Exploring the History Journey of RWAs

*Forward the Original Title： Web3 | RWA赛道漫谈：RWA的来时路

Introduction

Since the emergence of tokenized private credit in 2021, it has evolved into what we now refer to as RWA (Real-World Asset) after considerable development. Its presence supplements the intermediate zone of risk management in the crypto world, partly fulfilling the needs of investors for diversified investment portfolios, alternative sources of income, introduction of diverse collateral, and enriching on-chain asset management. However, due to limitations from legal regulations, financial structures, technical support, and data applications, compared to traditional finance, the categories of tokenized assets are still very limited, primarily concentrated in private credit and US government bonds.

As of December 31, 2023, funds allocated to tokenized US government bonds exceeded $831 million (compared to $114 million at the beginning of 2023), and nearly all funds allocated to such products (about 90%) at the beginning of 2023 were facilitated through Franklin Templeton’s Benji product, the first tokenized US government bond product launched in the market. Subsequently, the Ondo Finance’s issuance of the Ondo Short-Term Government Bond Fund (OUSG)^[1] successfully introduced a tokenized version of the BlackRock iShares Short-Term Treasury ETF^[2] to investors. As of December 31, 2023, OUSG has accumulated assets under management exceeding $138 million, leading the market among native crypto issuers. Of course, the Federal Reserve’s rate hikes throughout 2022-2023 were a key factor in the rise in interest rates on tokenized US government bonds. These rate hikes, coupled with the collapse of cryptocurrency yields, made global standard risk-free rates (i.e., US government bonds) an attractive “low-risk” option for cryptocurrency holders. On the other hand, in 2022, tokenized private credit peaked at $1.5 billion, dropped to $256 million in early 2023, and recovered to $485 million as of December 31, 2023. Since January 1, 2023, TVL has also grown by 89%.

Market Value of Tokenized US Government Bond Products:

(Source: RWA.xyz)

Tokenized private credit assets under management:

(Source: RWA.xyz)

From a technical point of view, RWA is nothing more than mapping original asset types to the blockchain through technical and legal means, using “tokens” to represent the rights and interests of “underlying assets”, thereby enjoying the high efficiency and low cost brought by new financial settlement tools. From the perspective of asset ownership and value exchange, we make a distinction from off-chain to on-chain:

Therefore, to grow into a balanced financial market, diversified and multi-level financial products are necessary, which require both native on-chain assets and off-chain assets that traditional capital can understand. Traditional financial market participants also want to reduce costs and increase efficiency to achieve higher asset flexibility and enjoy the opportunity to design more global products. For the above distinctions, let us give examples respectively:

01.

The first scenario is easily understood. It is similar to the case: an investor purchases stocks of a listed company through a securities exchange, becoming a shareholder of the listed company, and sharing dividends or making profits by selling the stocks.

02.

The second scenario is akin to an investor purchasing the Franklin Chain’s US Government Money Market Fund (FOBXX)^[3] on Benji, represented as $BENJI tokens on the Polygon chain, but the value exchange occurs off-chain, with investors subscribing to and redeeming FOBXX with fiat currency. FOBXX still involves traditional financial service providers, such as transfer agents facilitating interaction between investors and the blockchain. The transfer agent for FOBXX maintains formal records in a ledger format, with the blockchain serving as a supplementary record. Private keys associated with investor wallets are provided and held by the fund’s transfer agent. This marks the first US registered mutual fund to utilize blockchain public chains for transaction processing and ownership recordation. Overall, traditional asset management companies adopt nearly identical approaches to tokenizing US government bonds, operating in the form of tokenized fund shares.

Token holders of tokenized funds need to register their addresses on the fund whitelist, and transactions will not execute on addresses outside the whitelist. Additionally, only fiat transactions are supported, not cryptocurrencies such as stablecoins, with the blockchain primarily serving a secondary accounting role.

03.

The third scenario resembles investors depositing $USDC into the New Silver Pool through Centrifuge’s application, receiving $NS2DROP tokens issued by the token issuer (SPV, NS Pool LLC), representing investors’ priority interests in the New Silver Pool. The counterparty in the transaction is the token issuer, a subsidiary owned and managed by New Silver Lending LLC (New Silver). New Silver sells its assets (such as receivables from bridge loans) to the SPV, which converts the receivables into ERC-721 tokens ($NS2DROP). By sending tokenized receivables to the New Silver Pool’s smart contract, the SPV automatically collateralizes the receivables for credit, enabling it to withdraw $USDC from the New Silver Pool. Income generated from underlying assets is directly paid to the SPV, converted into $USDC, and then sent to the New Silver Pool’s smart contract. Investors redeem their investments by interacting with the smart contract of the New Silver Pool. The smart contract executes transactions, but ownership of underlying assets is always captured and represented off-chain. Centrifuge Pool is an open, smart contract-based financing platform that gathers enterprises or “asset originators” and investors through DeFi, allowing asset originators to finance RWAs (such as bills, collateralized loans, or media royalties) on-chain with investments from cryptocurrency investors. Asset originators tokenize financial assets into NFTs and use these NFTs as collateral for their Centrifuge Pool. Thus, the Centrifuge Pool includes the token issuer (typically an SPV to hold assets, obtain financing from Centrifuge, issue priority/subordinate tokens, and manage the fund), and asset originators (own real-world assets and collateralize these assets to obtain financing from issuers), with investors providing liquidity and earning returns through this mechanism.

04.

The fourth scenario differs from the third only in that in certain jurisdictions, the law recognizes token holders’ complete ownership of traditional off-chain assets. Because most regulatory authorities in current jurisdictions do not yet accept tokens and blockchains directly as tools for ownership registration, it means that token ownership cannot directly represent ownership of underlying assets under the legal regulations of these jurisdictions. In a few countries and regions that support direct registration of securities on the blockchain, such as the introduction of the concept of “Uncertificated Register Securities” in Switzerland’s DLT Act, securities can be directly issued on the blockchain as ledger entries by relevant authorized agencies, recognizing the blockchain as a tool for equity registration. Currently, in other major financial markets such as the United States, Singapore, and the Hong Kong Special Administrative Region, relevant laws do not yet support direct registration and recording of securities on the blockchain, so most assets need to be processed through the third scenario. Rare exceptions include Anemoy^[4], which is specifically designed for non-US qualified investors and issues underlying assets of US government bonds through a fund structure regulated by BVI FSC.

Due to the legal lag in ownership rights mentioned above, most RWA products on the market belong to the third model or, more colloquially, the asset-backed model. Essentially, the newly issued tokens represent new securities that represent the economic interests of underlying assets. Asset issuers issue and register assets outside the blockchain system. After third-party purchase of assets, tokens are issued proportionally, hence the terms “asset originators” and “token issuers” mentioned in the third model. Under the exploration of leading projects such as MakerDAO, a clearer path has been formed.

05.

The fifth scenario involves native on-chain assets that we are more familiar with, such as on Uniswap, where investors become liquidity providers and receive corresponding LP tokens for the liquidity they provide, representing their ownership interests in the assets in the liquidity pool. Control and realization of ownership of underlying assets are conducted entirely on-chain.

Of course, the tokenization mentioned above is not simply a matter of issuing tokens on-chain but rather a series of processes, including the purchase, custody, trading, correlation of underlying assets and token legal frameworks, information exchange, and on-chain token issuance. Therefore, the tokenization of RWAs cannot occur without the framework of the traditional world. The law forms the basis of RWA tokenization, determining which assets can be tokenized, the regulations to be followed during tokenization, and restricting the specific structure of asset tokenization and trading, including asset evaluation, audit, title confirmation, token issuance and trading, as well as related risk management. Additionally, a significant amount of technology is required to support the information exchange stage shown in the diagram, including blockchain technology, smart contract technology, oracles, cross-chain solutions, and related security and privacy protection technologies.

Currently, the participants in the RWA space are still quite limited. Short-term expectations for RWAs in the market should not be overly high. For an RWA project, there are multiple considerations, including the selection of underlying assets, standardization of underlying assets, the complexity of processes they bring, collaboration with real-world off-chain institutions, and how to address risk management issues at various stages such as underlying asset maintenance, asset onboarding, profit distribution, and asset liquidation. Of course, the most crucial aspect remains the underlying assets, requiring evaluation of liquidity, asset security, standardization level, revenue sources, and other aspects. The capability of the project team to select, package, and operate underlying assets also significantly influences the success of the project and its ability to scale. Taking traditional investment banking as an example, companies like Kade in commercial real estate and Prologis in logistics and warehousing have strong brand management capabilities. Through the industrial capital investment banking model, they have achieved fundraising, management, and exit strategies, spanning private equity funds, industrial management operations, IPOs, and REITs, forming an effective capital circulation exit channel.

Indeed, there are many benefits to RWAs on both the project and funding sides. With blockchain support on the project side, it is possible to access global liquidity and reduce the cost of capital acquisition. Investors in developing countries have gained a new means of combating fluctuations in their national currencies, and for allocation-oriented investors, blending native crypto assets with various types of RWAs can better achieve risk diversification. As the market matures and regulation deepens, the diversification of underlying assets will generate more new asset business structures apart from trusts and SPVs. Compliance is a necessary prerequisite, requiring legal safeguards to protect investors from fraud, combat financial crimes and related illicit activities, safeguard investor privacy, ensure that industry participants meet at least minimum standard baselines, and provide recourse mechanisms in case of issues.

Disclaimer：

1. This article is reprinted from [Eyes on the world]. Forward the Original Title‘Web3 | RWA赛道漫谈：RWA的来时路’. All copyrights belong to the original author [*Shi Minmin]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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