RWA: The Elephant in the Gap

Preface

The tokenization of real assets ( RWA ) aims to enhance liquidity, transparency, and accessibility, allowing more people to access high-value assets. While this explanation is common, it is not entirely accurate. This article will attempt to interpret the current context of RWA from a personal perspective.

1. The Broken Prism

The combination of blockchain and real-world assets can be traced back to Colored Coins on Bitcoin over a decade ago. By adding metadata to Bitcoin UTXOs to achieve "coloring," specific Satoshis are endowed with attributes representing external assets, thereby marking and managing real-world assets on the Bitcoin chain. This was humanity's first systematic attempt to implement non-monetary functions on the blockchain, marking the beginning of blockchain's journey towards intelligence. However, due to the limited opcode operations of Bitcoin scripts, the asset rules of Colored Coins had to be interpreted by third-party wallets, requiring users to trust these tools' definitions of UTXO "color." Factors such as centralized trust and insufficient liquidity led to the failure of the initial concept validation of RWA.

In the years that followed, the emergence of Ethereum ushered in the Turing-complete era of blockchain. Various narratives once became popular, but RWA has remained largely underwhelming except for fiat-backed stablecoins. Why is that?

First of all, there has never been a real dollar on the blockchain. USDT or USDC are essentially "digital bonds" issued by private companies, theoretically weaker than the dollar. Tether's success comes from the urgent need in the blockchain world for a stable medium of value that it cannot create on its own.

In the RWA field, decentralization has never truly existed. Trust assumptions must be built on centralized entities, and the risk control of these entities can only rely on regulation. The anarchistic nature inherent in crypto is essentially contrary to this concept, as the underlying architecture of any public chain is designed to resist regulation. The difficulty of regulation existing above public chains is the primary reason why RWA has never been successful.

Second, the complexity of assets is a major challenge. Although RWA encompasses the tokenization of all physical assets, it can be roughly divided into financial assets and non-financial assets. Financial assets have homogenization characteristics, and the connection between the underlying assets and tokens can be established under regulated custodians. Non-financial assets, on the other hand, are much more complex, with solutions primarily relying on IoT systems, but still unable to cope with sudden factors such as human malfeasance and natural disasters. Therefore, non-financial assets that can persist on the chain in the future must meet both conditions of homogenization and ease of valuation.

Thirdly, compared to the highly volatile digital assets, it is difficult to find underlying assets in the real world with comparable volatility. The APYs in DeFi, often reaching dozens or even hundreds, make traditional finance look inferior. Low yields and a lack of participation motivation are another pain point for RWA.

So, why is the industry refocusing on this narrative now?

2. Policy Orientation

The advancement of regulation in traditional finance is key to the existence of RWA. This concept can only progress when the trust hypothesis holds true. Currently, regions friendly to Web3, such as Hong Kong, Dubai, and Singapore, have only recently introduced RWA regulatory frameworks one after another. Therefore, the journey of RWA has just begun. However, looking at the current situation, regulatory fragmentation and traditional finance's heightened vigilance towards risks still cast a shadow over this field.

From the current situation, the RWA protocol does not have sufficient accessibility and is extremely lacking in interoperability, resembling "islands" and contrary to the ideal form.

So is it really impossible to find a path back to decentralization within these frameworks? Not at all. Take the leading RWA protocol Ondo as an example; the team developed a lending protocol called Flux Finance, which allows users to use open tokens like USDC and restricted tokens like OUSG as collateral for loans. They issue a tokenized bearer note called USDY, which is a compounded stablecoin (, designed with a 40-50 day lock-up period to avoid being classified as a security. Ondo then simplifies the circulation of USDY on public chains through cross-chain bridges, ultimately achieving a pathway for interaction with the DeFi world.

However, this complex and non-reversible approach may not be the RWA we expect. Another key to the success of fiat-backed stablecoins today lies in excellent accessibility, which allows for low-threshold inclusive finance in the real world. RWA still needs traditional finance and project parties to explore together on the issue of isolation, focusing on how to first achieve interconnection within different jurisdictions and interact with the on-chain world as much as possible. Only then can it align with the general interpretation of the term RWA.

) 3. Assets and Income

According to data platform statistics, the total value of on-chain RWA assets is $20.69 billion ### excluding stablecoins (, mainly composed of private credit, U.S. Treasuries, commodities, real estate, and stock securities.

From the perspective of asset classes, RWA protocols are primarily aimed not at DeFi native users, but at traditional financial users. Some leading RWA protocols mainly target small and medium-sized enterprises and institutional-level users. So why move these businesses on-chain?

1. 24/7 Instant Settlement: This is one of the pain points of traditional finance relying on centralized systems. Blockchain provides an uninterrupted trading system. It also enables instant redemption, T+0 loan disbursements, and other operations.

2. Breaking the fragmentation of regional liquidity: Blockchain is a global financial network that allows small and medium-sized enterprises in third-world countries to attract external investors' funds at the lowest cost by circumventing local institutions.

3. Reduce marginal service costs: Through smart contract management, the cost of servicing 100 companies in an asset pool is almost the same as servicing 10,000 companies.

4. Service for special enterprises: Some enterprises generally lack traditional credit records, making it difficult to obtain loans from banking institutions. They can use traditional supply chain finance logic to finance equipment and accounts receivable, etc.

5. Lowering the entry threshold: Although early successful RWA protocols were mostly designed for enterprises, institutions, or high-net-worth individuals, with the introduction of regulatory frameworks, many RWA protocols are also trying to segment financial assets to lower the investment threshold for investors.

For the cryptocurrency sector, if RWA can succeed, it indeed has the potential for a trillion-dollar scale of imagination. Moreover, RWAFi may also eventually arrive. For DeFi protocols, the addition of tokens with real returns to the underlying assets will make them more robust. For DeFi native users, there are new options for asset selection and pairing. Especially in the current world of geopolitical turmoil and uncertain economic prospects, certain real-world assets might be a better low-risk choice than simply holding stablecoins for investment.

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) Four, Sword Bearer

"Dark Forest" is a term used by many industry insiders to refer to blockchain, which is also the "original sin" inherent in its decentralized nature. In certain specific fields, RWA may serve as the swordbearer of this parallel world. Although the stories of PFP avatars and game finance have now become a bubble, looking back at the crazy era a few years ago, we did produce some projects comparable to traditional IP. But did we really purchase IP intellectual property? In fact, we did not; NFTs are, to some extent, more like consumer goods, and the blockchain's definition of 10K PFP is quite vague. It indeed created some momentarily brilliant IPs by lowering the investment threshold, but in terms of returns and project development, the founding team monopolizes the power.

Taking a well-known NFT project as an example, its original intellectual property is clearly owned by the issuer. According to the user agreement and official website information, the issuing company, as the project operator, holds the core intellectual property rights such as copyright and trademark rights. Holders who purchase the NFT only acquire ownership and usage rights to the specific numbered avatar, not the copyright itself.

In decision-making, the issuer's design route for the project is the metaverse, exchanging unlimited issuance of sub-IP for funding, distancing itself from the original luxury narrative. NFT holders, in this regard, have neither the right to be informed, nor the right to make decisions, let alone the right to profits. In the traditional world, when investing in an IP, investors usually have direct usage rights, direct profit distribution, participation in decision-making, and even development dominance for the entire IP.

This project is at least one of the top performers among PFP projects, and there used to be a lot of NFT projects with even more chaotic rights distribution. When a giant sword hangs over their heads, will they choose to respect their community more?

Five, On the Carrier

In summary, RWA has the potential to reshape finance, while also bringing the opportunities contained in the real world onto the blockchain, which may be a new way to address the chaos in blockchain. However, constrained by the current regulatory framework of traditional finance, its form still resembles a private protocol existing on a public chain, unable to unleash the highest imaginative potential. As time goes by, we look forward to future guides or alliances that can break through this barrier.

The brilliance that assets can release on different carriers is unimaginable. From the bronze inscriptions of the Western Zhou Dynasty to the fish scale atlases of the Ming Dynasty, asset confirmation guarantees social stability and development. What would the final form of RWA look like? Perhaps we could buy stocks in another place during the day in one location, deposit funds into a bank in a third country at midnight, and the next day invest in properties in other regions together with investors from around the world.

Yes, a world running on a massive public ledger is the ultimate form of RWA.

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