Original - Odaily
Author - Fan Jiabao
A brief introduction to RWA
RWA, the abbreviation of Real World Assets, means real world assets. Unlike virtual assets on blockchains such as Bitcoin and Ethereum, RWA is the cornerstone of real assets in the DeFi track. The recently popular RWA chaining or RWA tokenization is to use technical means to put real-world assets (such as real estate, vehicles, treasury bonds) on the chain, and establish a connection between blockchain assets and real-world assets, thereby Complete the tokenization of real assets.
For example, the most well-known RWA tokenization projects currently are USDT and USDC. The formation principles of the two are the same: the project company reserves US dollars, then mints the corresponding amount of USDT/USDC, and tokenizes the US dollars into stable coins, thus achieving the purpose of US dollar tokenization.
RWA-related projects have established a connection between blockchain and the real world. For blockchain, the emergence of RWA has enabled a number of tokens and growth to have real assets as underlying support, increasing the stability of the DeFi system. For traditional finance, RWA projects have replaced traditional financial intermediaries to a certain extent, increasing the circulation channels of assets, thereby increasing their liquidity and reducing asset circulation costs.
Overview of stable currency projects, data source: RWA.xyz
Legal framework for RWA
Since the DAO on the chain cannot directly serve as a legal subject, it is often inconvenient to sign agreements and liquidate for compensation. Therefore, out of compliance considerations, DAO established an off-chain foundation as a legal entity to manage the RWA project. This combines the real world and the on-chain world.
In addition, many projects also use SPVs, or special purpose entities. This is an independent legal person specially established for the corresponding fund pool of the project, which plays a role in isolating the risk of bankruptcy.
An introduction to the different RWA circuits and the legal issues involved
RWA projects can be divided into three types:
The first is to put non-securities real assets on the chain.Such as real estate, commodities, cars, art, etc. This method only introduces ordinary real assets into collaterals and increases the types of collaterals, thereby achieving a mixed and diverse mix of underlying assets in the blockchain and ensuring the stability of the DeFi system.
In this case, the mortgagor still possesses the assets, but the tokens after the assets are uploaded to the chain are pledged on the chain and are not actually possessed or controlled by the mortgagor. soIn a legal sense, there is a contradiction in possession rights - the token as a certificate of ownership is inconsistent with the controlling party of the real asset.
In other words, since the creditors in the RWA project cannot directly control the real assets off the chain and can only control the tokens on the chain as certificates, there will be a situation like this - from the perspective of the control rights of the tokens, the two parties constitute a pledge relationship; In terms of control of real assets, the relationship between the two parties is only a mortgage. This also directly affects the attribution and subsequent execution of the interest on the collateral.
And, the situation becomes even more complicated when the mortgage is real property and needs to be registered to declare the mortgage. How the project party can verify the authenticity of the mortgage and whether it can quickly complete the registration as a mortgagee are all issues that need to be clarified urgently.
Furthermore, by law, assets in the real world can be multi-hypothecated. In this way, it is possible for the same real asset to correspond to multiple tokens. However, these tokens can generate income and can also be used as collateral on the chain again, soSpiral nested framework pattern exacerbates risk。
at last,Enforcement after a credit default is also a major pain point. Breach of contract in civil and commercial matters requires the parties to collect evidence and sue themselves, and the project party needs to bear high litigation costs and even the risk of cross-border litigation. Even if the execution is successful, the liquidity of the entitys non-securities assets is usually severely insufficient and cannot be liquidated in a short time to complete the repayment. This makes this type of RWA more difficult to develop.
The second is the introduction of marketable securities or funds as collateral for the RWA.In this case, what investors hold is essentially tokens rather than funds. For example, Ondo Finance provides USDY, OUSG, OSTB, OHYG and other products to correspond to treasury bonds, short-term treasury bonds, corporate bond ETFs and high-yield corporate bonds respectively. The source of profit for these products is the securities that serve as underlying collateral. It is worth mentioning that this structural design allows foreign investors to bypass restrictions and invest in U.S. bonds, U.S. stocks and domestic ETF funds. Therefore, Ondo’s whitelist review system is also strict.
Ondos homepage
In addition, due to the naturally high volatility of the crypto market, every shock in Bitcoin and Ethereum has the potential to cause liquidations and defaults on a large number of DeFi protocols.The introduction of securities such as treasury bonds, large corporate bonds, etc. satisfies the core of DeFi, which is asset growth, while ensuring safety and stability.It also has better supervision and more convenient liquidation processing, so it has become the main track for the development of RWA.
List of tokenized government bond projects, data source: RWA.xyz
In the third case, the project party uses the off-chain foundation as the core to hold securities or funds, attracting investors to purchase tokens as a certificate for holding the fund shares.Such projects issue tokens on the chain and hold corresponding securities or funds off-chain through foundations. The second difference from the previous article is that in this case, the tokens held by investors exist as fund certificates, and investors essentially hold funds. Blockchain is used in this case as an accounting tool and management tool, so this type of project is overall biased towards CeFi. These project parties have also created an operating system that adapts to the local legal framework, so there are fewer legal issues.
Future development of RWA
Regarding the subsequent development of RWA, we believe:
Real assets such as real estate are difficult to be monitored and controlled by on-chain DAOs, and the execution costs after default are high. Therefore, the main development direction of RWA for a considerable period of time in the future should be to put securities-based certificate assets on the chain.
Debt assets on the chain will also be mainly treasury bonds, corporate bonds, and corporate bonds.
The entity asset mortgage business for individuals will mainly serve large customers and reduce default risks and execution costs.
Regardless of the RWA track, since an off-chain foundation has been established as a legal entity, RWA will strictly comply with regulations to prevent legal risks.
Since RWA is essentially a DeFi project, mainly based on the yield development model, it will be combined with more DeFi models in the future, such as re-pledge, etc.
As BlackRock boosts the RWA track, we have reason to believe that RWA will be a hot spot for growth in this bull market and even the long-term crypto market. Projects like Ondo, MakerDAO, and Pendle will also shine.
