RWA: The Bridge Between the Real World and Blockchain

Introduction

Real assets ( RWA ) tokenization aims to improve liquidity, transparency, and accessibility, allowing more people to access high-value assets. This explanation is common, but not entirely accurate. This article will interpret the concept of RWA from a personal perspective in the current context.

1. Broken Prism

The combination of blockchain and real-world assets can be traced back to Colored Coins on Bitcoin more than a decade ago. By adding metadata to specific Satoshis, it was possible to mark and manage real-world assets on the Bitcoin chain. This was the first attempt of blockchain at non-monetary functions, also initiating the process of intelligence. However, due to the limitations of Bitcoin's scripting, Colored Coins relied on third-party wallets for parsing, which did not achieve complete decentralization.

The emergence of Ethereum has ushered in the era of Turing completeness, with various Blockchain narratives unfolding in turn. However, apart from fiat-backed stablecoins, RWA has remained in a state of much noise but little rain. This is mainly due to several reasons:

1. There is no real US dollar on the Blockchain; stablecoins are essentially "digital bonds" issued by private companies.

2. RWA cannot achieve complete decentralization and must rely on centralized entities and regulation. This contradicts the anarchistic spirit of Blockchain.

3. High complexity of assets. Financial assets are relatively easy to tokenize, while non-financial assets face many challenges, such as the need to rely on IoT systems.

4. Compared to the highly volatile cryptocurrency assets, the yield of real assets is relatively low, lacking participation motivation.

So, why is the blockchain industry starting to pay attention to the RWA narrative again?

2. Policy Promotion

The introduction of a regulatory framework is key to the development of RWA. Recently, places like Hong Kong, Dubai, and Singapore have successively launched regulatory measures related to RWA. However, the current fragmentation of regulations and the risk-averse attitude of traditional financial institutions remain major obstacles.

The following is an overview of the RWA regulatory framework in some regions:

United States: The SEC and CFTC are responsible for regulation, determining securities characteristics based on the Howey Test. KYC/AML is required, and there is a trend of expanding the scope of securities identification.

Hong Kong: The Monetary Authority and the Securities and Futures Commission are responsible for regulation, incorporating security tokens into the Securities and Futures Ordinance. A sandbox program has been launched to test applications such as tokenized bonds.

EU: Led by ESMA, the MiCA regulation will come into effect in 2025. It requires RWA issuers to establish EU entities and undergo audits.

Dubai: DFSA launches a tokenized sandbox allowing the testing of security and derivative tokens. It provides a compliance shortcut and regulatory exemptions.

Singapore: Incorporating security tokens into the Securities and Futures Act, MAS promotes pilot projects through the sandbox.

Under these frameworks, while RWA protocols can exist on public chains, they must be accompanied by compliant blocks. It is difficult for compliance protocols in different regions to interact directly, resulting in an "island" effect.

However, some projects are exploring ways to break through regulatory limitations. Taking Ondo as an example, its Flux Finance protocol allows the use of open tokens like USDC and restricted tokens like OUSG as collateral for lending. By issuing USDY, a bearer instrument, it avoids being classified as a security, achieving interaction with the DeFi world.

The key to the future development of RWA lies in how to achieve interconnection across different jurisdictions and interact with the on-chain world as much as possible.

3. Assets and Earnings

According to data from rwa.xyz, the current total value of RWA assets on the chain is approximately $20.69 billion (excluding stablecoins), mainly including private credit, U.S. government bonds, commodities, real estate, and stock securities.

The RWA protocol is mainly aimed at traditional financial users, especially small and medium-sized enterprises and institutional clients. The advantages of moving these businesses onto the blockchain include:

1. Provide 24/7 instant settlement
2. Break the regional liquidity fragmentation
3. Reduce marginal service costs
4. Groups that traditional finance finds difficult to cover (such as mining companies and small to medium exchanges)
5. Lowering the investment threshold

For the cryptocurrency industry, the success of RWA could bring a trillion-level market. The emergence of RWAFi will provide a more solid asset foundation for DeFi protocols, offering users a more diverse range of asset choices.

In the current context of geopolitical turmoil and uncertain economic prospects, RWA may offer a better low-risk option than simply holding stablecoins. For example:

• Gold has risen by 80% in the past two years.
• The fixed deposit interest rate for the ruble in Russia exceeds 20%.
• Energy assets of sanctioned countries are discounted by more than 40%.
• Short-term U.S. Treasury yield 4%-5%
• High-quality stocks with relatively low valuations in Nasdaq
• Subdivided asset areas such as charging piles, trendy toys, etc.

4. Swordbearer

RWA may become the "sword bearer" in the world of Blockchain in certain areas. Taking NFTs as an example, although they have created well-known IPs such as Bored Ape, the holders have not actually obtained real intellectual property rights.

Taking Bored Ape as an example, its intellectual property belongs to the issuer Yuga Labs LLC. NFT holders only obtain ownership and usage rights of a specific avatar, not the copyright itself. In project development decisions and profit distribution, holders also lack a voice.

In contrast, traditional IP investments typically grant investors more rights, including direct usage rights, profit distribution, and decision-making participation. The introduction of RWA may encourage project parties to better respect community rights and reshape the management model of IP assets.

5. On the Carrier

RWA is expected to reshape the financial landscape by bringing real-world opportunities onto the chain, while also providing new ideas for regulating the Blockchain ecosystem. However, it is currently limited by traditional financial regulatory frameworks, remaining similar to private protocols on public chains, and has not fully realized its potential. In the future, guides or alliances will be needed to break through this barrier.

Assets can release unimaginable value on different carriers. From ancient bronze inscriptions to the Ming Dynasty's fish scale atlases, asset confirmation has driven social development. The ideal form of RWA may be: on a global public ledger, users can invest in various assets across borders at any time, achieving true global financial connectivity.