RWA: Mapping of Real-World Assets on Blockchain

Introduction

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

1. Early Attempts of RWA

The combination of Blockchain and real-world assets can be traced back to Colored Coins on Bitcoin. This protocol represents external assets by adding metadata to Bitcoin UTXOs, marking the first systematic attempt at non-monetary functions on the blockchain and paving the way for intelligence. However, due to the limitations of Bitcoin scripts, Colored Coins rely on third-party wallets for interpretation, failing to overcome bottlenecks such as centralized trust and insufficient liquidity.

After Ethereum ushered in the era of Turing completeness, various blockchain narratives once became popular, but RWA has never truly landed beyond fiat stablecoins. This is mainly due to the following reasons:

1. The contradiction between decentralization and regulation: RWA requires centralized entities to provide a trust foundation, which contradicts the decentralized nature of Blockchain.

2. Asset Complexity: Financial assets are relatively easy to standardize, but the on-chain representation of non-financial assets faces numerous technical challenges.

3. Insufficient Yield Attractiveness: Compared to the highly volatile crypto assets, the yield of traditional assets is difficult to match the high returns of DeFi.

2. The Evolution of the Regulatory Framework

Recently, places like Hong Kong, Dubai, and Singapore have successively introduced RWA regulatory frameworks, laying a foundation for their development. However, fragmented regulation and the risk aversion of traditional financial institutions remain major obstacles.

Overview of Regulatory Frameworks in Various Regions:

• United States: The SEC and CFTC regulate security tokens and commodity tokens respectively, with strict KYC/AML requirements.
• Hong Kong: Incorporate security tokens into the existing regulatory framework and launch a sandbox program to test tokenized bonds and other applications.
• EU: The MiCA regulation is about to come into effect, imposing clear requirements on RWA issuers.
• Dubai: Launching a tokenization sandbox program to support testing of security tokens and derivative tokens.
• Singapore: Incorporate security tokens into existing regulations while promoting pilot programs for utility tokens.

The current RWA protocol needs to run on a public Blockchain, but must be equipped with compliant Blocks to meet the regulatory requirements of different regions. This limits interoperability between protocols and makes it difficult to achieve the desired openness.

Some projects are exploring the implementation of decentralization within a compliant framework. For example, Ondo Finance uses a specially designed USDY token to circumvent the definition of securities, building a bridge between RWA and the DeFi world. However, this complex solution still struggles to meet the needs of inclusive finance. In the future, traditional financial institutions and project parties need to work together to break down barriers between different jurisdictions and achieve widespread application of RWA.

3. Asset Categories and Advantages of RWA

The total value of on-chain RWA assets (excluding stablecoins) is approximately $20.7 billion, mainly including private credit, US Treasury bonds, commodities, real estate, and stock securities. These assets are primarily targeted at traditional financial users, especially small and medium-sized enterprises and institutional investors.

The main advantages of RWA on-chain include:

1. 24/7 Instant Settlement
2. Break regional restrictions and reduce the cost of capital acquisition.
3. Reduce marginal service costs through smart contracts
4. Provide financing channels for special industries (such as mining companies)
5. Lower the investment threshold and achieve asset segmentation

For the cryptocurrency industry, RWA is expected to bring a trillion-level market space. For DeFi users, RWA provides new low-risk investment options, such as gold, US Treasuries, stocks, etc.

4. Potential Applications of RWA

RWA not only has the potential to reshape the financial system but may also become a new way to regulate the Blockchain industry. Taking the NFT field as an example, most current NFT projects have failed to grant holders substantial rights. In the future, RWA may provide a more standardized rights distribution mechanism for NFT projects, allowing holders to gain rights similar to traditional IP investments.

V. Outlook

Although RWA is currently still limited by regulatory frameworks and resembles private protocols on public chains, its potential cannot be underestimated. In the future, with the improvement of regulations and advancements in technology, RWA is expected to achieve seamless asset management and investment across time zones and regions. This will bring revolutionary changes to the global financial system, allowing assets to flow freely on the Blockchain, this vast public ledger.