Original Authors: Will Awang, Diane Cheung
Original Source: Web3 XiaoLaw
With the arrival of the 2022 crypto winter, 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 started exploring risk-free returns. At the same time, as the macroeconomic environment changes and US bond yields rise, 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 Assets (RWA) by examining the implementation paths of major RWA projects (Compound Superstate, Franklin Templeton, MakerDAO, Ondo Finance, Matrixdock, Centrifuge) that hold underlying assets.
TL;DR
Being overly fixated on the definition of RWA is not very meaningful. Tokens are the carriers of value, and the value of RWA depends on how the rights/valuations of the underlying assets are brought onto the chain, as well as the 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-standard with real yield assets, which is essentially similar to the logic of LSD establishing ETH as an interest-bearing asset;
Therefore, US bond RWAs have gained popularity. Depending on the different paths to achieve US bond yields, they can be divided into (1) Off-Chain to On-Chain paths represented by traditional compliant funds, and (2) On-Chain to Off-Chain paths led by DeFi protocols, but regulatory compliance still poses significant obstacles;
Making RWAs map interest-bearing assets onto the chain is just the first step, and it is worth exploring how to integrate the composability of DeFi like LEGO blocks, with the potential to further unlock the ceiling of RWA+DeFi;
Long term, RWA should not be one-sided, but rather a two-way flow. On one hand, it can bring real-world assets onto the blockchain, and on the other hand, TradFi can leverage the advantages of DeFi to further unleash its potential;
Future exploration focus: How to enable investors to enjoy both the beta returns from real-world RWA assets and the alpha returns from the crypto market.
(Source: https://blog.isyatirim.com.tr/dijital-dunya-regulasyonlari/)
1. The Geometry of this Round of RWA Narrative
For the current $1 trillion crypto market, investors mainly earn returns based on on-chain activities such as trading, borrowing, staking, derivatives, etc. The market as a whole lacks a stable source of real yield.
Since Ethereum shifted to POS, liquidity staking based on ETH can be considered a native source of real yield in the crypto market, but currently it only occupies a small share of the overall crypto market. To truly break through the bottleneck of the existing market, strong external forces are needed to support it.
Therefore, a new source of real yield is emerging: real world assets (RWA) existing off-chain are being brought to the blockchain through tokenization, which can serve as an important source of real yield for crypto market assets.
The on-chain entry of RWA has an almost transformative impact on the crypto market. RWA can provide sustainable, diverse types of real yield backed by traditional assets. Additionally, RWA can serve as a bridge between decentralized finance systems and traditional financial systems, which means that apart from bringing incremental funds to the crypto market, RWA can also access the massive liquidity, broad market opportunities, and significant value capture of traditional financial markets.
According to research by BCG and ADDX, the tokenization of non-liquid assets globally will create a market worth $16 trillion (which will be close to 10% of the global GDP in 2030). Citigroup's RWA report, "Money, Tokens, and Games," also predicts a market worth $10 trillion will be tokenized by 2023.
(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. It is the process of converting the value of rights in tangible or intangible assets (which can be ownership, income rights, usage rights, etc.) into digital tokens. This enables storage and transfer of assets without the need for central intermediaries, with the value mapped to the blockchain for transactional circulation.
RWA can represent various types of traditional assets (including tangible and intangible assets), such as commercial real estate, bonds, cars, and almost any value-storing asset that can be tokenized. Market participants have been exploring the integration of RWA onto the blockchain since the early days of blockchain technology. Traditional TradFi institutions such as Goldman Sachs, Hamilton Lane, Siemens, and KKR are actively working on bringing their real world assets onto the chain. In addition, native crypto DeFi protocols like MakerDAO and Aave are also making adjustments and actively embracing RWA.
Compared to the monotonous narrative of token financing in ICO/STO in 2018, the narrative of RWA today covers a wider range: not limited to the primary market in traditional finance, almost any value-marked asset can be tokenized. In addition, the DeFi protocols and numerous infrastructures that did not exist in 2018 can also open up endless possibilities for RWA today.
1.2 Drivers behind RWA
Currently, the main driving force behind bringing real-world assets into the crypto world is that real-world assets, especially US bonds, can provide a stable risk-free return for the crypto market in the macro background.
Therefore, the implementation paths of most mature RWA projects are currently based on the one-sided demand for real-world assets by DeFi protocols, such as
Demand for asset management: Native on-chain earnings mainly come from staking, trading, and lending activities. However, in the background of the crypto winter, the sluggish on-chain activities directly lead to the decline in on-chain yield rates. Against the backdrop of higher yield rates for US bonds, established DeFi protocols are gradually introducing US bond RWAs. For example, through recent proposals, MakerDAO is gradually converting stablecoin assets in its treasury (with no or low returns) into interest-bearing US bond RWAs (4%-5% risk-free returns). This can ensure the security of treasury assets while obtaining stable returns;
Portfolio diversification: In the event of extreme market conditions, the high volatility and high correlation of native crypto assets make it prone to misallocation and liquidation of assets. Introducing low-correlation and stable RWA assets related to on-chain native crypto assets can effectively mitigate such issues. Investors can achieve diversification and build more robust and effective investment portfolios;
Introduction of new asset classes: Building on top of RWAs, integrating DeFi Lego can further unleash 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 implementation of this demand is mainly based on the one-way movement of the crypto market, and 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, such as the current one-sided demand for TradFi by DeFi. The future will be a two-way movement, where on the one hand, real-world assets can be brought to the blockchain, and on the other hand, the real world can also leverage blockchain technology and advantages to further unleash potential.
1.3 How to capture the value of underlying assets in RWA
Depending on the different underlying assets of RWA, there can be various classifications.
In the short term, we narrowly divide RWA into "interest-bearing RWA" and "non-interest-bearing RWA". Because we believe that most RWA projects on the market today are more focused on capturing the interest value of underlying assets, such as the yield of interest-bearing assets such as US Treasury bonds, government securities, corporate bonds, and REITs.
The essence of interest-bearing RWA is to establish a U standard and create RWA assets with real yields from underlying assets, which is consistent with the logic of ETH-based interest-bearing assets in the LSD system. Although the yield of RWA assets is not high, they can be further combined in the DeFi LEGO.
Non-interest-bearing RWA, on the other hand, is more suitable for capturing the intrinsic value of underlying assets themselves, such as gold, oil, collectibles, and the RWA value of South American football players.
II. On-chain Path for RWA Assets
According to Binance Research, the implementation process of RWA is divided into three phases: (1) Off-chain formalization; (2) Information bridging; (3) RWA protocol demand and supply.
2.1 Off-chain Formalization
In order to bring real-world assets into DeFi, it is necessary to first package the assets off-chain to digitize, financialize, and comply with regulations, in order to clarify the value, ownership, and legal protection of the assets.
In this step, it is important to clarify the following: (1) Representation of Economic Value: The economic value of an asset can be represented by its fair market value in traditional financial markets, recent performance data, physical condition, or any other economic indicators. (2) Ownership and Legitimacy of Title: Ownership of the asset can be determined through deeds, mortgages, bills of exchange, or any other form. (3) Legal Backing: In cases involving changes in asset ownership or rights, 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, the information regarding the economic value, ownership, and rights of the assets is digitized and brought onto the blockchain, stored in the distributed ledger of the blockchain.
In this step, it will involve: (1) Tokenization: After the information packaged in the off-chain stage is digitized, it is put on the chain and represented by metadata in digital tokens. These metadata can be accessed through the blockchain, and the economic value, ownership, and rights of the assets are completely open and transparent. Different asset categories can correspond to different DeFi protocol standards. (2) Regulatory Technology/Securitization: For assets that need to be regulated or considered as securities, they can be included in DeFi in a legal and compliant manner. These regulations include but are not limited to licensing for the issuance of security tokens, KYC/AML/CTF, compliance requirements for listing on exchanges, etc. (3) Oracle: For RWAs, it is necessary to refer to external data from the real world to accurately depict the value of the assets. For example, for stock RWAs, access to performance data of the stock is needed. However, because the blockchain cannot directly centralize external data onto the blockchain, data connectors such as Chainlink are needed to link on-chain data with real-world information, providing data on the off-chain asset value to DeFi protocols.
2.3 RWA Protocol Demand and Supply
The DeFi protocols that focus 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 that specialize in studying RWAs can serve as the starting point for RWA formation and provide markets for the final products of RWAs.
2.4 Specific Implementation Paths of RWAs
(Source: https://forum.makerdao.com/t/poll-rwa-working-group-covenant-structure/4836)
In the specific implementation path of anchoring RWA assets, a similar approach to asset securitization can be taken, by establishing a Special Purpose Vehicle (SPV) to support underlying assets and serve as a control, management, and risk isolation mechanism. At the same time, BCG and ADDX's research reports also provide a roadmap for various ecosystem participants (asset initiators, issuance platforms, asset custody, fund settlement, etc.) from the perspective of the RWA asset initiators:
III. Current Implementation Path for US Treasury RWA
We have clarified that RWA represents the tokenization of real-world assets off-chain. It is crucial to understand how the ownership rights and asset values in the real world are converted, or how RWA is explained as a legitimate representation of real-world assets, and how real-world assets are mapped onto the chain.
By examining the most mature RWA project - US Treasury bonds, we find two paths: (1) Off-Chain to On-Chain path represented by traditional compliant funds, and (2) On-Chain to Off-Chain path dominated 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 the T protocol which belongs to a permissionless protocol, all other projects have strict KYC/AML verification processes in place for compliance reasons. 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 Superstate, founded by the creator of Compound
(Source: https://www.axios.com/2023/06/28/defi-robert-leshne-rmutual-fund)
Compound founder Robert Leshner is targeting the current hot topic of RWA narrative. 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 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 that invests in short-term government bonds, including U.S. Treasury bonds and government agency securities. However, the documents make it very 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 U.S. Treasury bonds, and use the blockchain (Ethereum) to handle the fund's transactions and records, tracking the ownership shares of the fund. Superstate states that investors must be whitelisted and it will not whitelist smart contracts such as Uniswap or Compound, so such DeFi applications cannot use it.
In a statement to Blockworks, Superstate said, "We are creating an investment product registered with the SEC that will allow investors to obtain ownership certificates of traditional financial products, just like holding stablecoins and other crypto assets."
3.1.2 Franklin OnChain U.S. Government Money Fund
(Source: rwa.xyz & Stellar expert)
In Superstate, we saw that Franklin Templeton launched the Franklin OnChain U.S. Government Money Fund (FOBXX) in 2021. This fund is the first SEC-approved fund in the United States 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 unit of the fund is represented by a BENJI token, we have not yet seen the interaction of BENJI tokens with DeFi protocols on the blockchain. Investors need to undergo compliance verification through Franklin Templeton's app or website to enter their whitelist.
3.1.3 Tokenization of Hamilton Lane's Private Equity 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 its partnership with Securitize, these tokenized partial shares will form a feeder fund on the platform and be managed by Securitize Capital.
The CEO of Securitize stated, "Hamilton Lane offers some of the best-performing private market products, but historically they have been limited to institutional investors. Tokenization allows 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, tokenized funds provide an "affordable" way to participate in top-tier private equity funds, with the minimum investment threshold reduced from an average of $5 million to just $20,000. However, individual investors still need to undergo qualified investor verification on the Securitize platform, so there are still certain barriers.
From the perspective of private equity funds, tokenized funds offer the obvious advantage of real-time liquidity (compared to the 7-10 year lock-up period of traditional private equity funds) and can achieve LP diversification and flexible capital allocation.
3.1.4 Summary
Off-Chain to On-Chain is mostly an innovative exploration conducted by traditional finance on the basis of compliance. Considering the strong regulation in traditional finance, the current exploration only applies blockchain technology to traditional financial products themselves, using blockchain as the accounting method, rather than directly accessing DeFi for interaction, without expanding externally. However, the ownership certificate of its fund shares (a record of your ownership of this mutual fund) is essentially no different from tokens. Just think about the difference between owning a certificate and holding a stablecoin.
We look forward to Compound founder Robert Leshner providing more value exploration for the Off-Chain to On-Chain path 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) that aims to govern the Maker protocol running on Ethereum. The protocol provides the first decentralized stable cryptocurrency DAI (which can be simply understood as USD on Ethereum) and a range of derivative financial systems. Since its launch in 2017, DAI has always been pegged to the US dollar.
Due to the high volatility of the cryptocurrency market, relying on a single collateral asset may result in significant liquidation. Therefore, MakerDAO has been actively exploring ways to diversify collateral, and RWA is an important component. After years of trial and error, MakerDAO has implemented two mature paths for RWA: (1) directly purchasing and holding assets in the form of DAO + trusts (MIP 65 proposal); (2) directly purchasing tokenized RWA assets (through decentralized lending platform Centrifuge), including current holdings such as New Silver (real estate loans) and BlockTower (structured loans) in Valut.
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.
（Source: https://makerburn.com/#/rundown）
Let's take a look at MIP 65: Monetalis Clydesdale: Liquid Bond Strategy Execution proposal. The proposal was put forward by Allan Pedersen, the founder of Monetalis, in January 2022. The goal is to invest a portion of the stablecoin assets in MakerDAO's treasury into real-world, highly liquid, low-risk bond assets managed by Monetalis through a trust. The proposal was subsequently approved by the MakerDAO community through a vote and was implemented in October 2022. The initial debt ceiling was set at $500 million. In May 2023, a subsequent proposal will raise the ceiling to $1.25 billion.
According to the MIP 65 proposal, MakerDAO delegates Monetalis as the project's executor through a vote, responsible for designing the overall legal framework and providing periodic reports to MakerDAO. Monetalis has designed a unified legal framework based on the British Virgin Islands (BVI) to bridge on-chain governance (MakerDAO), off-chain governance (trust company's authorized resolutions), and off-chain execution (off-chain transactions).
First, MakerDAO and Monetalis authorize a Transaction Administrator to review all transactions and ensure their execution aligns with MakerDAO proposals. Second, MakerDAO's on-chain proposals serve as a precondition for off-chain entities to make resolutions, excluding any matters unrelated to MakerDAO resolutions from off-chain entity authorization. Lastly, BVI law's flexibility helps ensure the alignment of on-chain governance and off-chain governance and execution to a certain extent. Through complex legal arrangements and trust authorization, MakerDAO and Monetalis' arrangement is as follows:
(Source: DigiFT Research, MakerDAO MIP 65)
In the process of consolidating the on-chain governance and off-chain governance and execution of MakerDAO and Monetalis, the procurement of the US Treasury Bond ETF will be carried out by James Assets (PTC) Limited, a trust company based in BVI. The procurement targets include BlackRock's iShares US$ 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 MIP 65)
In the overall process, James Assets (PTC) Limited, as the external entity of MakerDAO and Monetalis, handles each transaction with on-chain authorization and off-chain authorization. Among them, Coinbase serves as the exchange institution for fiat currency deposits and withdrawals, and Sygnum Bank provides trading and custody of trust assets, as well as a separate account for the operation expenses of the trust (with initial expenses reaching $950,000).
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, providing more investment opportunities and liquidity through tokenization, fractionalization, and securitization. Centrifuge is one of the early DeFi protocols in the field of Real-World Assets (RWA), and it is also a technology 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 sector, with its own Centrifuge Chain and the 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 assets NFTs from the same type of borrowers are pooled together to form an asset pool, where liquidity providers fund the pool instead of individual borrowers; (3) The asset pool is divided into two tranches, Junior and Senior, through a structured way (corresponding to different ERC 20 tokens), with Junior Tranche investors obtaining higher returns and assuming more risks, while Senior Tranche investors obtaining lower returns and assuming lower risks, catering to the needs of different risk preferences.
Centrifuge has made considerable efforts in compliance based on the legal structure of asset securitization in the United States (under Rule 506 (b) (c) of the U.S. Securities Law). For example, Centrifuge partners with Securitize to assist investors in completing KYC/AML and other compliance verifications; Every asset originator on Centrifuge needs to establish an independent legal entity corresponding to the fund pool, namely Special Purpose Vehicle (SPV), which acts as a 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 structure, risks, terms, etc., and then use DAI to purchase DROP or TIN tokens corresponding to different tranches.
(Source: https://docs.centrifuge.io/learn/legal-offering/)
MakerDAO issued the first RWA 002 Vault in Centrifuge in February 2021 with New Silver. Since then, the relatively larger-scale BlockTower S 4 (RWA 013-A) and BlockTower S 3 (RWA 012-A) are implemented based on the aforementioned RWA path, with BlockTower S 4 primarily consisting of ABS products for consumer loans.
Afterwards, the MIP 6 proposal improved the implementation path of Centrifuge's RWA, 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 notable changes are:
1. The asset issuer entrusts a third party as a Trustee to act on behalf of the DAO and investors. The Trustee will protect the interests of the DAO and ensure the independence of the assets. In extreme cases of default, the Trustee can also handle and distribute the assets, removing control from the issuer or liquidator;
2. The concept of LockBox is introduced. A LockBox means an isolated account that safeguards the assets outside the control of the asset issuer and SPV. This structure signifies 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 and ensure that the correct party (such as 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 issuer's funds loss or misuse.
(Source: https://forum.makerdao.com/t/progress-update-on-the-legal-structure-for-centrifuge-rwa-vaults/13307)
In the improved RWA implementation path mentioned above, firstly, the underlying assets are sold to the SPV, and at the same time, the SPV enters into an agreement with the Trustee to pledge the underlying assets. Then, the SPV issues DROP and TIN tokens to MakerDAO based on the Tinlake protocol. When there are cash flow payments from the underlying assets, according to the agreement, the funds are directly paid to an isolated account called LockBox that is separate from the SPV and MakerDAO. Once LockBox receives the funds, the Trustee initiates instructions to pay DROP and TIN to MakerDAO, which is then completed through the Tinlake protocol.
It should be noted that MakerDAO and the SPV have no opportunity to access DAI or USD cash flows because all cash flows are processed through LockBox and the Tinlake protocol. The only role of MakerDAO and the 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, using this structure should make it easier to onboard traditional financial industry participants into DeFi, thereby expanding the types and quantities of real-world assets available for Maker to use and reducing the volatility of DAI.
3.2.3 Exemption Path of Ondo Finance and Flux Finance (DeFi Lending Protocol)
(Source: https://defillama.com/protocol/ondo-finance)
Ondo Finance launched tokenized funds in January 2023, dedicated to providing institutional investment opportunities and services for on-chain professional investors. It brings risk-free/low-risk interest rate funds to the chain, allowing holders of stablecoins to invest in government bonds and US Treasury bonds on-chain. At the same time, Ondo Finance collaborates with DeFi protocol Flux Finance on the backend to provide on-chain stablecoin lending services for OUSG token holders.
According to DeFiLlama data, as of August 1st, Ondo Finance has a TVL (Total Value Locked) of $162 million, and Flux Finance, the lending protocol, has a TVL of $42.78 million with borrowing amount reaching $28.02 billion.
Ondo Finance currently offers 4 tokenized fund products: (1) US Money Market Fund (OMMF); (2) US Treasury Bonds (OUSG); (3) Short-Term Bonds (OSTB); (4) High-Yield Bonds (OHYG). Among them, OUSG is the most popular fund among investors, with the underlying assets held by BlackRock iShares Short Treasury Bond ETF. OUSG is pegged to the stablecoin USDC, and investors can use OUSG tokens obtained from investing in the OUSG fund as collateral to borrow stablecoins such as USDC and DAI through the decentralized lending protocol Flux Finance developed by Ondo Finance.
(Source: https://ondo.finance/)
For regulatory compliance reasons, Ondo Finance has implemented strict whitelisting measures for investors, only allowing investments from Qualified Purchasers. The SEC defines Qualified Purchasers as individuals or entities with at least $5 million in investments. If a fund only has Qualified Purchasers, it can be exempted from registering as an investment company with the US SEC under the Investment Company Act of 1940.
Investors need to go through Ondo Finance's official KYC and AML verification process before signing the subscription documents. Qualified investors can invest stablecoins into Ondo Finance's OUSG fund, conduct fiat deposits and withdrawals through Coinbase Custody, and execute trades of US Treasury ETFs through the compliant broker Clear Street.
It is important to note that Qualified Purchasers and Accredited Investors are not the same concept. The latter only requires an annual income of over $200,000 or a net worth exceeding $1 million, excluding their primary residence.
3.2.4 Matrixdock and T protocol (permissionless on-chain US Treasury Bonds)
Matricdock is a bond platform launched by Matrixport, a Singapore-based asset management company. Short-term Treasury Bill Token (STBT) is a product launched by Matrixdock based on U.S. Treasury bonds. Only qualified investors who have undergone KYC can invest in Matrixdock's products. Investors deposit stablecoins and mint STBT through whitelisted addresses. The underlying assets of STBT are 6-month U.S. Treasury bonds and repurchase agreements collateralized by U.S. Treasury bonds. STBT can only be transferred between whitelisted users, including in the Curve pool.
(Source: https://www.matrixdock.com/stbt/home)
The implementation path of STBT is as follows: (1) Investors deposit stablecoins into the STBT issuer, and the STBT issuer mints 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 the qualified third-party custodian purchases short-term bonds that will expire within six months through traditional financial institutions' U.S. bond trading accounts or invests in the overnight repo market of the Federal Reserve.
The STBT issuer is established by Matrixport as an SPV, and the SPV pledges the held U.S. bonds and cash assets to the STBT holders. The STBT holders have the first priority claim on the physical asset pool.
(Source: https://www.tprotocol.io/)
T protocol was launched in March 2023. The underlying asset of its TBT token is MatrixDock's STBT. T protocol removes the whitelist restrictions of STBT through token wrapping, enabling permissionless tokenization of U.S. bonds. TBT uses a rebase mechanism to anchor its price to 1 USD and can be traded on Curve.
TBT achieves the requirements of the STBT whitelist by accumulating stablecoin assets from investors and purchasing STBT from partner MatrixDock. TBT indirectly enables the permissionless acquisition of US Treasury RWA assets.
3.2.5 Summary
In the case of MakerDAO, for the purpose of asset management, a portion of its stablecoin assets in the treasury needs to be converted into RWA assets. In terms of implementation, compared to the large-scale US Treasury procurement path through Monetalis' trust legal framework, the RWA asset pools adopted by MakerDAO from Centrifuge, including the largest BlockTower S 4, have relatively small sizes, just reaching hundreds of millions of US dollars. The advantage of Centrifuge's RWA solution lies in its simple process, without requiring MakerDAO to construct complex legal frameworks.
Matrixdock's RWA implementation path is similar to 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-chain, Ondo Finance can improve liquidity by linking Flux Finance's DeFi lending protocol to enable OUSG borrowing, while Matrixdock can achieve permissionless circulation of US Treasury RWA through the T protocol.
IV. The Collision of RWA and DeFi Lego
We believe that the subsequent application logic of RWA interest-bearing assets based on a U standard is consistent with the DeFi application logic of LSD interest-bearing assets based on ETH. Mapping interest-bearing assets of RWA onto the chain is just the first step (Staked US Dollar). How to combine it with DeFi, and how to graft DeFi Lego will become very interesting.
In the above cases, we also see the combination of Ondo Finance and Flux Finance, and MatrixDock with T protocol and Curve. The following will list the TRON ecosystem's "Web3 Balance" product - stUSDT, to further understand the application of bringing interest-bearing assets of RWA onto the chain, and then draw analogies with the Pendle project based on the LSD track to further explore possible application scenarios of RWA+DeFi.
4.1 stUSDT - Web3 Balance
On July 3, 2023, the TRON ecosystem officially launched the RWA stable collateral product stUSDT and positioned it as "Web3 Balance," allowing users to pledge USDT to obtain real-world RWA returns. The pledging certificate stUSDT will also become an important building block in the DeFi Lego world built on the TRON ecosystem.
Specifically, when users pledge USDT, USDT can be minted 1:1 to create a pledge certificate called stUSDT. stUSDT is pegged to real-world assets such as government bonds, and the stUSDT-RWA smart contract distributes profits to holders through a Rebase mechanism. When designing stUSDT, it referred to the design concept of Lido stETH, so stUSDT is also a wrapped TRC-20 token, which will further enhance the composability of stUSDT in the TRON ecosystem, combining with DeFi Lego to unleash the infinite possibilities of assets.
Sun Yuchen said in an interview with Foresight News: "stUSDT has very strong composability, it can exist in various DeFi lending, yield, and contract protocols, and can also be listed on exchanges for users to trade. In the future, stUSDT will become an anchoring asset for the basic income of the entire TRON chain with 50 billion US dollars in assets, which is also very important for the entire DeFi Lego."
(Source: https://support.justlend.org/hc/en-us/articles/20134645757337)
4.2 Pendle - an interest-bearing asset-based interest swap protocol
(Source: https://www.pendle.finance/)
Pendle is an interest-bearing asset-based interest derivative protocol. Through Pendle, users can execute various capital and interest-based yield management strategies based on their risk preferences. Since Ethereum switched to POS, the frenzy of ETH liquidity staking derivatives (LSD) has brought Pendle's TVL to the milestone of $145 million.
First, Pendle defines "Yield-Bearing Tokens" (SY), which refers to any token that can generate income, 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), that is, P(PT) + P(YT) = P(SY). PT represents the principal portion of the underlying yield asset, giving users the right to redeem the principal before the expiration date, while YT represents the income generated by the underlying yield asset, giving users the right to receive income before the expiration date.
(Source: https://docs.pendle.finance/ProtocolMechanics/YieldTokenization/Minting)
Subsequently, Pendle AMM (Automated Market Maker) appeared and set up trading pairs for Principal Tokens (PT) / Yield Tokens (YT) in the Pendle liquidity pool. Users can formulate trading strategies based on market conditions using the constant formula X * Y = K, such as increasing the yield exposure during a bull market and hedging the reduction in yield during a bear market.
As a protocol for interest rate derivatives, Pendle brings the TradFi interest rate derivatives market (worth over $400 trillion) into DeFi, making it accessible to everyone. By creating an interest rate derivatives 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) bullish yield (betting on the increase in stETH yield by buying more yield); (3) earning more income without additional risk (providing liquidity with stETH).
5. Conclusion
It is meaningless to excessively fixate on the definition of RWA. Tokens are the carriers of value, and the geometric value of RWA depends on bringing the rights/values of the underlying assets to the chain 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, diversified investments, and new asset categories. DeFi protocols capture the interest-bearing value of underlying assets through RWA projects, which essentially establish a U-based asset category with real yield. The logic is similar to LSD establishing a yield asset based on ETH. Therefore, US Treasury RWA is sought after and can be divided into two paths based on the different ways to achieve US Treasury yield: (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 both paths.
Mapping interest-bearing assets onto the chain is just the first step for RWA (e.g., TRON's "Web3 Balance Treasure" product - stUSDT). It is worth exploring how to integrate the composability of DeFi, which could further unlock the potential of RWA+DeFi. This can be compared to Pendle, a yield swap project in the LSD-Fi track, or stablecoin projects based on LSD.
In the long term, RWA should not be one-sided, as seen in the current unilateral demand of DeFi for TradFi. The future will be a two-way journey, where real-world assets can be brought onto the chain, and TradFi can leverage the various advantages of DeFi to further unleash its potential.
