From the perspective of underlying assets, business structure and development path, talk about the current hot RWA track

Since the beginning of the year, the market has been discussing RWA (real world assets, that is, real world assets) more and more frequently. Some people believe that RWA will trigger the next round of bull market. Some entrepreneurs have also adjusted their direction to the track related to RWA, hoping to boost the rapid growth of business under the blessing of the gradually heating up narrative.

RWA is to map the assets in the traditional market on the chain in the form of tokens for web3.0 users to buy and sell. RWA's tokens have the right to earn money from assets. A few years ago, the scope of STO mainly focused on corporate bond financing, but now the scope of RWA is broader: it is not limited to the primary market of traditional assets, and any asset that circulates in the primary and secondary markets can be tokenized On the chain in a way that allows web3.0 users to participate in investment. Therefore, the narrative of RWA contains a wide variety of assets and a wide range of yields.

RWA has gradually attracted the attention of the market. There may be several reasons: First, the crypto market lacks low-risk U-standard assets, while the traditional financial market is under the wave of interest rate hikes, and the risk-free interest rates of major economies have risen to 4% or even A higher level is attractive enough for investors in the crypto-native market. Corresponding to this phenomenon is that during the 2020-2021 bull market, many traditional funds also entered the encryption market to earn low-risk returns through strategies such as arbitrage. The introduction of low-risk and high-yield products in the traditional market through RWA may be welcomed by some investors; secondly, the encryption market is not in a bull market now, and even in the native encryption market, there are not enough narratives. RWA is currently seen The few tracks with solid income support may achieve explosive growth in business; finally, RWA is one of the bridges connecting the traditional market and the encrypted market, through RWA, there is also an opportunity to attract incremental users in the traditional market and inject new flows This is undoubtedly a positive for the development of the blockchain industry.

However, judging from some RWA projects seen so far, their business indicators such as TVL have not grown rapidly, and the market may have too high short-term expectations for RWA. For an RWA project, the following dimensions need to be considered:

1. The underlying assets. This is the core problem of the RWA track. Choosing the right underlying assets is of great help to subsequent management.
2. Standardization of underlying assets. Due to the different "heterogeneity" of different underlying assets, the difficulty of standardizing the underlying assets is also different. Assets with stronger heterogeneity require higher standardization requirements and more complex processes.
3. Off-chain cooperative institutions and cooperation forms. High-quality off-chain cooperative institutions can not only fulfill their obligations smoothly, but also fully release the value of the underlying assets.
4. Risk management. The maintenance of underlying assets, asset on-chain, and income distribution all involve risk management. If it is a debt-type asset, it also involves risk management in asset liquidation and collection after the debtor defaults.

1. Underlying assets

The underlying assets are the core element.

At the current stage of the RWA track, the underlying assets are mainly divided into the following categories:

1. Bond assets, mainly short-term U.S. Treasury bonds or bond ETFs. Typical representatives include stablecoins USDT and USDC. Some lending projects, such as Aave and Maple Finance, have also joined this camp. Treasury bonds/Treasury bond ETFs are currently the largest RWA;
2. Gold, the typical representative is PAX Gold. Still under the big narrative of "stable currency", but the development is slow and the market demand is weak;
3. Real estate RWA, typical representatives are RealT, LABS Group, etc. It is similar to packaging real estate into REITs and then going to the chain. This type of project has a wide range of real estate sources, and the project team often chooses its own city as the main source of assets;
4. Loan assets. Typical types such as USDT, Polytrade, etc. The types of assets are relatively wide, including personal housing mortgage loans, corporate loans, structured financing instruments, car mortgage loans, etc.;
5. Equity assets, typical projects include Backed Finance, Sologenic, etc. The transaction of this type of asset seeks real existence, but is greatly limited by legal and other issues. An important development direction of crypto-native "synthetic assets" is listed and circulated stocks, which highly overlap with this field;
6. Others, including farms, artworks and other large-scale (larger individual assets) but less standardized asset types.

Which asset is used as the underlying asset needs to consider five dimensions: liquidity, degree of standardization, principal security, scalable scale, and rate of return. From these five dimensions, we can roughly frame the attributes of the above-mentioned assets.

From the perspective of underlying assets, debt assets currently seem to be the most worthwhile category to explore. Based on their own positioning, they can seek differentiated routes: anchoring fiat currency stablecoins, encrypted market Yu'E Bao, etc. Although there are already many oligarchs on the stablecoin track anchored to legal currency, and major projects have formed ecological cooperation with a large number of projects, but the current track such as "encrypted market Yu'ebao" has yet to be tapped.

For real estate assets, although the REITs scheme is very mature, if the project team decides to choose assets by themselves and conduct regional and property diversification management, it will undoubtedly increase the cost: for example, in terms of project maintenance, if the geographical distribution is too scattered, The number of people who need to participate in property management will increase, and the procurement cost of property maintenance and other aspects, and the cost of personnel transportation will also need to increase. In the process of looking at the project, the author once encountered the situation that the project team hoped to control the value of a single property within 100,000 US dollars, distributed in more than 5 countries, and the types of properties were not limited to residential and commercial properties. Although it may be sufficiently decentralized, it is more difficult in terms of information disclosure and property management. It will also be difficult to achieve rapid growth of underlying assets in the future.

At present, the author does not recommend paying too much attention to "other" types of underlying assets. The most important reason is liquidity and standardization. For example, the underlying assets related to agriculture, due to the large degree of non-standard, this adds a lot of difficulty to determine the quality of the underlying assets. Taking a single farmland as an example, the quality of the crops produced will also vary. Storage, transportation, and sales are also relatively specialized processes. If you want the income of agricultural assets to be finally delivered to investors, you need to cultivate in the industry for many years. possible. The production cycle fluctuations faced by economic crops and the impact of weather factors are also difficult to predict. There is also greater difficulty in the final realization.

If the project party finds and packages assets by itself, the growth of the project itself will be greatly affected. It is more difficult for this type of project to grow rapidly.

As far as the underlying assets are concerned, it may be more practical and achievable to take bond assets as the core direction and REITs-like assets as the way to increase income.

2. Business Architecture

If there were still big problems in how to put RWA on the chain in the past few years, now under the exploration of leading projects such as MakerDAO, a relatively clear path has been formed.

First of all, in order to realize the convenience of RWA on-chain, the RWA Foundation architecture can be established. Under this framework, MakerDAO can manage multiple RWAs through the RWA Foundation, and the new RWA can be directly loaded into the SPV (Special Purpose Vehicle) initiated by the RWA Foundation.

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Secondly, for a single SPV, a management model similar to the asset-backed securitization financing method of the ABS (Asset Backed Securitization) project can be adopted:

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For the safety of funds, MakerDAO chooses to invest in priority assets, and other investors can become investors with inferior shares. For other project parties, the risk level of holding assets can be determined according to the risk preference of the target user group.

Different from traditional asset securitization steps, in a single SPV of MakerDAO, there is no role of settlement and fund custody, but a tokenized issuance platform is added. In the future, after the regulatory space becomes clearer, settlement and fund custody may still be necessary participants in RWA.

3. Risk Management

The risk management of RWA is mainly divided into three dimensions:

1. Risk management of underlying assets. Assets with a lower degree of standardization require higher risk management capabilities. Compared with forest farms and farms, national bonds have a higher degree of standardization, better liquidity of assets, and stronger price discovery capabilities. Therefore, it is less difficult to manage national debt. However, even for the same type of assets, the difficulty of management varies in different regions and countries. For example, some developing countries have a low level of digitalization, and debt assets may still exist in paper form. This requires that during the period of holding a large amount of bonds, the project party needs to find a place where the bonds cannot be damaged. Assets that exist in paper form are still more likely to be "civet cats for princes". This type of incident has occurred in many areas with large amounts of cases.

In short, for the risk management of the underlying assets, the most basic thing is to ensure that the underlying assets are true and effective during the project duration; secondly, to ensure that the value of the underlying assets will not be lost by human factors; In the end, it should be ensured that the proceeds and principal can be safely and smoothly delivered to investors. This type of risk has a large overlap with the attributes of traditional assets, and there are risk management measures that can be referred to.

2. Risk management on the chain. Because it involves data on-chain, if off-chain institutions are not adequately managed, there may be cases of false data reporting. Similar negative cases often occur in the traditional financial field. For example, in the fields of commercial paper, supply finance, and commodities, there have been huge amounts of counterfeiting. Even through real-time sensor monitoring, fixed delivery places, etc., there is still no way to 100% avoid risks.

For the RWA industry, which is still in its infancy, the author believes that a similar situation will also occur. Moreover, there is currently a lack of corresponding regulatory rules, the cost of breaking the law is too low, and the risk of data falsification on the chain cannot be underestimated.

3. Partner risk management. This type of risk is still biased towards tradition, but the problem is that there are currently no detailed rules for RWA regulation. For example, in the trusteeship link, what kind of trusteeship institution is used to comply with the regulations? In the auditing process, can the current accounting and financial standards accurately and completely reflect the characteristics of RWA? In the process of project operation, if a risk event occurs, what kind of risk handling method and process can better protect investors? There are still no very precise answers to this type of question. Therefore, the partner still has the opportunity to do evil.

4. Current user structure and user needs

As mentioned in the previous "Prospect of the "Native Bond Market" in the Encrypted World", due to the extremely volatile and cyclical nature of the encrypted market, it is difficult for investors with relatively low risks and conservative risk preferences to obtain sustained and stable returns in the market. In such a market, a large number of users also show strong risk appetite:

In the survey report released by dex.blue and other teams in 2020, half of the surveyed crypto market users have invested 50% or more of their total savings in the crypto market; in the survey reports released by Pew Research and Binance, also It is mentioned separately that young people account for a relatively high proportion of users in the current encryption market. Under such a market structure, investors in the encrypted market will have a higher risk preference than investors in the traditional market.

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In the current market dominated by "arbitrageurs and extremely high-risk investors", its volatility also shows similar characteristics: K33 Research's research shows that from the beginning of 2017 to October 2022, Bitcoin's volatility has been around It is higher than Nasdaq and S&P 500 for most of the time period. Only when the market is extremely sluggish can the volatility of US stocks have a chance to exceed Bitcoin.

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The two main groups of investors in the encryption market may have different requirements for yield: for arbitrageurs, "low-risk" investment opportunities are easier to obtain, and this type of trading opportunity is based on the Bitcoin perpetual contract funding rate For example, since the product appeared, the annualized rate of return has been between 15% and 20%, which is much higher than the 5% long-term rate of return in the global stock market, and higher than the long-term rate of return of various types of bonds. For high-risk investors, the expected return is much higher than that of arbitrage investors.

Therefore, even if the stock is tokenized, it may be difficult to satisfy the current market user structure and its expected return level. In the short term, the positioning of the risk-benefit ratio of a large number of RWA products is rather embarrassing.

5. Supervision: Maybe a Potential Opportunity

At the beginning of June this year, the U.S. SEC announced that multiple tokens including BNB, BUSD, MATIC, etc., were defined as securities, which aroused market concerns about supervision, and the corresponding targets also experienced a relatively obvious decline.

If the SEC’s regulatory measures are recognized by other G20 or more countries, and more tokens are listed as securities and included in the traditional regulatory framework, the issuance of tokens on the chain in the future may also be included in the scope of supervision. From the current regulatory policies, we have seen similar signs: Whether it is the United States, Japan, or the European Union, the regulatory measures for stablecoins have begun to move closer to traditional banks. Perhaps the future regulation of tokens will also be to a certain extent. Learn from the regulatory measures of securities.

If such a situation arises, some current practitioners in the traditional financial field will feel more at ease to put their assets on the chain: the advantage of this is that the assets are local, but they can absorb global liquidity. This kind of thinking has been recognized by some RWA project entrepreneurs: although they are limited by geographical factors, with the blockchain, they can obtain global investors. For these practitioners, on-chain assets under supervision will bring two benefits: 1. With the tentacles of global liquidity, the capital side will not be affected by geographical factors, which may be financed to cheaper money; 2. Because it is possible to find investors who have a lower rate of return than local investors, increasing the range of options for projects.

At the same time, regulatory measures on the user side are also advancing: KYC. Encryption-native projects only need a wallet to access, but some of the start-up projects financing in the primary market already require KYC assistance to determine whether the user is a qualified investor. Some projects that introduce RWA, such as Maple Finance, also regard KYC as an indispensable process in the customer acquisition process. If the KYC process is also gradually implemented in more new projects, then clearer regulation of the blockchain industry that coexists with KYC may bring an additional benefit: more and more ordinary investors can more Enter the market with confidence.

The risk appetite of this type of users prefers familiar assets, and there is also a certain interest in emerging crypto-native assets. At this time, RWA can be used as an important investment direction for this type of more ordinary investors.

Six, the possible development path of RWA

In the short term, RWA brings three benefits to investors in the encryption industry:

1. Fiat-based low-risk investment targets: At present, the risk-free interest rate level of major economies led by the United States has reached a level above 3%, which is significantly higher than the loans in various types of U-based lending agreements in the encryption market rate of return. On the premise of not needing to increase leverage, it brings investors an extremely low-risk investment opportunity. At present, projects such as Ondo Finance, Maple Finance, and MakerDAO have launched investment projects based on the yield of U.S. Treasury bonds, which is very attractive to investors who settle in legal currency. On this track, the "Ye Bao" project in the encrypted market may appear.

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2. Risk diversification of assets: Taking Bitcoin as an example, in different market stages, the correlation with gold and US stocks also fluctuates to varying degrees.

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Even in the big year driven by macro factors after 2020, assets of different asset classes still have a certain degree of diversification advantage.

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For configuration investors, mixing native encrypted assets with various types of RWA can diversify asset risks to a greater extent.

3. A means for investors in developing countries to resist fluctuations in the value of their currencies: Some developing countries, such as Argentina and Turkey, have a relatively high level of inflation throughout the year. RWA can help investors in these areas to To a certain extent, hedging against fluctuations in the value of the domestic currency to achieve global asset allocation.

From the perspective of the above three dimensions, the RWA that can be widely accepted in the short-to-medium term is more likely to be the high-yield, low-risk government bond RWA of major economies due to interest rate hikes.

In the long run, RWA has the opportunity to reproduce the grand occasion when China's Internet finance broke out 10 years ago when the regulatory framework is more clearly implemented, more mass investors are gradually entering the encryption market, and the operation of the encryption industry is more convenient:

**1. Blockchain-based RWA assets provide unprecedented "accessibility" for global public investors: **RWA, as the most familiar asset for public investors, may become the main asset for non-Web3 aboriginal investors on-chain investment targets. For them, the borderless nature and permissionless access and operation of on-chain assets opens the door for them to invest in and use a wider range of global assets. Conversely, for entrepreneurs in the field, this also provides them with unprecedented user breadth, scale and extremely low customer acquisition costs. The rapid development and widespread use of USDT and USDC as "on-chain dollars" has initially verified this trend.

2. RWA assets may generate new DeFi business models: LSD, as a new underlying asset, has stimulated the rapid development of LSD-Fi. Among them, in addition to the previous business paradigms such as asset management, spot trading, and stable currency, which have been re-emphasized, there are also directions such as fluctuations in yields that have appeared in the past but have not received attention. If RWA becomes an important underlying asset, the introduction of new and huge off-chain income may give birth to a new DeFi business model. In the future, RWA can also be combined with crypto-native assets and strategies to form a hybrid asset , so that more users who are willing to explore encrypted native assets can understand it in a more familiar way. From this perspective, the next RWA+DeFi project with ultra-high TVL may be "On-Chain Yu'E Bao".

3. The game between the industry and regulation will eventually have an answer, and practitioners can find ways to acquire customers in compliance: No matter in Western countries or in Hong Kong in the East, the gradual implementation of regulation is the general trend. The encryption industry will grow to a volume of US$10 trillion in the future, and supervision will not sit idly by. With the gradual clarification of regulatory policies, we can see that some regions can implement businesses that could not be realized in the past: Hong Kong has been able to issue stable coins through compliant channels, and the Middle East is also exploring the combination of blockchain industry and traditional industries. way out.

In the long run, one of the important factors for the vigorous development of the encryption industry is sufficient liquidity. With the implementation of regulations, RWA, led by fiat-backed stablecoins, is bound to grow rapidly. Especially under the stimulation of the next round of global liquidity easing, if new players can have strong support in terms of ecology and channels, compliant fiat currency-backed stablecoins may also be able to replicate the ultra-high growth path of USDT .