Analyzing the current implementation path of RWA and exploring the development logic of future RWA-Fi.
Analyzing the current RWA implementation path and exploring future RWA-Fi development logic.
With the arrival of the crypto winter in 2022, combined with the regulatory crackdown and the collapse of CEX, the high APR in the crypto market is no longer there. Investors who are still active in the market have begun to explore risk-free returns. With the changes in the macroeconomic environment and the rise in US bond yields, the tokenization of real-world assets has become an important value capture channel in the current crypto market.
This article attempts to clarify the logic of the current narrative of real-world asset (RWA) by examining the implementation paths of major RWA projects holding underlying assets (Compound & Superstate, Franklin Templeton, MakerDAO, Ondo Finance, Matrixdock, Centrifuge).
It is not meaningful to be overly concerned about the definition of RWA. Tokens are the carriers of value, and the value of RWA depends on bringing the rights/valuations of underlying assets to the chain and its application scenarios.
- In the short term, the driving force behind RWA comes more from the demand of DeFi protocols in the crypto world, such as asset management, diversification of investments, and new asset categories.
- DeFi protocols capture the interest value of underlying assets through RWA projects, establishing a U-centric approach similar to the establishment of ETH-centric interest-bearing assets.
- Therefore, US bond RWA is sought after. Depending on the different paths of implementing US bond yields, it can be divided into (1) Off-Chain to On-Chain path represented by traditional compliant funds, and (2) On-Chain to Off-Chain path led by DeFi protocols, but regulatory compliance remains a major obstacle.
- Mapping interest-bearing assets to the chain is only the first step for RWA. It is worth exploring how to integrate the composability of DeFi like Lego blocks, which is expected to further open up the ceiling of RWA+DeFi.
- In the long run, RWA should not be one-sided. It will be a two-way journey in the future, where real-world assets can be brought to the chain, and TradFi can also leverage the various advantages of DeFi to further unleash its potential.
- Future exploration focus: How to enable investors to enjoy both the beta returns brought by real-world RWA assets and the alpha returns of the crypto market.
1. The Geometry of This Round of RWA Narrative
For the current $1 trillion crypto market, investors mainly derive income from on-chain activities (such as trading, lending, staking, derivatives, etc.), and the entire market lacks a stable source of real yield.
Since Ethereum switched to proof of stake, liquidity staking based on ETH-centric interest-bearing assets (LSD) can be considered as a native source of real yield in the crypto market, but it currently accounts for a small share of the overall crypto market. To truly break through the bottleneck of the existing market, strong external forces are still needed to support it.
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Therefore, a new source of real yield is emerging: real world assets (RWA) that exist off-chain are brought onto the blockchain through tokenization, serving as an important source of real yield for the cryptocurrency market.
The on-chain entry of RWA has the potential to be revolutionary for the cryptocurrency market. RWA can provide sustainable, diverse, and traditional asset-backed real yields for the cryptocurrency market. Additionally, RWA can serve as a bridge between decentralized finance (DeFi) and traditional finance, meaning that RWA not only brings incremental funds to the cryptocurrency market but also gains access to massive liquidity, vast market opportunities, and significant value capture from the traditional financial market.
According to research by BCG and ADDX, the tokenization of global illiquid assets will create a market worth $16 trillion (which will be close to 10% of global GDP in 2030). Citigroup’s RWA research report “Money, Tokens, and Games” also predicts that by 2023, a market worth $10 trillion will be tokenized.
（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 (including ownership, income rights, usage rights, etc.) in tangible or intangible assets into digital tokens. This enables the storage and transfer of assets without the need for central intermediaries, and the value is mapped to the blockchain for transaction circulation.
RWA can represent many different types of traditional assets (including tangible and intangible assets), such as commercial real estate, bonds, cars, and almost any asset that stores value and can be tokenized. Since the early days of blockchain technology, market participants have been seeking to bring RWA onto the chain. Traditional TradFi institutions such as Goldman Sachs, Hamilton Lane, Siemens, and KKR are also actively working to bring their real world assets onto the chain. In addition, native crypto DeFi protocols such as MakerDAO and Aave are also making adjustments and actively embracing RWA.
Compared to the monotonous narrative of ICO/STO token financing in 2018, the current RWA narrative is much broader: it is not limited to the primary market in traditional finance, and almost any asset that can be valued can be tokenized. Additionally, the existence of DeFi protocols and numerous infrastructure that did not exist in 2018 can open up endless possibilities for RWA today.
1.2 The Driving Force behind RWA
Currently, the main driving force behind bringing real-world assets into the crypto world is the ability of real-world assets, especially US Treasury bonds, to provide a stable risk-free return for the crypto market.
Therefore, the current implementation path for most mature RWA projects is based on the one-sided demand for real-world assets by DeFi protocols, such as:
- Asset management demand: Native on-chain revenue mainly comes from staking, trading, and lending activities. However, in the context of the crypto winter, the sluggish on-chain activities directly lead to a decline in on-chain yields. In the current context of higher yields on US Treasury bonds, traditional DeFi protocols are gradually introducing US Treasury bond RWAs. For example, MakerDAO, through recent proposals, gradually converts stablecoin assets in its treasury (with no or low yield) into interest-bearing US Treasury bond RWAs (with a risk-free return of 4%-5%). This ensures the safety of treasury assets while earning stable returns;
- Diversification of portfolios: In the event of extreme market conditions, the high volatility and correlation of native crypto assets can lead to misalignment and liquidation of assets. Introducing RWAs with lower correlation and stability to on-chain native crypto assets can effectively alleviate such problems. Investors can achieve diversification and build more robust and efficient investment portfolios;
- Introduction of new asset categories: Building DeFi Lego on the basis of RWAs can further unlock the potential of RWA assets. For example, Flux Finance provides lending for Ondo Finance’s OUSG, Curve allows trading of MatrixDock’s STBT, and Pendle provides an AMM trading pool for interest-bearing assets.
In the short term, the realization of this demand is only based on the one-way flow of the crypto market. Traditional finance in the real world does not have much willingness to enter the crypto market, and some are just testing the waters. In the long term, RWA should not be one-sided, like the current one-way demand for TradFi by DeFi. The future will be a two-way flow, where real-world assets can be brought to the chain, and the real world can also leverage blockchain technology and advantages to further unleash its potential.
1.3 How to Capture the Value of Underlying Assets of RWAs
According to the different underlying assets of RWAs, they can be classified in various ways.
In the short term, we narrowly classify RWAs into “interest-bearing RWAs” and “non-interest-bearing RWAs”. This is because we believe that most RWA projects in the market today are more focused on capturing the interest value of underlying assets, such as the yield of interest-bearing assets like US Treasury bonds, government securities, corporate bonds, REITs, etc.
The essence of interest-bearing RWAs is to establish a U basis, a category of RWA assets with real yield rates of underlying assets, which is consistent with the logic of LSD establishing an ETH basis for interest-bearing assets. Although the yield of RWA assets is not significant, they can be further combined in the DeFi Lego.
Non-income generating RWAs are more suitable for capturing the intrinsic value of underlying assets themselves, such as the value of gold, crude oil, collectibles, and the RWA value of South American players.
II. RWA Asset On-chain Path
According to Binance Research’s report, the implementation process of RWAs is divided into three stages: (1) off-chain formalization, (2) information bridging, and (3) RWA protocol demand and supply.
2.1 Off-Chain Formalization
In order to bring real-world assets into DeFi, assets must first be packaged off-chain to digitize, financialize, and comply with regulations, in order to clarify the value of assets, ownership of assets, and legal protection of asset rights and interests.
In this step, it is necessary to clarify: (1) Representation of Economic Value: The economic value of assets can be represented by the fair market value of assets in traditional financial markets, recent performance data, physical condition, or any other economic indicators. (2) Ownership and Legitimacy of Title: The ownership of assets can be determined through deeds, mortgages, bills, or any other form. (3) Legal Backing: In cases involving changes in asset ownership or rights and interests, there should be a clear resolution process, which usually includes specific legal procedures for asset liquidation, dispute resolution, and enforcement.
2.2 Information Bridging
Next, information about the economic value, ownership, and rights and interests of assets is digitized and brought onto the chain, stored in the distributed ledger of the blockchain.
This step will involve: (1) Tokenization: After the information packaged in the off-chain stage is digitized, it is brought onto the chain and represented by metadata in digital tokens. These metadata can be accessed through the blockchain, and the economic value, ownership, and rights and interests of assets are fully transparent. Different asset categories can correspond to different DeFi protocol standards. (2) Regulatory Technology/Securitization: For assets that need to be regulated or considered securities, they can be included in DeFi in a legal and compliant manner. These regulations include but are not limited to licensing for issuing security tokens, KYC/AML/CTF, and compliance requirements for listing on exchanges. (3) Oracle: For RWAs, it is necessary to refer to external real-world data to accurately depict the value of assets, such as performance data for stock RWAs. However, since the blockchain cannot directly import external data, data connections such as Chainlink are needed to bridge the on-chain data with real-world information, providing off-chain asset value data to DeFi protocols.
2.3 RWA Protocol Demand and Supply
DeFi protocols focused on RWAs drive the entire process of tokenizing real-world assets. On the supply side, DeFi protocols oversee the formation of RWAs. On the demand side, DeFi protocols facilitate investors’ demand for RWAs. In this way, most DeFi protocols specializing in RWA research can serve as the starting point for RWA formation and provide markets for the final products of RWAs.
2.4 Specific Implementation Path of RWA
In the specific implementation path of on-chain RWA assets, a similar approach to asset securitization can be adopted. This involves setting up a Special Purpose Vehicle (SPV) to support the underlying assets, providing control, management, and risk isolation. At the same time, BCG and ADDX’s research reports also provide a roadmap for various participants in the ecosystem (asset initiators, issuance platforms, asset custody, fund settlement, etc.) from the perspective of the RWA asset initiators.
III. Current Implementation Path of US Treasury RWA
It is clear that RWA represents the tokenization of off-chain real-world assets. Therefore, it is crucial to understand how the rights and values of real-world assets are converted in both the real and crypto worlds, and how RWA is interpreted as a legitimate representation of real-world assets, or how real-world assets are mapped to the blockchain.
By examining the most mature RWA project, US Treasury bonds, we find 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. As the main driving force behind RWA currently comes from the crypto world, DeFi protocols are more mature in exploring RWA projects.
Currently, except for T Protocol, which belongs to permissionless protocols, all other projects have strict KYC/AML verification processes in place for compliance reasons. Moreover, the majority of US Treasury RWA projects do not support transfer transactions and have very limited use cases, requiring further exploration and development.
3.1 Off-Chain to On-Chain in Traditional Finance
3.1.1 Robert Leshner’s New Company Superstate
Robert Leshner, the founder of Compound, has targeted the current hot topic of RWA narratives. On June 28, 2023, he announced the establishment of a new company, Superstate, dedicated to bringing regulated financial products from traditional financial markets to the blockchain.
According to the documents submitted by Superstate to the U.S. Securities and Exchange Commission (SEC), Superstate will use Ethereum as a supplementary accounting tool and create a fund invested in short-term government bonds, including U.S. Treasury bonds and government agency securities. However, the document makes it clear that the fund will not directly or indirectly invest in any assets that rely on blockchain technology, such as cryptocurrencies.
In simple terms, Superstate will establish an off-chain SEC-compliant fund to invest in short-term US Treasury bonds, and process the fund’s transactions and records on-chain (Ethereum), tracking the ownership shares of the fund. Superstate states that investors must be whitelisted and it will not whitelist smart contracts like Uniswap or Compound, so these DeFi applications cannot use it.
In a statement to Blockworks, Superstate said, “We are creating an SEC-compliant registered investment product that will allow investors to have ownership credentials of traditional financial products (a record of your ownership of this mutual fund), just like holding stablecoins and other crypto assets.”
3.1.2 Franklin OnChain U.S. Government Money Fund
（Source: rwa.xyz & Stellar expert）
Prior to Superstate, we saw Franklin Templeton launch the Franklin OnChain U.S. Government Money Fund (FOBXX) in 2021, which was the first SEC-approved fund that uses blockchain (Stellar) technology to process transactions and record ownership. As of now, its assets under management (AUM) have exceeded $29 billion, and investors can enjoy an annualized return of 4.88%.
Although each share of the fund is represented by one BENJI token, there is currently no interaction between BENJI tokens on-chain and DeFi protocols. Investors need to go through Franklin Templeton’s app or website for compliance verification to enter their whitelist.
3.1.3 Tokenization of Hamilton Lane’s Private Funds
Hamilton Lane is a globally leading investment firm with assets under management of up to $823.9 billion. The company has tokenized partial shares of three of its funds on the Polygon network and made them available to investors on the trading platform Securitize. Through the collaboration with Securitize, the partial shares of the funds will form a feeder fund on the platform, managed by Securitize Capital.
The CEO of Securitize said, “Hamilton Lane offers some of the best-performing private market products, but historically they have been limited to institutional investors. Tokenization will allow individual investors to participate in private equity investments for the first time in a digital way and create value together.”
From the perspective of individual investors, although tokenized funds provide an “affordable” way to participate in top-tier private funds, with the minimum investment threshold reduced from an average of $5 million to just $20,000, individual investors still need to pass the qualified investor verification on the Securitize platform, which still poses a certain threshold.
From the perspective of private funds, the advantages of tokenized funds in providing real-time liquidity are self-evident (compared to the 7-10 year lock-up period of traditional private funds), and they can achieve LP diversification and flexible fund allocation.
The path from Off-Chain to On-Chain is mostly an innovative exploration carried out by traditional finance on its regulatory basis. Considering the strong regulation of traditional finance, the current exploration only applies blockchain technology to traditional financial products themselves, using blockchain as a way of accounting, rather than directly accessing DeFi for interaction and not achieving external expansion. However, the ownership certificate of its fund shares (a record of your ownership of this mutual fund) is basically no different from tokens. Just imagine the difference between holding a certificate and a stablecoin.
We look forward to Compound founder Robert Leshner providing more value exploration for the Off-Chain to On-Chain path of RWA from a more Crypto-native/DeFi perspective.
3.2 On-Chain to Off-Chain of Crypto Finance
3.2.1 Makerdao’s Monetalis Trust Legal Framework
MakerDAO is a decentralized autonomous organization (DAO) designed to manage the Maker protocol running on Ethereum. The protocol provides the first decentralized stablecoin DAI (which can be understood as the dollar on Ethereum) and a series of derivative financial systems. Since its launch in 2017, DAI has always been anchored to the dollar.
Due to the high volatility of the cryptocurrency market, relying on a single collateral asset may lead to a large amount of liquidation. Therefore, MakerDAO has been actively exploring ways to diversify collateral, and RWA is an important part of it. After years of experimentation, MakerDAO has implemented two mature RWA paths: (1) directly purchasing and holding assets through DAO + trust (MIP65 proposal); (2) directly purchasing tokenized RWA assets (through decentralized lending platform Centrifuge), including New Silver (real estate loans) and BlockTower (structured credit) Vaults currently held.
According to data from MakerBurn.com, there are currently 11 RWA-related projects used as collateral for MakerDAO, with a total TVL of $2.7 billion.
Let’s take a look at the MIP65: Monetalis Clydesdale: Liquid Bond Strategy & Execution proposal. The proposal was submitted by Monetalis founder Allan Pedersen in January 2022, aiming to invest a portion of the stablecoin assets in the MakerDAO treasury into real-world high-liquidity, low-risk bond assets managed by Monetalis Trust. The proposal was later passed by the MakerDAO community vote and was implemented in October 2022, with an initial debt ceiling of $500 million. In May 2023, subsequent proposals will raise the ceiling to $1.25 billion.
According to the MIP65 proposal, MakerDAO delegates Monetalis as the project executor through voting, responsible for designing the overall legal framework and periodically reporting to MakerDAO. Monetalis has designed a unified legal framework arrangement based on the British Virgin Islands (BVI) to bridge on-chain governance (MakerDAO), off-chain governance (trust company’s authorized resolutions), and off-chain execution (off-chain transactions).
First of all, MakerDAO and Monetalis authorize a Transaction Administrator to review all transactions and ensure that the execution of the transactions aligns with MakerDAO’s proposals. Secondly, MakerDAO’s on-chain proposals serve as a prerequisite for off-chain decision-making. Any matters unrelated to MakerDAO’s resolutions will be excluded from the authorization scope of the off-chain entity. Lastly, based on the flexibility of BVI law, a certain level of unity between on-chain governance and off-chain governance and execution is ensured. Through complex legal arrangements and trust authorization, the arrangements of MakerDAO and Monetalis are as follows:
(Source: DigiFT Research, MakerDAO MIP65)
After sorting out the unity of on-chain governance and off-chain governance and execution for MakerDAO and Monetalis, the subsequent procurement of the US Treasury Bond ETF will be carried out by James Assets (PTC) Limited, a trust company established in BVI. The procurement targets include BlackRock’s iShares US$ Treasury Bond 0-1 yr UCITS ETF and iShares US$ Treasury Bond 1-3 yr UCITS ETF. The specific process is as follows:
(Source: MakerDAO MIP65)
In the overall process, James Assets (PTC) Limited, as the external entity of MakerDAO and Monetalis, handles each transaction on the premise of obtaining on-chain authorization and off-chain authorization. Coinbase, as the institution for fiat currency deposits and withdrawals, provides currency exchange services. Sygnum Bank provides trading and custody services for trust assets and sets up separate accounts for the expenses of trust operations (with initial expenses reaching 950,000 USD).
3.2.2 Centrifuge’s SPV Tokenization Path
Centrifuge is a decentralized lending platform that aims to bring real-world assets into the crypto world and provide more investment opportunities and liquidity through tokenization, fractionalization, and structuring. Centrifuge is one of the earliest DeFi protocols involved in the RWA field and is also the technical provider behind leading DeFi protocols such as MakerDAO and Aave. According to rwa.xyz, Centrifuge is currently one of the most comprehensive projects in the RWA field and has its own Centrifuge Chain and main product, the Tinlake protocol.
The implementation path of Centrifuge’s RWA can be roughly summarized as follows: (1) Borrowers tokenize off-chain assets into NFTs through asset originators (underwriters) and lock them in Centrifuge’s smart contract asset pool; (2) Multiple NFTs of assets from different borrowers are pooled together to form an asset pool, and liquidity providers provide funds for this asset pool instead of individual borrowers; (3) Through structuring, the asset pool is divided into junior and senior tranches (corresponding to different ERC20 tokens), with junior tranche investors earning higher returns and bearing more risks, while senior tranche investors have lower returns and risks, meeting the needs of investors with different risk preferences.
Centrifuge has done a considerable amount of work in terms of compliance, based on the legal structure of asset securitization in the United States (Regulation D under Section 506 (b)(c) of the U.S. Securities Act). For example, Centrifuge collaborates with Securitize to help investors complete KYC/AML and other compliance verifications. Every asset originator on Centrifuge is required to establish a separate legal entity, known as a Special Purpose Vehicle (SPV), for the fund pool, which serves the purpose of bankruptcy isolation. Legally, these assets have been sold to the SPV, so even if the asset originator goes bankrupt, it will not affect the assets held by the SPV, thereby protecting the interests of investors. Investors sign investment agreements with the SPV corresponding to the asset pool, which include investment structures, risks, terms, etc., and then purchase DROP or TIN tokens corresponding to different Trenches with DAI.
In February 2021, MakerDAO issued the first RWA002 Vault in Centrifuge in collaboration with New Silver. Subsequently, BlockTower S4 (RWA013-A) and BlockTower S3 (RWA012-A), which are relatively large-scale, are both based on the aforementioned implementation path of RWA, with the main underlying assets of BlockTower S4 being consumer loan ABS products.
Afterwards, the MIP6 proposal improved the implementation path of Centrifuge’s RWA by introducing the concepts of Trustee and LockBox. MakerDAO believes that this transaction structure standardizes asset pool transactions and better protects the interests of investors and the DAO. The two most significant changes are:
1. The asset issuer appoints a third party as the Trustee to act on behalf of the DAO and investors. The Trustee protects the interests of the DAO and ensures the independence of the assets. In extreme cases of default, the Trustee can also handle and allocate assets, ensuring that they are no longer controlled by the issuer or liquidator;
2. The concept of LockBox is introduced. LockBox means an isolated account that holds assets outside the control of the asset issuer and the SPV. This structure means that SPV assets are no longer controlled by the asset issuer, but by the Trustee. The Trustee’s responsibility is to receive and process funds in the isolated account, ensuring that the correct party (e.g., MakerDAO) receives the funds. This means that the asset issuer no longer controls the funds from the borrower to the MakerDAO reserve, reducing the risk of fund loss or misuse by the issuer.
In the improved implementation path of RWA mentioned above, firstly, the underlying assets are sold to the SPV, which then pledges the underlying assets to the Trustee through an agreement. Subsequently, the SPV issues DROP and TIN tokens to MakerDAO based on the Tinlake protocol. When cash flow payments occur on the underlying assets, according to the agreement, the funds are directly paid to an isolated account called LockBox, which is independent of the SPV and MakerDAO. Once the LockBox receives the funds, the Trustee initiates instructions to pay DROP and TIN to MakerDAO from the LockBox, and the payment is completed through the Tinlake protocol.
It should be pointed out that MakerDAO and SPV have no opportunity to touch DAI or USD cash flow, as all cash flows are processed through the LockBox and Tinlake protocols. The only role of MakerDAO and SPV is to sign subscription agreements and make decisions as token holders.
This structure better protects investors and asset issuers from potential litigation claims and provides a consistent and coherent solution for discussions with third-party service providers such as regulatory agencies and custodian banks. Once this structure has been widely recognized in the industry and accepted by many traditional financial industry participants, it should be easier to bring traditional financial industry participants into DeFi, thereby expanding the types and quantities of real-world assets available for Maker’s use and reducing the volatility of DAI.
3.2.3 Ondo Finance’s Exemption Path and Flux Finance (DeFi lending protocol)
Ondo Finance launched tokenized funds in January 2023, dedicated to providing institutional-grade investment opportunities and services for on-chain professional investors. It brings risk-free/low-risk interest rate funds to the chain, allowing stablecoin holders to invest in government bonds and US Treasury bonds on-chain. At the same time, Ondo Finance collaborates with the DeFi protocol Flux Finance on the backend to provide on-chain stablecoin lending services for OUSG token holders.
According to DeFiLlama’s data, as of August 1st, Ondo Finance has a TVL of $162 million, and Flux Finance, its lending protocol, has a TVL of $42.78 million and a borrowing amount of $28.02 billion.
Ondo Finance currently has four tokenized fund products, namely (1) US Money Market Fund (OMMF); (2) US Treasury Bonds (OUSG); (3) Short-term Bonds (OSTB); (4) High-yield Bonds (OHYG). Among them, the most popular fund among investors is OUSG, which holds the underlying assets of BlackRock iShares Short Treasury Bond ETF. OUSG is anchored to a stablecoin, and investors in the OUSG fund receive OUSG tokens collateralized by short-term US Treasury bonds. OUSG token holders can also use the decentralized lending protocol Flux Finance developed by Ondo Finance to collateralize OUSG and borrow stablecoins such as USDC and DAI.
For regulatory compliance reasons, Ondo Finance adopts a strict whitelist system for investors and is only open to Qualified Purchasers. The SEC defines Qualified Purchasers as individuals or entities that invest at least $5 million. If a fund only has Qualified Purchasers, it can obtain an exemption under the Investment Company Act of 1940 in the United States and does not need to register with the SEC as an investment company.
Investors first need to go through the official KYC and AML verification process of Ondo Finance before they can sign the subscription documents. Qualified investors will invest stablecoins into Ondo Finance’s OUSG fund, then conduct fiat currency deposits and withdrawals through Coinbase Custody, and execute US Treasury ETF transactions through compliant broker Clear Street.
It should be noted that the concept of Qualified Purchasers and Accredited Investors is not the same. The latter only requires an annual income of over $200,000 or net assets excluding the primary residence of over $1 million.
3.2.4 Matrixdock and T Protocol (Permissionless On-Chain US Treasuries)
Matrixdock is a blockchain bond platform launched by Singapore asset management company Matrixport. Short-term Treasury Bill Token (STBT) is a product based on US Treasury bonds launched by Matrixdock. Only qualified investors who have gone through KYC can invest in Matrixdock’s products. Investors deposit stablecoins and mint STBT through whitelisted addresses. The underlying assets of STBT are 6-month US Treasury bonds and reverse repurchase agreements collateralized by US Treasury bonds. STBT can only be transferred among whitelisted users, including in the Curve pool.
The implementation path of STBT is as follows: (1) Investors deposit stablecoins into the STBT issuer, and the STBT issuer mints the corresponding STBT through smart contracts; (2) The STBT issuer exchanges stablecoins for fiat currency through Circle; (3) The fiat currency is entrusted to a qualified third-party custodian and purchased by the custodian through a traditional financial institution’s US Treasury trading account for short-term bonds that mature within six months, or is invested in the overnight reverse repo market of the Federal Reserve.
The STBT issuer is an SPV established by Matrixport. The SPV pledges the held US Treasury bonds and cash assets to the STBT holders, who have the first priority claim on the underlying asset pool.
T protocol was launched in March 2023, and its TBT token is backed by MatrixDock’s STBT. T protocol removes the whitelist restrictions of STBT through token wrapping, achieving permissionless tokenization of US Treasuries. TBT adopts a rebase mechanism to anchor its price to $1 and can be traded on Curve.
TBT accumulates stablecoin assets from investors to meet the requirements of the STBT whitelist, thus purchasing STBT from partner MatrixDock indirectly. TBT achieves permissionless access to US Treasury RWA assets in an indirect manner.
In the case of MakerDAO, for the purpose of asset management, a portion of its stablecoin assets in the treasury need to be converted into RWA assets. In terms of implementation path, compared to the large-scale US Treasury procurement path of the Monetalis trust legal framework, the RWA asset pools from Centrifuge adopted by MakerDAO currently have a relatively smaller scale, and the largest-scale BlockTower S4 has just reached hundreds of millions of dollars. The advantage of Centrifuge’s RWA solution lies in its simple process and the fact that MakerDAO does not need to build complex legal frameworks itself.
The implementation path of Matrixdock’s RWA is basically the same as that of Ondo Finance, and due to compliance requirements, a strict whitelist system needs to be implemented. Given the high threshold of the whitelist system, after implementing RWA on the chain, Ondo Finance can improve liquidity by linking Flux Finance’s DeFi lending protocol to enable borrowing of OUSG, while Matrixdock can achieve permissionless circulation of US Treasury RWA through the T protocol.
IV. Collision of RWA and DeFi Lego
We believe that the application logic of interest-bearing assets based on U-based RWA is consistent with the DeFi application logic of interest-bearing assets based on ETH-based LSD. Mapping interest-bearing assets to the chain is just the first step (Staked US Dollar) for RWA. How to combine with DeFi and how to integrate DeFi Lego will become very interesting.
In the case above, we also see the combination of Ondo Finance and Flux Finance, and MatrixDock with T protocol and Curve. The following will list the “Web3 Balance Treasure” product in the TRON ecology – stUSDT, further understanding the application of RWA bringing interest-bearing assets to the chain, and then referring to the Pendle project based on the LSD track to further analogize the possible application scenarios of RWA+DeFi.
4.1 stUSDT – Web3 Balance Treasure
On July 3, 2023, the TRON ecology officially launched the RWA stable pledge product stUSDT and positioned it as the “Web3 version of the Balance Treasure,” allowing users to pledge USDT to obtain real-world RWA income. The pledge certificate stUSDT will also become an important building block in the TRON ecology DeFi Lego world.
Specifically, when users pledge USDT, USDT can be minted into the pledge certificate stUSDT at a ratio of 1:1. stUSDT will anchor real-world assets (such as national debt), and the stUSDT-RWA smart contract will distribute profits to holders through the Rebase mechanism. When designing stUSDT, the design ideas of Lido stETH were considered, so stUSDT is also an encapsulated TRC-20 token, which will further enhance the composability of stUSDT in the TRON ecology, integrate with DeFi Lego, and unleash the infinite possibilities of assets.
Sun Yuchen said in an interview with Foresight News, “stUSDT has strong composability. It can exist in various DeFi lending, yield, and contract protocols, and can also go online in exchanges for users to trade. In the future, stUSDT will become a basic anchor for the entire TRON chain’s $50 billion assets’ income, which is also very important for the entire DeFi Lego.”
4.2 Pendle – Interest Rate Swap Protocol Based on Interest-Bearing Assets
Pendle is an interest-bearing asset-based derivative protocol. With Pendle, users can execute various yield management strategies based on their risk preferences, involving both principal and interest. Since Ethereum switched to POS, the popularity of the ETH liquidity staking derivative (LSD) track has brought Pendle’s TVL to a milestone of $145 million.
Firstly, Pendle defines “Yield-Bearing Tokens” (SY), which refers to any tokens that generate yield, such as stETH obtained by staking ETH on Lido. Then, Pendle splits the Yield-Bearing Tokens (SY) into “Principal Tokens” (PT) and “Yield Tokens” (YT), where P(PT) + P(YT) = P(SY). PT represents the principal portion of the underlying interest-bearing assets, giving users the right to redeem the principal before the expiration date. YT represents the yield generated by the underlying interest-bearing assets, giving users the right to receive the yield before the expiration date.
Subsequently, Pendle AMM (Automated Market Maker) is introduced, setting up trading pairs for Principal Tokens (PT) and Yield Tokens (YT) in the Pendle liquidity pool. Users can formulate trading strategies based on the constant formula X*Y=K, taking into account market conditions. For example, increasing the yield exposure in a bull market and hedging the decrease in yield in a bear market.
As an interest rate derivative protocol, Pendle introduces the TradFi interest rate derivative market (worth over $400 trillion) into DeFi, making it accessible to everyone. By creating an interest rate derivative market in DeFi, Pendle unlocks the full potential of interest rates, allowing users to execute advanced yield strategies, such as: (1) Fixed income (earning fixed income through stETH); (2) Long yield (betting on the increase in stETH yield by purchasing more yield); (3) Earning more yield without additional risk (providing liquidity with stETH).
It is meaningless to overly focus on the definition of RWA. Tokens are vehicles of value, and the value of RWA depends on bringing the rights/value of underlying assets onto the blockchain and its application scenarios.
In the short term, the driving force behind RWA comes more from the unilateral demand of DeFi protocols in the crypto world, such as asset management, investment diversification, and new asset categories. DeFi protocols capture the interest value of underlying assets through RWA projects. Its essence is to establish a U standard, with underlying assets having real yield (Real Yield) as an asset category. This logic is essentially the same as the ETH-based interest-bearing assets in the LSD. Therefore, US Treasury RWA is sought after, and depending on the path to achieve US Treasury yield, it can be divided into (1) Off-Chain to On-Chain path represented by traditional compliant funds, and (2) On-Chain to Off-Chain path dominated by DeFi protocols. However, regulatory compliance still poses significant obstacles in these paths.
The mapping of interest-bearing assets to the chain is just the first step for RWA (such as TRON’s “Web3 Balance Treasure” product – stUSDT). It will be very worthwhile to explore how to graft the composability of DeFi, which is similar to the LSD-Fi track’s Pendle interest rate swap project or stablecoin projects based on LSD.
In the long run, RWA should not be one-sided, such as the current one-sided demand of DeFi for TradFi. The future will be a two-way journey, on the one hand, it can bring real-world assets to the chain, and on the other hand, TradFi can also leverage the various advantages of DeFi to further unleash its potential.