Sharing my macro and regulations reviews on public blockchains, permissionless dapps and commodities.
Sharing my macro and regulations reviews on public blockchains, permissionless dapps and commodities.
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The world of finance has never been that prone to disruptions: around 80% of personal transactions and 43% of the banking system rely on COBOL, a 60-year-old programming language. With AI, geostrategic instability, volatility in the commodity market, new financial systems from the BRICS and the adoption of decentralized network technologies, you’d better plan ahead. In this article, I will take you through the disruptive potential of the tokenization of off-chain assets or what many like to call Real World Assets (RWA), and how are they changing the way we own, issue and trade equities and debt-like assets.
“I believe the next generation for markets, the next generation for securities, will be tokenization of securities […] Think about instantaneous settlements of bonds and stocks, no middlemen, we're going to bring down fees even more dramatically”, Larry Fink, BlackRock CEO
Tokenization of RWA such as bonds/loans (debt-like), securities & physical assets [real-estate, luxury goods, art, metals, etc] (equity-like) is opening up new investment opportunities for both institutional and individual investors in Traditional (TradFi) and Decentralized Finance (DeFi) by providing enhanced accessibility, transparency and liquidity.
In se, Tokenized RWA are disruptive because they enable:
Transparent and Secure infrastructure for debt and loans: with smartcontracts, we know exactly what's going on under the curtain (coded privileges and transparent processes);
Fractional Ownership: the fact that we can divide an asset allow a wider range of investor to participate in these markets which increase the potential liquidity and investment opportunities;
Diversify Collateral in DeFi: tokenizing assets from the physical world holds the potential to provide DeFi with increased collateral diversity and revenue stream with fractionalized ownership while decreasing volatility.
Here are some examples of tokenization enhancing current markets:
Credit Markets: emerging markets and DeFi participants gain access to better credit infrastructure – bringing more growth potential from under-collateralized lending and portfolio diversity;
Tokenized Shares: less corporate financing and bringing in innovative blockchain methods like the ICOs and DAOs. They are more accessible for investors and enable smoother processes for entrepreneurs;
Real estate: the 326.5 trillion Market would be more liquid (lesser threshold barriers to own a portion of a house means more liquidity for house-sellers) with lower cost, faster, transparent and automated transactions.
Precious Metals: tokenisation of physical assets increases liquidity and accessibility to investors – though you lose the custodian perks of owning your ingots!
Before the recent narrative shifts and ongoing progressive adoption of digital assets and blockchains by the financial mastodonts, the main brakes to RWA growth were unclear regulations and volatile/unsecure infrastructures. Yet, now that blockchains are not only considered for the speculation over cryptoassets and are getting more reliable, and that various referential institutions are pushing for developing RWA legal and practical frameworks, some jurisdictions and many technology providers focused on RWA are seeing amazing growth with their new disruptive offerings.
Don't trust, verify:
Swiss law regarding "ledger-based securities" (Art 973d et seqq. CO) provides a guide to the tokenization process
Singapore’s Project Guardian to test the feasibility of tokenization across more asset classes
Mastercard and Google Pay come together to facilitate tokenization for card-based payments across India
Siemens issues 60M$ bond with a one-year maturity on Polygon
Goldman Sach’s GS DAP issues 100Meuro bond with 2-year maturity on the Luxembourg Stock Exchange
Tokenized US treasuries reached $640 billion in circulation across 11 protocols
RWA see 600% TVL growth in 2023
RWA offerings can be grouped into two types:
Actively Managed RWA portfolio: a portfolio composed of multiple assets actively managed by a company/smartcontract that rebalances the basket of RWA products (i.e. Maple, OpenEden, MakerDAO, Angle Labs and more)
Tracked Asset portfolio: a portfolio (of one or more asset) that directly represent ownership of an off-chain financial product or a mix of on- and off-chain assets (i.e. Ondo, LoftyAI, Mt Pelerin, Taurus’ TdX, RealT, and more). Both types of offerings have their pros and cons, and we should audit their contracts and business processes to make the best decisions.
I highly recommend learning from RWA.xyz's latest Tokenize Treasuries Research Report where they survey the different mechanisms behind various tokenized US treasuries offering three core principles:
Principal Protection
Yield Maximization
Convenience
Even though they focus on US bills or cash equivalent ETF, their due diligence process can easily be adapted to analyze other types of RWA. In my humble opinion, I am more confident in using Tracked Asset portfolio because they present less risk of mismanagement. No need to add a portfolio manager’s emotions or bureaucracy to smartcontract and custodian risks. Pssst, if you are looking to build your own RWA offerings, keep an eye on the Swiss players who are less prone to regulation hazards (Hello Taurus SA & Mt Pelerin :)).
As you might have understood from my last Alpha drop here, there is no consensus yet on which regulated or unregulated framework will take the lead in the global RWA market. Builder and digital assets investors come to Switzerland because it pioneers regulations and has shown versatility in the financial services industry. But will it require opening an account with a Virtual Asset Providers and using Traditional finance (TradFi) like regulated protocols (aka. “bankchains") or will the crypto natives using decentralized finance (DeFi) protocols with their permissionless and censorship nature have direct access to these off-chain assets?
In the first scenario, RWA would be more efficiently issued and traded but it would leave apart the "unbanked" and the core libertarian vision of crypto.
In the second scenario, RWA would bring predictability, and stable yields to the hyper-volatile and permissionless crypto markets while pushing the KYC/AML requirements to adapt or fight.
Today we see both approaches thriving in this growing market. There are more than 30+ dapps and companies building in the space of RWA and I believe we will see impressive growth in the next months and years.
The TradFi players will be carried by the great institutional player à la BlackRock and commercial banks; they will probably acquire the best tokenized RWA providers / cryptoasset custodians and capitalize on arbitraging and market-making a more liquid market. They are de facto lagging behind the Decentralized actors as they require regulation and infrastructure clarity, yet they are the ones with the greatest access to off-chain capital assets. The DeFi market, with its anons as well as KYC/AML compliant individuals, dreams of risk-free rates and tangible assets in the small (yet growing) volatile crypto realms. It remains to be seen if the dapp and their Real World Partners that tokenized RWA are compliant with the relevant securities and fund management regulations. Uncharted seas, here we go!
Nonetheless, I am confident there will be both non-compliant (scams even, welcome on the internet aye) and compliant actors in the open blockchains world. Cryptography is not only for blockchains and we already have new encryption technologies (Zero-Knowledge proofs) that can integrate KYC/AML compliance while preserving privacy for end-users and the web3 protocols (see the Data Vault from Sismo and learn more on Decentralized ID (DID).
Beyond the AML/KYC, Digital identity obstacles for institutional participation and broader market inclusion there are other risks to consider.
The default risks - faced by real-world assets protocols due to undercollateralized loans - result in solvency issues and the questions are:
Who’s holding the bag with bad debts?
What legal enforcement body will be able to act across jurisdictions?
What legal framework would normalize on-chain transactions as a way to exchange legal titles?
Here’s a case where a consumer electronic firm defaulted on its 2.1$ million stablecoin loan.
The Oracle and Trust Risks: We need to trust legal entities and Oracles (Chainlink Labs [<8$ at the time of writing - NFA & I hold some] being the ultimate boss here) to ensure a safe connection between on-chain and off-chain worlds.
With the fundamentals and challenges around RWA covered above, let's now review the state and history of RWA in crypto as of today.
Off-chain assets in DeFi are an eldorado for many in crypto. As explained above, tokenizing RWA holds the promise of much more revenue streams and market efficiency from collateral diversity, fractionalized ownership, reduced cost and volatility. At first, most of the RWA market share in crypto consisted of real estate projects, tokenized gold with its custodian risk (Paxos’ $PAXG,Tether’s $XAUG, etc.) and private credits protocols (Goldfinch and Centrifuge took the lead from Maple and TrueFi DAO since their 2021 peak).
Private credit protocols aim at giving capital (generally from stablecoin lenders) to borrowers that would finance off-chain services. I highly recommend learning more about this from Centrifuge’s credit market and documentation. Historically, however, according to Messari, most of these loans were used in leverage and arbitrage strategies on-chain…
More recently, along with the adoption of blockchain by TradFi players, we have seen impressive and most importantly constant growth from on-chain state treasuries (mostly US ones). With yields offered as competitive as and with lower risk than stablecoins, tokenized treasuries have led to the rise of a handful of protocols that bring these off-chain yields on-chain. For example, Franklin Templeton’s U.S. Government Money Market Fund is the largest on-chain (on Stellar) fund with almost $300 million invested. Ondo Finance’s $OUSG is a stablecoin that essentially wraps short-term U.S. Treasury bill ETF and passes the interest to its holders. Remember most treasury issuers are professional investors and follow strict regulations that make them hard to use for the average crypto investor.
Many believe tokenized Treasuries will be a key motor to the next public blockchains bull market. I don't have a solid opinion here; I can only confidently state they will continue to play a significant role in stablecoin protocols and collateral usage if they are legal on public blockchains. We can already see this in action as MakerDAO (the issuer of $DAI stablecoin) has recently purchased $700 million worth of U.S. Treasuries to bring its total holdings to $1.2 billion, comprising 49% of Maker's assets. Similarly, Circle has recommitted to using Treasuries to back its $USDC stablecoin, splitting its exposure between short-term Treasuries and repos going forward.
In conclusion, Real World Asset Tokenization is transforming the way we own and invest in assets. It aims to create a more accessible and efficient financial system. However, as with any emerging technology, there are still challenges and risks that need to be addressed.
While the original vision of Crypto is to create a borderless, censorship-resistant global liquidity network and internet that operate above the traditional financial and GAFAM infrastructures, the crypto industry is now being adopted by the traditional financial system to upgrade itself. The game is not over but it is increasingly clearer that the mainstream financial system won’t be fully replaced in the short term, and instead, there is a need for collaboration and integration between the two systems. On one hand, TradFi wants greater liquidity and will enjoy the low entry barrier of public blockchains, and - on the other hand - DeFi will need trustworthy and regulated actors if it wants to enlarge its types of collateral and exposure to off-chain assets. What’s your take?
Thanks for reading,
Marc
If you want to stay ahead in the evolving crypto industry and macro landscapes, be sure to follow me. Happy to answer any questions you may have, and explore these exciting frontiers together.
Other cool content I recommend: Dune dashboard from Steakhouse Financial tracking Tokenized Public Securities on EVM chains along with their report Maker’s RWA exposure report (from Steakhouse)
Sources: https://www.rwa.xyz/blog/tokenized-treasuries-report https://www.coingecko.com/learn/what-are-real-world-assets-exploring-rwa-protocols https://messari.io/report/us-treasuries-fuel-real-world-asset-growth https://www.digitalassetresearch.com/dar-real-world-assets-tokenization-report-may-2023-recap/
Disclaimer: This article is for informational purposes only and constitutes neither investment nor legal advice. Do your own research and share back if you see any inaccuracies in this report (especially in the classification of projects in the two types of RWA offerings).
The world of finance has never been that prone to disruptions: around 80% of personal transactions and 43% of the banking system rely on COBOL, a 60-year-old programming language. With AI, geostrategic instability, volatility in the commodity market, new financial systems from the BRICS and the adoption of decentralized network technologies, you’d better plan ahead. In this article, I will take you through the disruptive potential of the tokenization of off-chain assets or what many like to call Real World Assets (RWA), and how are they changing the way we own, issue and trade equities and debt-like assets.
“I believe the next generation for markets, the next generation for securities, will be tokenization of securities […] Think about instantaneous settlements of bonds and stocks, no middlemen, we're going to bring down fees even more dramatically”, Larry Fink, BlackRock CEO
Tokenization of RWA such as bonds/loans (debt-like), securities & physical assets [real-estate, luxury goods, art, metals, etc] (equity-like) is opening up new investment opportunities for both institutional and individual investors in Traditional (TradFi) and Decentralized Finance (DeFi) by providing enhanced accessibility, transparency and liquidity.
In se, Tokenized RWA are disruptive because they enable:
Transparent and Secure infrastructure for debt and loans: with smartcontracts, we know exactly what's going on under the curtain (coded privileges and transparent processes);
Fractional Ownership: the fact that we can divide an asset allow a wider range of investor to participate in these markets which increase the potential liquidity and investment opportunities;
Diversify Collateral in DeFi: tokenizing assets from the physical world holds the potential to provide DeFi with increased collateral diversity and revenue stream with fractionalized ownership while decreasing volatility.
Here are some examples of tokenization enhancing current markets:
Credit Markets: emerging markets and DeFi participants gain access to better credit infrastructure – bringing more growth potential from under-collateralized lending and portfolio diversity;
Tokenized Shares: less corporate financing and bringing in innovative blockchain methods like the ICOs and DAOs. They are more accessible for investors and enable smoother processes for entrepreneurs;
Real estate: the 326.5 trillion Market would be more liquid (lesser threshold barriers to own a portion of a house means more liquidity for house-sellers) with lower cost, faster, transparent and automated transactions.
Precious Metals: tokenisation of physical assets increases liquidity and accessibility to investors – though you lose the custodian perks of owning your ingots!
Before the recent narrative shifts and ongoing progressive adoption of digital assets and blockchains by the financial mastodonts, the main brakes to RWA growth were unclear regulations and volatile/unsecure infrastructures. Yet, now that blockchains are not only considered for the speculation over cryptoassets and are getting more reliable, and that various referential institutions are pushing for developing RWA legal and practical frameworks, some jurisdictions and many technology providers focused on RWA are seeing amazing growth with their new disruptive offerings.
Don't trust, verify:
Swiss law regarding "ledger-based securities" (Art 973d et seqq. CO) provides a guide to the tokenization process
Singapore’s Project Guardian to test the feasibility of tokenization across more asset classes
Mastercard and Google Pay come together to facilitate tokenization for card-based payments across India
Siemens issues 60M$ bond with a one-year maturity on Polygon
Goldman Sach’s GS DAP issues 100Meuro bond with 2-year maturity on the Luxembourg Stock Exchange
Tokenized US treasuries reached $640 billion in circulation across 11 protocols
RWA see 600% TVL growth in 2023
RWA offerings can be grouped into two types:
Actively Managed RWA portfolio: a portfolio composed of multiple assets actively managed by a company/smartcontract that rebalances the basket of RWA products (i.e. Maple, OpenEden, MakerDAO, Angle Labs and more)
Tracked Asset portfolio: a portfolio (of one or more asset) that directly represent ownership of an off-chain financial product or a mix of on- and off-chain assets (i.e. Ondo, LoftyAI, Mt Pelerin, Taurus’ TdX, RealT, and more). Both types of offerings have their pros and cons, and we should audit their contracts and business processes to make the best decisions.
I highly recommend learning from RWA.xyz's latest Tokenize Treasuries Research Report where they survey the different mechanisms behind various tokenized US treasuries offering three core principles:
Principal Protection
Yield Maximization
Convenience
Even though they focus on US bills or cash equivalent ETF, their due diligence process can easily be adapted to analyze other types of RWA. In my humble opinion, I am more confident in using Tracked Asset portfolio because they present less risk of mismanagement. No need to add a portfolio manager’s emotions or bureaucracy to smartcontract and custodian risks. Pssst, if you are looking to build your own RWA offerings, keep an eye on the Swiss players who are less prone to regulation hazards (Hello Taurus SA & Mt Pelerin :)).
As you might have understood from my last Alpha drop here, there is no consensus yet on which regulated or unregulated framework will take the lead in the global RWA market. Builder and digital assets investors come to Switzerland because it pioneers regulations and has shown versatility in the financial services industry. But will it require opening an account with a Virtual Asset Providers and using Traditional finance (TradFi) like regulated protocols (aka. “bankchains") or will the crypto natives using decentralized finance (DeFi) protocols with their permissionless and censorship nature have direct access to these off-chain assets?
In the first scenario, RWA would be more efficiently issued and traded but it would leave apart the "unbanked" and the core libertarian vision of crypto.
In the second scenario, RWA would bring predictability, and stable yields to the hyper-volatile and permissionless crypto markets while pushing the KYC/AML requirements to adapt or fight.
Today we see both approaches thriving in this growing market. There are more than 30+ dapps and companies building in the space of RWA and I believe we will see impressive growth in the next months and years.
The TradFi players will be carried by the great institutional player à la BlackRock and commercial banks; they will probably acquire the best tokenized RWA providers / cryptoasset custodians and capitalize on arbitraging and market-making a more liquid market. They are de facto lagging behind the Decentralized actors as they require regulation and infrastructure clarity, yet they are the ones with the greatest access to off-chain capital assets. The DeFi market, with its anons as well as KYC/AML compliant individuals, dreams of risk-free rates and tangible assets in the small (yet growing) volatile crypto realms. It remains to be seen if the dapp and their Real World Partners that tokenized RWA are compliant with the relevant securities and fund management regulations. Uncharted seas, here we go!
Nonetheless, I am confident there will be both non-compliant (scams even, welcome on the internet aye) and compliant actors in the open blockchains world. Cryptography is not only for blockchains and we already have new encryption technologies (Zero-Knowledge proofs) that can integrate KYC/AML compliance while preserving privacy for end-users and the web3 protocols (see the Data Vault from Sismo and learn more on Decentralized ID (DID).
Beyond the AML/KYC, Digital identity obstacles for institutional participation and broader market inclusion there are other risks to consider.
The default risks - faced by real-world assets protocols due to undercollateralized loans - result in solvency issues and the questions are:
Who’s holding the bag with bad debts?
What legal enforcement body will be able to act across jurisdictions?
What legal framework would normalize on-chain transactions as a way to exchange legal titles?
Here’s a case where a consumer electronic firm defaulted on its 2.1$ million stablecoin loan.
The Oracle and Trust Risks: We need to trust legal entities and Oracles (Chainlink Labs [<8$ at the time of writing - NFA & I hold some] being the ultimate boss here) to ensure a safe connection between on-chain and off-chain worlds.
With the fundamentals and challenges around RWA covered above, let's now review the state and history of RWA in crypto as of today.
Off-chain assets in DeFi are an eldorado for many in crypto. As explained above, tokenizing RWA holds the promise of much more revenue streams and market efficiency from collateral diversity, fractionalized ownership, reduced cost and volatility. At first, most of the RWA market share in crypto consisted of real estate projects, tokenized gold with its custodian risk (Paxos’ $PAXG,Tether’s $XAUG, etc.) and private credits protocols (Goldfinch and Centrifuge took the lead from Maple and TrueFi DAO since their 2021 peak).
Private credit protocols aim at giving capital (generally from stablecoin lenders) to borrowers that would finance off-chain services. I highly recommend learning more about this from Centrifuge’s credit market and documentation. Historically, however, according to Messari, most of these loans were used in leverage and arbitrage strategies on-chain…
More recently, along with the adoption of blockchain by TradFi players, we have seen impressive and most importantly constant growth from on-chain state treasuries (mostly US ones). With yields offered as competitive as and with lower risk than stablecoins, tokenized treasuries have led to the rise of a handful of protocols that bring these off-chain yields on-chain. For example, Franklin Templeton’s U.S. Government Money Market Fund is the largest on-chain (on Stellar) fund with almost $300 million invested. Ondo Finance’s $OUSG is a stablecoin that essentially wraps short-term U.S. Treasury bill ETF and passes the interest to its holders. Remember most treasury issuers are professional investors and follow strict regulations that make them hard to use for the average crypto investor.
Many believe tokenized Treasuries will be a key motor to the next public blockchains bull market. I don't have a solid opinion here; I can only confidently state they will continue to play a significant role in stablecoin protocols and collateral usage if they are legal on public blockchains. We can already see this in action as MakerDAO (the issuer of $DAI stablecoin) has recently purchased $700 million worth of U.S. Treasuries to bring its total holdings to $1.2 billion, comprising 49% of Maker's assets. Similarly, Circle has recommitted to using Treasuries to back its $USDC stablecoin, splitting its exposure between short-term Treasuries and repos going forward.
In conclusion, Real World Asset Tokenization is transforming the way we own and invest in assets. It aims to create a more accessible and efficient financial system. However, as with any emerging technology, there are still challenges and risks that need to be addressed.
While the original vision of Crypto is to create a borderless, censorship-resistant global liquidity network and internet that operate above the traditional financial and GAFAM infrastructures, the crypto industry is now being adopted by the traditional financial system to upgrade itself. The game is not over but it is increasingly clearer that the mainstream financial system won’t be fully replaced in the short term, and instead, there is a need for collaboration and integration between the two systems. On one hand, TradFi wants greater liquidity and will enjoy the low entry barrier of public blockchains, and - on the other hand - DeFi will need trustworthy and regulated actors if it wants to enlarge its types of collateral and exposure to off-chain assets. What’s your take?
Thanks for reading,
Marc
If you want to stay ahead in the evolving crypto industry and macro landscapes, be sure to follow me. Happy to answer any questions you may have, and explore these exciting frontiers together.
Other cool content I recommend: Dune dashboard from Steakhouse Financial tracking Tokenized Public Securities on EVM chains along with their report Maker’s RWA exposure report (from Steakhouse)
Sources: https://www.rwa.xyz/blog/tokenized-treasuries-report https://www.coingecko.com/learn/what-are-real-world-assets-exploring-rwa-protocols https://messari.io/report/us-treasuries-fuel-real-world-asset-growth https://www.digitalassetresearch.com/dar-real-world-assets-tokenization-report-may-2023-recap/
Disclaimer: This article is for informational purposes only and constitutes neither investment nor legal advice. Do your own research and share back if you see any inaccuracies in this report (especially in the classification of projects in the two types of RWA offerings).
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