Discussion on the Potential of RWA: The Next Large-Scale Application Track After Dollar Stablecoins?

Summary

• The high transparency and strong liquidity characteristics of RWA assets make them expected to become the next track for large-scale application in DeFi, following USD stablecoins.

• RWA mainly has three development directions: public chains with a DeFi-like experience without permission, public chains but with whitelist trading characteristics, and trading limited to private chains or consortium chains. The first one has the highest composability and is also the most ideal development direction.

• Currently, DeFi lacks effective ways to retain existing assets or introduce new assets, while traditional finance faces issues such as liquidity, transparency, and transaction costs. Introducing RWA can help address the current problems of both to some extent, promoting the integration of DeFi and traditional finance.

• Similar to the concept of RWA, we can extend it to CWA(Crypto-World Asset), such as Bitcoin ETFs and other tools that allow traditional financial markets to participate in cryptocurrency. The deep-seated demand for both stems from investors' urgent need for segmented products to improve financial efficiency.

• Considering factors such as comprehensive trading costs, holding costs, and compliance requirements, U.S. Treasury ETF assets are the best choice for the large-scale application of early RWA. The main uncertainties faced by the current RWA development come from compliance risks, counterparty risks, and the risk of U.S. Treasury defaults.

• By introducing RWA assets, MakerDAO has currently achieved an adjusted yield of approximately 6.83% and can amplify the DSR to 1.86 times the RWA yield. MakerDAO offers a 5% yield to DAI depositors, slightly higher than the yield of U.S. Treasury ETFs, obtaining considerable income through RWA and distributing the earnings on-chain to DAI depositors.

• As CDP stablecoin project parties gradually imitate MakerDAO by using RWA as the underlying asset, RWA in the CDP stablecoin market is expected to grow significantly with the increase in market share and asset proportion, with a projected scale between 15.96 billion to 21.5 billion dollars.

• With the improvement of compliance regulations, RWA will start from standardized assets and gradually expand to non-standard assets. The combination of RWA and CWA will drive the transformation of blockchain technology from backend to frontend, becoming a key track for the integration of DeFi and traditional finance, and achieving scalable applications.

Overview of RWA

Real World Assets, abbreviated as RWA, refers to traditional assets that are tokenized through blockchain technology, a process that gives these assets a digital form and programmable characteristics. Within this framework, various types of assets, from real estate and infrastructure to artwork and private equity, can be converted into digital tokens. These tokens not only serve as digital symbols of asset value but also contain multidimensional information corresponding to the physical assets, such as asset nature, current status, historical transaction records, and ownership structure. Broadly speaking, the U.S. dollar stablecoins currently in large-scale use are also a form of RWA, which is the tokenization of the dollar. This article will gradually explain how RWA can become the next track for large-scale application after U.S. dollar stablecoins.

RWA assets, with their unique multi-dimensional advantages, possess the potential for large-scale application within the blockchain ecosystem. Their high asset correlation and trading transparency can establish investor trust, while enhanced liquidity and cost efficiency vigorously drive market activity and diversity. The introduction of smart contracts further improves operational efficiency while simplifying compliance and auditing processes. These core characteristics collectively pave the way for RWA to become the next large-scale application track following the US dollar stablecoin, indicating its vast prospects in the blockchain and even the entire financial sector. Of course, RWA assets come in various types; which assets will achieve large-scale application on-chain first? What are the risks or challenges of different assets being tokenized?

Overall, the main tokenization markets that are currently easier to realize and have begun to take shape are the fixed income assets and rare metals assets. Although the market capitalization of the gold tokenization market has exceeded 1 billion dollars (, mainly represented by projects like $PAXG and $XAUT ), considering the current pain points and demands of DeFi, which seek standardized assets that can bring real yield to the chain, fixed income assets such as US Treasuries and US Treasury ETFs are currently a more feasible and efficient way for the development of RWA.

The three main development directions of RWA:

1. Public Chain and Permissionless Experience

The first direction emphasizes achieving permissionless transactions for assets on public chains as much as possible, in order to provide a user experience close to DeFi. In this model, real-world assets are tokenized and freely traded on public chains without the need for centralized approval or permission, and asset transfers are not subject to any restrictions. This approach maximizes asset liquidity and market participation while also reducing transaction costs. However, this DeFi-like experience also brings a series of regulatory and compliance challenges, including but not limited to anti-money laundering ( AML ) and KYC issues. Therefore, while this direction has obvious advantages, it also requires addressing corresponding risks and compliance issues.

2. Public Chain and Regulatory Whitelist

The second direction is a compromise solution, where assets may be traded on public chains but could be subject to some form of regulation or have certain thresholds, such as restricting participants through an address whitelist mechanism. In this case, only addresses that have been verified and added to the whitelist can participate in RWA trading. This approach provides a certain degree of liquidity and transparency while allowing regulators to conduct more effective oversight and compliance checks. Thus, it finds a balance between permissionless and fully regulated models.

3. Private Chains/Consortium Chains and Complex KYC Processes

The third direction is to conduct RWA transactions on private chains or consortium chains, which usually involves complex KYC processes and stricter regulatory controllability, and currently there is basically no asset composability. In this model, validating nodes are typically government-verified institutions with certain thresholds, ensuring that the entire system operates in a highly compliant and controllable environment. Although this approach may limit asset liquidity and market participation, it provides the highest level of regulatory compliance and data security. This is a model that many governments and traditional financial institutions prefer to adopt.

Why do we need RWA?

( DeFi perspective:

From the DeFi TVL data, it can be seen that since the UST depegging in May 2022 triggered market panic and large-scale selling, the TVL of the DeFi sector has been on a downward trend. Currently, it is difficult for projects and narratives to attract off-chain funds, and new narrative structures and participants need to be introduced. Drawing on the characteristics of RWA mentioned above, bringing real-world assets on-chain to provide real asset value may be the best solution at present.

At the same time, in order to retain on-site funds or attract off-site funds, the high yield that DeFi can provide is the key data pursued by capital. The Ponzi-like yield of $UST has led to distrust among capital providers regarding high yields. RWA can effectively address this issue by adding real yields backed by more realistic world assets to the protocol.

![Discussion on RWA Potential: Is the Next Large-scale Application Track After the US Dollar Stablecoin?])https://img-cdn.gateio.im/webp-social/moments-abb58ebb4abc13997b3ee43cc5af6e3e.webp###

( Traditional financial perspective:

1. Limitations of Strong Regulatory Control and Liquidity Tools

Despite significant advancements in asset segmentation and liquidity within traditional financial systems, such as through Real Estate Investment Trusts ) REITs ### and Exchange-Traded Funds ( ETFs ), these tools remain subject to strict regulations and structural limitations. For example, REITs and ETFs often need to meet a series of complex compliance requirements, which not only increase operational costs but also restrict product innovation and market participation. Therefore, despite these tools enhancing asset liquidity to some extent, there is still considerable room for improvement.

2. Limitations in the Private Lending Sector

In private markets, particularly in the private credit sector, there are various restrictions and unmet demands. These markets are often manual, slow, opaque, and have high operational costs. The capital matching process involves multiple steps, from finding and qualifying investors and investment opportunities, to the initial capital allocation, and then to secondary trading and management of assets. These factors lead to irrational capital allocation and suboptimal customer experience.

3. The "black box" issue of complex financial products

When creating complex financial products, the traditional financial system often faces the "black box" problem, which is the lack of transparency and traceability, making it difficult to penetrate the underlying assets. This opacity not only increases risk but also limits the trust and participation of market participants. By mapping the underlying assets on-chain and packaging them into products on-chain through the composability of smart contracts, regulatory authorities only need to supervise the custody of the underlying assets, allowing the process of creating complex financial products based on simple financial products to remain open and transparent, thus addressing this issue. Regulatory conveniences may enhance the diversity and liquidity of on-chain financial products compared to traditional financial methods.

Overall, the demands and challenges faced by traditional finance mainly focus on improving liquidity, increasing transparency, and reducing costs. RWA provides effective solutions to these issues through tokenization and blockchain technology. Especially in the fields of private markets and complex financial products, RWA is expected to bring unprecedented transparency and efficiency, thus addressing the core bottlenecks of the traditional financial system. By introducing RWA, the traditional financial system is expected to achieve higher capital efficiency, broader market participation, and lower transaction costs, thereby promoting the health and sustainable development of the entire financial ecosystem.

At the same time, it is not difficult to observe that both traditional institutions in traditional finance and official institutions, as well as DeFi project parties, have been deeply involved in the RWA field for many years, seeking opportunities for synergy and integration between the two. Here, it is necessary to mention a recently popular concept - Bitcoin ETF, and thus, referring to the concept of RWA, we can extend a new concept - CWA (Crypto-World Assets).

( RWA and CWA

As Bitcoin gradually becomes a mainstream investment category, major financial institutions are actively applying for the approval of Bitcoin ETFs. This trend not only signifies the gradual integration of crypto assets into the traditional financial system but also provides us with a new perspective to consider these assets: the concept of CWA)Crypto-World Assets###. CWA has many similarities with RWA, mainly in terms of asset standardization and enhanced liquidity. However, unlike RWA, which mainly focuses on the tokenization of real-world assets, CWA is about the standardization of crypto assets and related financial products in the real world. We can see the embryonic forms of both, namely the on-chain issuance of US treasury bonds/US treasury bond ETFs and the approval and issuance trading of Bitcoin ETFs in the real world.

Like RWA, CWA also faces a series of regulatory and compliance issues. However, due to the decentralized and cross-border nature of crypto assets, these issues are more complex in the context of CWA. For example, the approval of Bitcoin ETFs requires addressing multiple regulatory challenges, including but not limited to asset custody, price manipulation, and market oversight. However, the introduction of CWA is expected to further enhance the liquidity and market participation of crypto assets. By combining crypto assets with traditional financial products, CWA can not only attract more traditional investors into the crypto market but also provide existing crypto investors with more investment and risk management tools.

No matter if it is