Importance of RWA for the DeFi ecosystem

DeFi has been one of the most successful use cases of smart contracts, which itself is a turning point of the validity and applicability of the blockchain technology. Currently, the financial ecosystem of DeFi includes lending protocols, DEX, insurance protocols and stablecoin protocols. Despite the diversity, all such use cases have been limited within the DeFi ecosystem, based on endogenous tokens/protocols, with no connections with the real world, which brings 2 important problems: (1) Stability of the DeFi ecosystem and (2) Long-term prospect of the adoption and dominance of DeFi

Stability of the DeFi system:

So far majority of DeFi lending is done on top of collateral that are crypto native, which (1) exhibits high volatility and (2) high correlation with each other.

As a result, to ensure the peg between the stablecoin and USD, DeFi lenders such as Maker has to ask for extremely high collateralization ratio - Maker has $5.5 billion worth of DAI in circulation and is backing it with $9.5 billion worth of collateral, an astonishing 172% collateralization ratio, meaning very low capital utilization rate, thus bringing down efficiency of the entire system.

At the same time, in time of market turbulence (such as the episode we’re experiencing right now), it is also very easy for DeFi lending protocols to collapse due to sudden drop in its collateral value, as all of its collateral exhibits price correlated volatility with each other, making it very difficult for DeFi protocols to expand at scale.

Long Run Prospect of DeFi:

DeFi, though its mechanism extremely delicate and sound theoretically, whether it can survive over the long run and become mainstream (e.g., eventually replacing Trad-Fi) depends on whether it can be applied to human interactions and solve existing painpoints in the real world.

Right now the monetary policy in USD affects DeFi (e.g. when the Fed raises rates, token prices drop), not the other way around. The total outstanding market cap of crypto is $1.6 trillion, fraction of what the US money supply (M1) is, currently at $28 trillion. In order to expand the size of DeFi protocols and rise to dominance, DeFi cannot be an isolated pool of liquidity, but has to be able to access the assets denominated in USD, i.e. real world asset (RWA).

Furthermore, solving real world painpoints is the only way for DeFi to be adopted more broadly and eventually replace Trad-Fi. Imagine you are an apartment owner and would like to borrow against your apartment as collateral. You can’t do this in our current DeFi ecosystem and have to resort to the Trad-Fi system. Our protocol aims to fill this missing piece and speed up the mass adoption of DeFi in the real world.

Current Landscape and Cytus’ Role

As a result, leading DeFi lenders such as Maker has been trying very hard to include more RWA (real world asset) into their system to bring up stability & expand use cases: (1) most RWA exhibits much lower volatility (commercial loans, real estate, government bonds, etc.) (2) its volatility is orthogonal to those assets in DeFi, providing the benefit of diversification (3) the low rates and fast turnaround of liquidity from DeFi is superior to many traditional financing source in Trad-Fi, thus addressing real painpoints of borrowers in the real world

However, it is not easy for DeFi lenders to navigate the world of RWA: (1) every collateral type is fundamentally different (2) much of them are privately placed and opaque and thus it requires domain expertise to onboard high quality projects (3) the legal, logistics, operational aspect is heavy and again industry specific.

Thus, having intermediaries bridging the gap between DeFi sources of financing and high quality assets in Trad-Fi is going to be a main direction of the development of DeFi over the foreseeable future. In the past, the money supply denominated in USD and in stablecoins used to be two completely disjoint pools. Now through the transformation provided by Cytus, they are linked together.

Problems of Existing RWA Protocols

There are a few RWA protocols out there. But their protocol designs see several problems in common which prevents mass adoption among DeFi investors.

The first problem is the low capital efficiency. Due to the nature of RWA investing (e.g. investing in a loan), the investors have to lock up their capital for a specific period of time. For instance, in one of the existing RWA protocols there are different loan pools where a user’s capital is lent to companies. The user can’t withdraw their funds until the expiration of the loan. This is problematic for users because there are so many new opportunities coming up everyday and DeFi investors usually are reluctant to lose the liquidity and bear the huge opportunity costs. The solution we provide will completely change this. With innovative protocol design, DeFi investors will be able to invest into a basket of RWAs without losing any liquidity.

The second problem is the poor liquidity for the RWA backed tokens. For instance, in one of the existing RWA protocols each RWA will be brought on-chain in the format of an NFT; then the NFT is fractionalized to ERC20 tokens which represent a share of the underlying RWA. This is also problematic, because each RWA is very heterogeneous and this process makes it difficult to create depth for the pool of the RWA tokens. Also the RWA usually has very small ticket size, meaning the value of a RWA could be as low as $1M. Using the above method adopted by CitaDAO, there is no way to provide good liquidity for such a RWA. Our protocol solves this problem by creating a basket of RWAs. Instead of creating liquidity for each RWA, our protocol will create liquidity for a portfolio of RWA in the format of algo stablecoins. Due to the nature of algo stablecoins, it is easier to attract liquidity providers which is a huge advantage of Cytus over other RWA protocols.

The third problem is the lack of diversification. In most of the RWA protocols, investing opportunities are presented as one investing pool for one RWA. The DeFi investors have to do the diversification by themselves to reduce the risks. It creates difficulty for investors to invest because they need to spend time assessing the risk & reward and also the correlation between RWAs to create a well diversified, well structured RWA portfolio. In contrast, our protocol provides investors with the opportunity to invest in a portfolio of high-quality RWAs which itself is diversified across the risk-return profile.

Importance of RWA for the DeFi ecosystem

DeFi has been one of the most successful use cases of smart contracts, which itself is a turning point of the validity and applicability of the blockchain technology. Currently, the financial ecosystem of DeFi includes lending protocols, DEX, insurance protocols and stablecoin protocols. Despite the diversity, all such use cases have been limited within the DeFi ecosystem, based on endogenous tokens/protocols, with no connections with the real world, which brings 2 important problems: (1) Stability of the DeFi ecosystem and (2) Long-term prospect of the adoption and dominance of DeFi

Stability of the DeFi system:

So far majority of DeFi lending is done on top of collateral that are crypto native, which (1) exhibits high volatility and (2) high correlation with each other.

As a result, to ensure the peg between the stablecoin and USD, DeFi lenders such as Maker has to ask for extremely high collateralization ratio - Maker has $5.5 billion worth of DAI in circulation and is backing it with $9.5 billion worth of collateral, an astonishing 172% collateralization ratio, meaning very low capital utilization rate, thus bringing down efficiency of the entire system.

At the same time, in time of market turbulence (such as the episode we’re experiencing right now), it is also very easy for DeFi lending protocols to collapse due to sudden drop in its collateral value, as all of its collateral exhibits price correlated volatility with each other, making it very difficult for DeFi protocols to expand at scale.

Long Run Prospect of DeFi:

DeFi, though its mechanism extremely delicate and sound theoretically, whether it can survive over the long run and become mainstream (e.g., eventually replacing Trad-Fi) depends on whether it can be applied to human interactions and solve existing painpoints in the real world.

Right now the monetary policy in USD affects DeFi (e.g. when the Fed raises rates, token prices drop), not the other way around. The total outstanding market cap of crypto is $1.6 trillion, fraction of what the US money supply (M1) is, currently at $28 trillion. In order to expand the size of DeFi protocols and rise to dominance, DeFi cannot be an isolated pool of liquidity, but has to be able to access the assets denominated in USD, i.e. real world asset (RWA).

Furthermore, solving real world painpoints is the only way for DeFi to be adopted more broadly and eventually replace Trad-Fi. Imagine you are an apartment owner and would like to borrow against your apartment as collateral. You can’t do this in our current DeFi ecosystem and have to resort to the Trad-Fi system. Our protocol aims to fill this missing piece and speed up the mass adoption of DeFi in the real world.

Current Landscape and Cytus’ Role

As a result, leading DeFi lenders such as Maker has been trying very hard to include more RWA (real world asset) into their system to bring up stability & expand use cases: (1) most RWA exhibits much lower volatility (commercial loans, real estate, government bonds, etc.) (2) its volatility is orthogonal to those assets in DeFi, providing the benefit of diversification (3) the low rates and fast turnaround of liquidity from DeFi is superior to many traditional financing source in Trad-Fi, thus addressing real painpoints of borrowers in the real world

However, it is not easy for DeFi lenders to navigate the world of RWA: (1) every collateral type is fundamentally different (2) much of them are privately placed and opaque and thus it requires domain expertise to onboard high quality projects (3) the legal, logistics, operational aspect is heavy and again industry specific.

Thus, having intermediaries bridging the gap between DeFi sources of financing and high quality assets in Trad-Fi is going to be a main direction of the development of DeFi over the foreseeable future. In the past, the money supply denominated in USD and in stablecoins used to be two completely disjoint pools. Now through the transformation provided by Cytus, they are linked together.

Problems of Existing RWA Protocols

There are a few RWA protocols out there. But their protocol designs see several problems in common which prevents mass adoption among DeFi investors.

The first problem is the low capital efficiency. Due to the nature of RWA investing (e.g. investing in a loan), the investors have to lock up their capital for a specific period of time. For instance, in one of the existing RWA protocols there are different loan pools where a user’s capital is lent to companies. The user can’t withdraw their funds until the expiration of the loan. This is problematic for users because there are so many new opportunities coming up everyday and DeFi investors usually are reluctant to lose the liquidity and bear the huge opportunity costs. The solution we provide will completely change this. With innovative protocol design, DeFi investors will be able to invest into a basket of RWAs without losing any liquidity.

The second problem is the poor liquidity for the RWA backed tokens. For instance, in one of the existing RWA protocols each RWA will be brought on-chain in the format of an NFT; then the NFT is fractionalized to ERC20 tokens which represent a share of the underlying RWA. This is also problematic, because each RWA is very heterogeneous and this process makes it difficult to create depth for the pool of the RWA tokens. Also the RWA usually has very small ticket size, meaning the value of a RWA could be as low as $1M. Using the above method adopted by CitaDAO, there is no way to provide good liquidity for such a RWA. Our protocol solves this problem by creating a basket of RWAs. Instead of creating liquidity for each RWA, our protocol will create liquidity for a portfolio of RWA in the format of algo stablecoins. Due to the nature of algo stablecoins, it is easier to attract liquidity providers which is a huge advantage of Cytus over other RWA protocols.

The third problem is the lack of diversification. In most of the RWA protocols, investing opportunities are presented as one investing pool for one RWA. The DeFi investors have to do the diversification by themselves to reduce the risks. It creates difficulty for investors to invest because they need to spend time assessing the risk & reward and also the correlation between RWAs to create a well diversified, well structured RWA portfolio. In contrast, our protocol provides investors with the opportunity to invest in a portfolio of high-quality RWAs which itself is diversified across the risk-return profile.