the intrinsic value of gold, crude oil, collectibles, and art, or the market value of soccer players from South America.

2. Path to On-Chain RWA Assets

Based on the report by Binance Research, the implementation process of RWA (Real-World Assets) is divided into three stages: 1) Off-chain formalization; 2) Information bridging; 3) RWA protocol demand and supply.

2.1 Off-Chain Formalization

To bring real-world assets into DeFi (Decentralized Finance), the assets must first be wrapped off-chain, making them digitized, financialized, and compliant. This ensures clarity in asset value, ownership, and legal protection of asset rights.

In this step, clarity is needed for:

Representation of Economic Value: The economic value of the asset can be represented by its fair market value in traditional financial markets, recent performance data, physical condition, or any other economic indicator.

Ownership & Legitimacy of Title: The ownership of an asset can be determined through deeds, mortgages, promissory notes, or other means.

Legal Backing: There should be a clear resolution process when it involves changes to asset ownership or rights. This typically includes asset liquidation, dispute resolution, and specific legal procedures for execution.

2.2 Information Bridging

Following this, information regarding the economic value and ownership and rights of the asset is brought onto the blockchain after being digitized and is stored in the blockchain’s distributed ledger.

In this step, it involves:

Tokenization: After the information is digitized in the off-chain phase, it’s brought on-chain and represented in the metadata of digital tokens. This metadata can be accessed through the blockchain, making the asset’s economic value and ownership and rights entirely transparent. Different asset categories can correspond to different DeFi protocol standards.

Regulatory Technology/Securitization: For assets that need to be regulated or considered as securities, they can be incorporated into DeFi in a legally compliant manner. These regulations include but are not limited to permits for issuing security tokens, KYC/AML/CTF, and compliance requirements for listing on exchanges.

Oracle: For RWAs, it’s essential to refer to real-world external data to accurately depict the asset’s value. For instance, if considering stock RWA, it requires access to that stock’s performance data. However, since the blockchain cannot directly fetch external data, platforms like Chainlink are needed to connect on-chain data with real-world information. They provide DeFi protocols with off-chain asset value data and more.

2.3 RWA Protocol Demand and Supply

DeFi protocols focused on RWA drive the entire process of tokenizing real-world assets. On the supply side, DeFi protocols oversee the formation of RWA. On the demand side, DeFi protocols facilitate investors’ demand for RWA. In this way, most DeFi protocols dedicated to studying RWA can act as both the starting point for RWA creation and a marketplace for the final RWA products.

2.4 Specific Implementation Path for RWA

Source:https://forum.makerdao.com/t/poll-rwa-working-group-covenant-structure/4836

Based on the specific path to bring RWA assets onto the blockchain, one can adopt an approach similar to asset securitization by establishing a Special Purpose Vehicle (SPV) to support underlying assets, playing roles in control, management, and risk isolation. Moreover, research reports from BCG and ADDX also provide a roadmap for various ecosystem participants (asset originators, issuance platforms, asset custody, and fund settlements) from the perspective of RWA asset initiators.

3. Current U.S. Bonds RWA Implementation Path

We’ve clarified that RWA represents the tokenization of off-chain real-world assets. It is crucial to understand how real-world rights and asset values are converted between the real world and the crypto world. In other words, how RWA serves as a legitimate representation of real-world assets, or how real-world assets map onto the blockchain.

By examining the most mature RWA project to date - U.S. bonds, we identified two paths: (1) The Off-Chain to On-Chain path represented by traditional compliant funds, and (2) The On-Chain to Off-Chain path led by DeFi protocols. Given that the primary driving force behind RWA currently comes from the crypto world, the exploration of RWA projects through DeFi protocols is more mature.

Currently, apart from the T protocol which operates as a permissionless protocol, all other projects have set up strict KYC/AML verification processes for compliance reasons. The vast majority of U.S. bond RWA projects do not support transfer transaction features, limiting their use cases and requiring further exploration and development.

3.1 Transition from Traditional Finance’s Off-Chain to On-Chain

3.1.1 Superstate: The New Venture of Compound’s Founder

Source: https://www.axios.com/2023/06/28/defi-robert-leshne-rmutual-fund

Compound

Robert Leshner, the founder of Compound, has shifted his focus to the trending RWA narrative. On June 28, 2023, he announced the establishment of Superstate, aiming to bring regulated financial products from the traditional financial market onto the blockchain. According to filings with the U.S. Securities and Exchange Commission (SEC), Superstate plans to use Ethereum as an auxiliary accounting tool and will create funds that invest in short-term government bonds, including U.S. Treasuries and government agency securities. However, the document explicitly states that the fund will not directly or indirectly invest in assets reliant on blockchain technology, such as cryptocurrencies. In simple terms, Superstate will establish an off-chain SEC-compliant fund to invest in short-term U.S. Treasuries. It will handle the fund’s transactions and record-keeping on-chain (Ethereum) and track the ownership of the fund. Superstate has clarified that investors must be whitelisted, and smart contracts like Uniswap or Compound will not be included, making such DeFi apps incompatible. In a statement to Blockworks, Superstate said, “We’re crafting an SEC-registered investment product that offers investors a record of their mutual fund ownership, similar to holding stablecoins and other crypto assets.”

3.1.2 Franklin OnChain U.S. Government Money Fund

Source: rwa.xyz & Stellar expert

Before Superstate’s emergence, Franklin Templeton had launched the Franklin OnChain U.S. Government Money Fund (FOBXX) in 2021. This fund, the first SEC-approved of its kind, utilizes blockchain (Stellar) technology for transactions and ownership records. As of now, its Assets Under Management (AUM) exceeds $29 billion, offering investors an annual return of 4.88%. Although one share of the fund is represented by one BENJI token, there’s yet to be any observed interaction between BENJI tokens on-chain and DeFi protocols. Investors must undergo compliance verification through Franklin Templeton’s app or website to be whitelisted.

3.1.3 Hamilton Lane’s Tokenized Private Equity Funds

Hamilton Lane is a leading global investment firm with a staggering $823.9 billion in managed assets. The company has tokenized a portion of shares from three of its funds on the Polygon network, making them available to investors on the Securitize trading platform. With Securitize’s collaboration, a portion of the fund shares will form a feeder fund on the platform, managed by Securitize Capital. Securitize’s CEO commented, “Hamilton Lane offers some of the best-performing private market products. Historically, they’ve been limited to institutional investors. Tokenization now allows individual investors to engage in private equity investments digitally for the first time, creating value together.” From an individual investor’s perspective, while tokenized funds offer a more affordable entry point into top-tier private equity funds (lowering the minimum investment threshold from an average of $5 million to just $20,000), they still need to pass the accredited investor verification on the Securitize platform, presenting a hurdle. From the private equity fund’s view, the advantages of tokenized funds, offering real-time liquidity (compared to the traditional 7-10 year lock-in periods) and diversified LP and flexible capital allocation, are evident.

3.1.4Conclusion

The journey from Off-Chain to On-Chain represents the innovative endeavors of traditional finance based on its regulatory framework. Given the strict regulations in traditional finance, current explorations involve only applying blockchain technology for record-keeping in conventional financial products rather than directly integrating with DeFi. Still, the ownership record of these funds is much like a token. Consider the nuanced difference between such ownership records and stablecoins. We look forward to Compound’s founder, Robert Leshner, providing more insights from a more Crypto-native/DeFi perspective, furthering the value exploration of the Off-Chain to On-Chain transition for RWA.

3.2 Cryptofinance: On-Chain to Off-Chain Integration

3.2.1 MakerDAO’s Monetalis Trust Legal Framework

MakerDAO is a Decentralized Autonomous Organization (DAO) dedicated to managing the Maker protocol running on Ethereum. The protocol offers the first decentralized foundational stablecoin, DAI (essentially understood as the “dollar on Ethereum”), along with an array of derivative financial systems. Since its launch in 2017, DAI has consistently been pegged to the US dollar.

Given the high volatility in the cryptocurrency market, relying on a single collateral asset might lead to massive liquidations. As such, MakerDAO has been actively exploring diversified collateralization methods, with Real World Assets (RWA) being a significant component. After years of experimentation, MakerDAO has established two mature pathways for RWAs:

1.Directly purchasing and holding assets in the form of a DAO + Trust (MIP65 Proposal).

2.Directly purchasing tokenized RWA assets via the decentralized lending platform, Centrifuge, including current holdings like New Silver (real estate loans) and BlockTower (structured credit) among other Vaults.

According to data from MakerBurn.com, there are currently 11 RWA-related projects used as collateral for MakerDAO with a total TVL (Total Value Locked) of 2.7 billion USD.

Source: https://makerburn.com/#/rundown

Now, let’s delve into the MIP65: Monetalis Clydesdale: Liquid Bond Strategy & Execution proposal. This proposal, introduced by Monetalis founder Allan Pedersen in January 2022, aimed to invest a portion of stablecoin assets from the MakerDAO vault into high liquidity, low-risk bond assets managed through a Monetalis trust. Following a vote by the MakerDAO community, the proposal was adopted and implemented in October 2022, with an initial debt ceiling of 500 million USD. By May 2023, a subsequent proposal raised this limit to 12.5 billion USD.

Under the MIP65 proposal, MakerDAO delegated Monetalis as the executing party through voting. Monetalis was tasked with designing the overall legal framework and providing periodic reports to MakerDAO. They created a trust legal framework based on the British Virgin Islands (BVI) legal system, seamlessly integrating on-chain governance (MakerDAO), off-chain governance (authoritative decisions of the trust company), and off-chain execution (off-chain transactions).

Firstly, both MakerDAO and Monetalis authorized a Transaction Administrator to review all transactions, ensuring alignment with MakerDAO’s proposals. Secondly, on-chain MakerDAO proposals were set as prerequisites for decisions made by off-chain entities, excluding any matters unrelated to MakerDAO’s decisions. Lastly, taking advantage of the flexibility of BVI law, they ensured a degree of unity between on-chain governance and off-chain governance/execution. With intricate legal arrangements and trust authorizations, the setup between MakerDAO and Monetalis was established.

Source: DigiFT Research, MakerDAO MIP65

Once the alignment of on-chain and off-chain governance and execution between MakerDAO and Monetalis was settled, a trust company set up in BVI, James Assets (PTC) Limited, was tasked with the external execution of purchasing US Treasury Bond ETFs. These included BlackRock’s iShares US$ Treasury Bond 0-1 yr UCITS ETF and iShares US$ Treasury Bond 1-3 yr UCITS ETF. The specific procedure is as follows:

Source: MakerDAO MIP65

Throughout the overall process, James Assets (PTC) Limited, acting as the external entity for both MakerDAO and Monetalis, processes each transaction upon receiving both on-chain and off-chain authorizations. Within this framework, Coinbase serves as the fiat in-and-out conversion institution, while Sygnum Bank handles the trading and custody of trust assets, with separate accounts established for trust operation expenses (initial costs amounted to 950,000 USD).

3.2.2 Centrifuge’s SPV Tokenization Approach

Centrifuge is a decentralized lending platform dedicated to bringing real-world assets into the crypto space, offering expanded investment opportunities and liquidity through tokenization, fragmentation, and structuring. Centrifuge was among the first DeFi protocols to delve into the RWA (Real-World Assets) domain and is the technology provider behind major DeFi protocols like MakerDAO and Aave. As per rwa.xyz, Centrifuge is one of the most comprehensive projects in the RWA space, boasting its own Centrifuge Chain and its main product, the Tinlake protocol.

Centrifuge’s RWA implementation can be summarized as:

（1）Borrowers tokenize off-chain assets into NFTs through originators (underwriters) and lock them in Centrifuge’s smart contract asset pools.

（2）Assets from multiple, similar borrowers are aggregated into a single pool. Liquidity providers fund the entire pool instead of individual borrowers.

（3）The asset pool is split into Junior and Senior Tranches (represented by distinct ERC20 tokens). Investors in the Junior Tranche gain higher returns but assume more risk, while those in the Senior Tranche face lower risks and returns, catering to diverse risk preferences.

In compliance with the U.S. asset securitization legal framework (under U.S. Securities Law Reg D, sections 506(b)(c)), Centrifuge has made significant strides. For instance, they partnered with Securitize to help investors complete KYC/AML verifications. Each asset originator on Centrifuge is required to set up a distinct legal entity, known as a Special Purpose Vehicle (SPV), to act as a bankruptcy-remote entity. Legally, assets are sold to the SPV; if the originator goes bankrupt, the SPV’s assets remain unaffected, safeguarding investor interests. Investors sign agreements with the SPV linked to the asset pool, detailing investment structures, risks, and terms. They then use DAI to purchase DROP or TIN tokens corresponding to the different Tranches.

Source: https://docs.centrifuge.io/learn/legal-offering/

In February 2021, MakerDAO collaborated with New Silver on Centrifuge to launch the first RWA002 Vault. Subsequent large-scale initiatives like BlockTower S4 (RWA013-A) and BlockTower S3 (RWA012-A) also followed this RWA implementation, with the primary underlying assets of BlockTower S4 being ABS products of consumer loans.

Subsequent improvements were made to Centrifuge’s RWA implementation through the MIP6 proposal, introducing the concepts of Trustees and LockBoxes. MakerDAO believes that this transactional structure standardizes asset pool transactions, better protecting investors and the DAO’s interests. Two prominent changes were:

1. Asset issuers appoint third parties as Trustees, acting on behalf of the DAO and investors. Trustees safeguard the DAO’s interests and ensure asset independence. In extreme default situations, they can also manage and distribute assets, ensuring they’re not controlled by the issuer or liquidators.

2. The introduction of the LockBox concept, a segregated account holding assets beyond the control of asset issuers and SPVs. This structure ensures SPV assets are overseen by Trustees, who are tasked with managing funds in the segregated account and ensuring the right party (e.g., MakerDAO) receives payments. This means the path from borrowers to MakerDAO’s reserve is no longer under the asset issuer’s control, reducing risks of fund misappropriation or misuse.

Source:https://forum.makerdao.com/t/progress-update-on-the-legal-structure-for-centrifuge-rwa-vaults/13307

In this improved RWA implementation, the underlying assets are initially sold to the SPV. The SPV then strikes a deal with the Trustees, pledging the assets to them. Next, the SPV issues DROP and TIN tokens to MakerDAO based on the Tinlake protocol. As the underlying assets yield cash flow payments, per the agreement, funds are directly transferred to a LockBox, independent of both SPV and MakerDAO. Upon receipt, Trustees instruct the LockBox to pay MakerDAO for DROP and TIN, executed via the Tinlake protocol.

It’s worth noting that MakerDAO and the SPV never directly interact with DAI or USD cash flows, as all monetary movements are processed via the LockBox and Tinlake protocol. Their sole roles are signing subscription agreements and making decisions as token holders.

This structure better insulates investors and asset issuers from potential litigation claims and offers a consistent solution for discussions with regulatory bodies and third-party service providers like custodial banks. Once widely recognized and accepted in the industry, even by traditional financial participants, this structure should make it easier to introduce such players into the DeFi space. This would expand the types and amounts of real-world assets available for MakerDAO’s use, ultimately reducing DAI’s volatility.

3.2.3 Ondo Finance’s Exemption Pathway and Flux Finance (DeFi Lending Protocol)

Source: https://defillama.com/protocol/ondo-finance

Ondo Finance launched its tokenized funds in January 2023, aiming to offer institutional-grade investment opportunities and services to on-chain professional investors. It introduced no-risk/low-risk rate fund products to the blockchain, allowing stablecoin holders to invest in government bonds and U.S. Treasuries. Concurrently, Ondo Finance initiated a backend collaboration with the DeFi protocol Flux Finance, providing lending services in on-chain stablecoins for OUSG token holders.

As per data from DeFiLlama, as of August 1st, Ondo Finance’s Total Value Locked (TVL) stood at $162 million, whereas its lending protocol, Flux Finance, reached a TVL of $42.78 million, with borrowings amounting to $2.802 billion.

Currently, Ondo Finance has rolled out four tokenized fund products:

（1）U.S. Money Market Fund (OMMF)

（2）U.S. Treasuries (OUSG)

（3）Short-term Bonds (OSTB)

（4）High-yield Bonds (OHYG)

Among these, the fund with the most investors is OUSG, which holds underlying assets in the BlackRock iShares Short Treasury Bond ETF. OUSG is pegged to the US dollar stablecoin, and the OUSG tokens obtained by investing in the OUSG fund are backed by short-term U.S. Treasuries. Moreover, OUSG token holders can also collateralize their OUSG through the decentralized lending protocol developed by Ondo Finance, Flux Finance, and borrow stablecoins like USDC and DAI.

Source: https://ondo.finance/

Considering regulatory compliance, Ondo Finance adopts a strict whitelist system, opening investments only to Qualified Purchasers. The SEC defines a Qualified Purchaser as an individual or entity investing at least $5 million. A fund consisting solely of Qualified Purchasers can obtain an exemption under the U.S. Investment Company Act of 1940, eliminating the need to register with the U.S. SEC as an investment company.

Investors must first undergo the official KYC and AML verification processes of Ondo Finance before signing subscription documents. Compliant investors can invest their stablecoins in Ondo Finance’s OUSG fund, followed by fiat in/out transactions via Coinbase Custody, and then execute U.S. bond ETF trades through the compliant broker, Clear Street.

It’s crucial to note that the concept of a Qualified Purchaser is distinct from an Accredited Investor. The latter only needs an annual income exceeding $200,000 or a net worth surpassing $1 million, excluding primary residence.

3.2.4 Matrixdock and T protocol (Permissionless On-chain U.S. Treasuries)

Matrixdock is an on-chain bond platform launched by the Singapore-based asset management company, Matrixport. The Short-term Treasury Bill Token (STBT) is a product based on U.S. treasuries that was introduced by Matrixdock. Only qualified investors who have undergone KYC procedures can invest in Matrixdock’s products. Investors deposit stablecoins and mint STBT through whitelisted addresses. The underlying assets of STBT include six-month U.S. treasuries and reverse repurchase agreements collateralized by U.S. treasuries. The STBT can only be transferred among whitelisted users, including within Curve pools.

Source:https://www.matrixdock.com/stbt/home

The implementation path for STBT is as follows:

（1）Investors deposit stablecoins with the STBT issuer, who mints the corresponding STBT through a smart contract.

（2）The STBT issuer converts the stablecoins into fiat currency through Circle.

（3）The fiat currency is then held in custody by a qualified third party, which purchases short-term U.S. treasuries that mature within six months, or places it in the Federal Reserve’s overnight reverse repurchase market.

The STBT issuer is an SPV established by Matrixport. This SPV pledges its U.S. treasury and cash assets to STBT holders. The holders of STBT have the primary right to claim against the tangible asset pool.

Source: https://www.tprotocol.io/

The T protocol was launched in March 2023. Its TBT token’s underlying asset is MatrixDock’s STBT. T protocol has tokenized the STBT by removing its whitelist restrictions, offering a permissionless U.S. treasury product. TBT uses a rebase mechanism to peg its price to 1 dollar and can be traded on Curve.

TBT accumulates stablecoin assets from investors to meet the STBT whitelist requirements and purchases STBT from its partner, MatrixDock. Through this indirect method, TBT has facilitated permissionless real-world asset (RWA) backing by U.S. treasuries.

3.2.5 Summary

In the case of MakerDAO, for asset management purposes, there’s a need to convert some of the stablecoin assets in its vault into RWA (Real-World Asset) assets. In terms of implementation pathways, compared to the large-scale U.S. bond purchases of the Monetalis trust legal framework, MakerDAO currently adopts several RWA asset pools from Centrifuge. These are of relatively smaller scale, with the largest, BlockTower S4, just reaching over a hundred million U.S. dollars. The advantage of Centrifuge’s RWA approach lies in its simplicity, negating the need for MakerDAO to establish a complex legal framework.

Matrixdock’s RWA implementation path is essentially in line with Ondo Finance. Due to compliance requirements, there’s a strict white-listing system in place. Given the high barrier of the white-list system, after Ondo Finance’s on-chain RWA implementation, it can enhance liquidity by connecting with Flux Finance’s DeFi lending protocol, enabling OUSG lending. On the other hand, Matrixdock can facilitate permissionless circulation of U.S. bond RWAs through the T protocol.

4. The Collision of RWA with DeFi Lego

We believe that the application logic of RWA interest-bearing assets based on the U-standard is consistent with the DeFi application logic of LSD interest-bearing assets based on the ETH standard. Mapping RWA interest-bearing assets onto the blockchain is only the first step (Staked US Dollar). The subsequent integration with DeFi and how it interconnects with the DeFi Lego will be fascinating. As seen in the cases above, there’s a collaboration between Ondo Finance and Flux Finance, as well as MatrixDock with T protocol and Curve. We will next explore the TRON ecosystem’s “Web3 Yu’ebao” product, stUSDT, to better understand how RWA brings interest-bearing assets onto the blockchain. Then, by referencing the Pendle project in the LSD track, we’ll further analogize potential applications of RWA+DeFi.

4.1 stUSDT — Web3 Yu’ebao

On July 3, 2023, the TRON ecosystem officially launched the RWA stable staking product stUSDT, positioning it as the “Web3 version of Yu’ebao”. This allows users to stake USDT and earn real-world RWA returns. The staking certificate, stUSDT, will also become a crucial component in the TRON ecosystem’s DeFi Lego world. Specifically, when users stake USDT, they can mint a 1:1 staking certificate of stUSDT. stUSDT is pegged to real-world assets like government bonds. The stUSDT-RWA smart contract will distribute returns to holders through the Rebase mechanism. The design of stUSDT was influenced by Lido’s stETH approach, making stUSDT a wrapped TRC-20 token. This will further enhance stUSDT’s composability within the TRON ecosystem, bridging it with DeFi Lego and unlocking endless potential for the asset. During an interview with Foresight News, Justin Sun stated, “The composability of stUSDT is very strong. It can exist within various DeFi lending, yield, and contract protocols and can also be listed on exchanges for user trading. stUSDT will anchor the returns of a base asset on the entire TRON blockchain with a value of 50 billion USD. It is vital for the whole DeFi Lego.”

Source: https://support.justlend.org/hc/en-us/articles/20134645757337

4.2 Pendle — Interest Rate Swap Protocol Based on Yield-bearing Assets

Source: https://www.pendle.finance/

Pendle is a rate derivative protocol based on yield-bearing assets. With Pendle, users can tailor their profit management strategies based on both the principal and the rate according to their risk preferences. After Ethereum switched to POS, the popularity of the ETH Liquidity Staking (LSD) track skyrocketed Pendle’s TVL to the 145 million USD mark. Initially, Pendle introduced the “Yield-Bearing Token” (SY), which broadly refers to any token that can produce returns, such as stETH obtained from staking ETH on Lido. Pendle then divides this SY into two parts: “Principal Token” (PT) and “Yield Token” (YT), such that P(PT) + P(YT) = P(SY). PT represents the principal part of the underlying yield-bearing asset, granting users the right to redeem the principal before the maturity date. YT represents the returns produced by the underlying yield-bearing asset, giving users the right to earn the yield before the maturity date.

Source: https://docs.pendle.finance/ProtocolMechanics/YieldTokenization/Minting

Subsequently, the Pendle AMM (Automated Market Maker) was introduced, setting up PT/YT trading pairs within Pendle’s liquidity pool. Users can use the constant formula X*Y=K to formulate trading strategies based on market conditions, such as increasing yield exposure during a bull market and hedging against a drop in yield during a bear market. As an interest rate derivative protocol, Pendle brings the traditional finance (TradFi) interest derivative market (worth over 400 trillion USD) into DeFi, making it accessible to everyone. By creating an interest rate derivative market in DeFi, Pendle unlocks the full potential of rates, allowing users to implement advanced yield strategies, such as:

（1）Earning fixed income (earning through stETH);

（2）Going long on rates (betting on an increase in the stETH rate by purchasing more yield);

（3）Earning additional returns without extra risk (providing liquidity with stETH).

5. In Conclusion

Obsessing over the precise definition of RWA (Real World Assets) is pointless. Tokens serve as the carriers of value. To understand the true value of RWA, one must examine which rights or values of the underlying assets are brought onto the blockchain and their application contexts.

In the short term, the momentum behind RWA largely stems from the unilateral demand of the crypto world’s DeFi (Decentralized Finance) protocols, such as asset management, investment diversification, and new asset categories. DeFi protocols capture the interest value of underlying assets through RWA projects. Essentially, they are establishing assets based on the U-standard, which come with a genuine yield (Real Yield) from underlying assets. This logic aligns with the approach of LSD (Liquidity-based Secured Debt) establishing interest-bearing assets based on ETH. Consequently, U.S. bond-based RWAs are in high demand. Depending on the method to realize the yield of U.S. bonds, they can be categorized into: (1) the Off-Chain to On-Chain route represented by traditional compliant funds, and (2) the On-Chain to Off-Chain route led by DeFi protocols. However, regulatory compliance remains a significant hurdle in both paths.

Mapping interest-bearing assets onto the blockchain, as with products like “Web3 Savings” in the TRON ecosystem (e.g., stUSDT), is merely the first step. The subsequent integration with the composability of DeFi, akin to Lego pieces, will be intriguing to explore. This holds promise to further elevate the potential of RWA combined with DeFi, drawing parallels to the Pendle rate swap project in the LSD-Fi space or stablecoin projects based on LSD.

In the long run, RWA shouldn’t be seen as a one-way street, as is currently the case with DeFi’s unilateral demand for TradFi (Traditional Finance). The future will see mutual engagement; on one hand, bringing real-world assets onto the blockchain, and on the other, TradFi leveraging the myriad advantages of DeFi to further unlock its potential.

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