Asset Tokenization: Underlying Logic Sorting and Pathway for Large-Scale Application Implementation

In 2023, the most talked-about topic in the blockchain space is undoubtedly the tokenization of real-world assets (Real World Asset Tokenization, RWA). This concept has not only caused heated discussions in the Web3 world, but has also been highly valued by traditional financial institutions and government regulators in many countries, and is regarded as a strategic development direction. For example, a number of authoritative financial institutions have successively released their own tokenization research reports and actively promoted related pilot projects.

At the same time, the Hong Kong Monetary Authority made it clear in its 2023 annual report that tokenisation will play a key role in Hong Kong's financial future. In addition, the Monetary Authority of Singapore, together with the Financial Services Agency of Japan and a number of financial giants, has launched an initiative called "Guardian Project (Project Guardian) to tap into the huge potential of asset tokenization.

While the topic of RWA is gaining momentum, the understanding of RWA is divided in the industry, and the discussion around its feasibility and prospects is quite controversial.

On the one hand, there is a view that RWA is nothing more than market speculation and does not stand up to in-depth discussion;

On the other hand, there are also people who are full of confidence in RWA and optimistic about its future.

At the same time, articles analyzing different perspectives on RWA have sprung up.

This article aims to share perspectives on RWA and conduct a more in-depth discussion and analysis of the current status and future of RWA.

Core viewpoint:

• Crypto's RWA logic mainly revolves around how to transfer the income rights of income-generating assets ( such as U.S. bonds, fixed income, stocks and other assets ) the income rights to the chain, put off-chain assets on the chain to mortgage loans to obtain liquidity of on-chain assets, and move various real-world assets to the chain for trading ( such as sand and gravel, minerals, Real estate, gold and other ) reflect the unilateral demand of the crypto world for real-world assets, and there are many obstacles in terms of compliance.

• Tokenization of Real World Assets (Real The future focus of World Asset Tokenization) will be driven by traditional financial institutions, regulators, and central banks and other authorities to build (Permission permissioned chain Chain) a new financial system using DeFi technology, and what is needed to realize this system is a computational system ( blockchain technology ) + non-computational system ( such as legal system )+ On-chain identity system and privacy protection technology + on-chain fiat currency (CBDC, tokenized deposits, fiat stablecoins ) + perfect infrastructure ( low-threshold wallets, oracles, cross-chain technology and other ).

• Blockchain is the first technical means to effectively support the digitization of contracts after the development of computers and networks. Therefore, it can be said that the blockchain is essentially a platform for digital contracts, and the contract is the basic form of expression of assets, and the token (Token) is the digital carrier of assets after the contract is formed.

• As a distributed system maintained by multiple parties, blockchain supports the creation, verification, storage, circulation and execution of digital contracts, as well as other related operations, and solves the problem of transferring trust. And as a "computational system", the blockchain can meet the demands of human beings for "repeatable processes and verifiable results", so DeFi has become a "computational" innovation in the financial system, replacing the "computational" part of financial activities, automatic execution can reduce costs and increase efficiency while also achieving programmability, but the "non-computational" part is based on human cognition part of the blockchain can not be replaced, so the current DeFi system does not cover credit. Credit-based unsecured lending has not yet been implemented in the current DeFi system, and the reasons for this phenomenon include the lack of an identity system for expressing "relational identity" on the blockchain and the lack of a legal system to protect the rights and interests of both parties.

• For the traditional financial system, the significance of the tokenization (Real World Asset Tokenization) is to create real-world assets on the blockchain ( such as stocks, financial derivatives, currencies, Digital representations such as equity ) extend the benefits of distributed ledger technology to a wide range of asset classes for exchange and settlement.

• Financial institutions have adopted DeFi technology to further improve efficiency, using smart contracts to replace the "computational" part of traditional finance, automatically executing various financial transactions according to predetermined rules and conditions, and enhancing programmability. This not only reduces labor costs, but also opens the door to a potentially promising financial system, especially for small and medium-sized enterprises (SMEs (SMSE) providing innovative solutions to financing problems.

• With the increasing attention and recognition of blockchain and tokenization technology in the traditional financial field and governments, as well as the continuous improvement of blockchain infrastructure technology, blockchain is moving towards the road of integrating with the traditional world architecture and solving the real pain points in real-world application scenarios, providing practical solutions for practical scenarios, rather than being confined to a "parallel world" isolated from the real world.

• In the future, cross-chain technology is particularly important to solve the problems of interoperability and liquidity fragmentation. In the future, on-chain tokenized assets will exist on public blockchains and regulated licensed chains operated by financial institutions, and tokenized assets on any blockchain can be connected through a cross-chain protocol similar to CCIP to achieve interoperability and achieve interoperability.

• At present, many countries around the world are actively promoting the legal and regulatory framework related to blockchain. At the same time, the infrastructure of the blockchain, such as wallets, cross-chain protocols, oracles, various middleware, etc., are rapidly improving, the central bank digital currency CBDC is also constantly being applied, and the token standards that can express more complex asset types are also constantly emerging, such as ERC-3525, coupled with the development of privacy protection technology, especially the continuous development of zero-knowledge proof technology, and the increasing maturity of the on-chain identity system, we seem to be on the eve of large-scale application of blockchain technology.

a. Background introduction to asset tokenization

Asset tokenization refers to the process of expressing assets in the form of token (Token) on a programmable blockchain platform, and the assets that can usually be tokenized are divided into tangible assets ( real estate, ) such as collectibles and intangible assets ( financial assets, carbon credits and other ), this technology of transferring assets recorded on the traditional ledger system to a shared programmable ledger platform is a disruptive innovation for the traditional financial system, and will even affect the future financial and monetary system of the entire human race.

First of all, we should put forward an observed phenomenon: "There are two groups with completely different views on the perception of RWA asset tokenization", which is called Crypto's RWA and TradFi's RWA, and the RWA described in this article is the RWA from the TradFi perspective.

RWA from a Crypto Perspective

First of all, let's talk about Crypto's RWA: Crypto's RWA The author calls it the unilateral demand of the Crypto world for the return on financial assets in the real world, the main background is that in the context of the Federal Reserve's continuous interest rate hikes and shrinkage of the balance sheet, high interest rates have greatly affected the valuation of the risk market, and the shrinkage of the balance sheet has greatly extracted the liquidity of the crypto market, resulting in a declining yield in the DeFi market. As of September 20, 2023, MakerDAO has purchased more than 2.9 billion U.S. bonds and other real-world assets.

The significance of MakerDAO's purchase of U.S. Treasury bonds is that DAI can diversify the assets behind it with the help of the ability of external credit, and the long-term additional income brought by U.S. Treasury bonds can help DAI stabilize its own exchange rate, increase the flexibility of issuance, and incorporate the components of U.S. Treasury bonds into the balance sheet can reduce DAI's dependence on USDC and reduce single-point risks. Not only that, since all the U.S. bond income will flow into MakerDAO's treasury, MakerDAO has recently increased the demand for DAI by sharing part of the proceeds of its U.S. bonds and raising the interest rate of DAI to 8%.

With the skyrocketing price of MRK tokens and the high sentiment of the market hype on the RWA concept, in addition to some large-scale RWA public chain projects that take the compliance route, various RWA concept projects have emerged in an endless stream, and various assets in the real world have been tried their best to move to the blockchain for tokenization and sale, including some outrageous assets, resulting in a mixture of fish and dragons in the entire RWA track.

In the author's opinion, the RWA logic of Crypto mainly revolves around how to transfer the income rights of income-generating assets ( such as US bonds, fixed income, stocks and other assets ) the income rights to the chain, put the off-chain assets on the chain to mortgage loans to obtain the liquidity of the assets on the chain, and move various assets in reality to the chain for trading ( such as sand and gravel , minerals, real estate, gold and other ).

Therefore, we can find that Crypto's RWA reflects the unilateral demand of the crypto world for real-world assets, which still has many obstacles in terms of compliance. It is worth noting that the so-called RWA U.S. bonds actually on the chain are not the U.S. Treasury bonds themselves, but their income rights, and this process also involves the steps of converting the fiat currency yield generated by the U.S. Treasury bonds into on-chain assets, which increases the complexity of the operation and the friction cost.

The rapid rise of the RWA concept is not just due to MakerDAO. In fact, a research report titled "Money, Tokens and Games" released by a financial institution from the traditional financial sector has also caused a strong response in the industry. This report reveals the strong interest in RWA from many traditional financial institutions, while also stimulating the enthusiasm of a large number of speculators in the market. They have spread the word that major financial institutions are about to enter the space, which has further boosted the market's expectations and hype.

RWA from a TradFi perspective

If we look at RWA from the perspective of Crypto, it mainly expresses the unilateral demand of the crypto world for the return on assets of the traditional financial world. If you build on this logic, from the perspective of traditional finance, the capital scale of the crypto market is basically negligible compared to the trillion-dollar market of traditional finance, whether it is U.S. bonds or any other financial assets, if it is for one more sales channel on the blockchain, it is not necessary. From the visual market size comparison chart below, we can see the difference in size between the crypto market and the traditional financial market.

! 10,000 Words Detailed Explanation of RWA Asset Tokenization: Underlying Logic Combing and Large-scale Application Implementation Path

Therefore, from the perspective of traditional finance (TradFi), RWA is a two-way flow between traditional finance and decentralized finance (DeFi). For the traditional financial world, DeFi financial services based on the automatic execution of smart contracts are a revolutionary fintech tool. RWA in the field of traditional finance is more concerned about how to combine DeFi technology to realize the tokenization of assets, so as to empower the traditional financial system, reduce costs, improve efficiency, and solve the pain points of traditional finance. The focus is on the benefits that tokenization brings to the traditional financial system, not just finding a new channel to sell assets.

It is necessary to distinguish the logic of RWA. Because RWA from different perspectives has very different underlying logic and implementation paths. First of all, in terms of choosing the type of blockchain, the two have different implementation paths. The RWA of traditional finance takes the path of permissioned chain (Permission Chain), while the RWA of the crypto world is based on the path of public chain (Public Chain).

Due to the characteristics of the public chain such as no access requirements, decentralization, and anonymity, the RWA of crypto finance will not only face greater compliance obstacles, but also have no legal rights and interests protection for users when encountering adverse events such as Rug, not to mention that hacking has high requirements for users' security awareness, so the public chain can