7:43 AM

Is the Current Approach to RWAs Sound?

Ashwath Balakrishnan

RWAs, or real world assets, are a big narrative in the crypto world. It’s crypto’s best shot of integrating with traditional finance. Simply put, it’s taking traditional assets and tokenizing them on public-ledger blockchains. Maker, Centrifuge, Maple Finance, Ondo, and a handful of others are leading this charge.

While the narrative makes sense, how impactful will RWAs in their current form be?

Maker currently earns somewhere around 70-80% of protocol revenue via stability fees against RWAs. Maker’s RWA portfolio consists of several managers and different kinds of debt instruments. Blocktower’s RWA vault manages investment grade bonds; the Monetalis Clydesdale vault comprises short-term t-bill ETFs; the Huntingdon Valley Bank vault is made up of construction, real estate, and business loans issued by the bank. Amongst the bigger names, Societe Generale also has an RWA vault with Maker.

RWAs in Maker are a way for traditional asset managers to tokenize their portfolio and access DAI liquidity against it. Not any Tom, Dick, or Harry can take a loan out against RWAs. It’s not exactly the perfect specimen for crypto’s biggest selling point — open, permissionless markets. But as we’ll see, this is a consistent theme in the RWA space.

Ondo Finance allows KYC-ed and accredited investors to buy U.S. treasury instruments on-chain. Maple’s cash management pool is more or less the same thing. Maple has taken steps away from permissionless lending in the aftermath of the FTX crisis which caused the Orthogonal default on the platform. And RWAs at large seem to be trending in a more permissioned direction, with KYC and accreditation becoming a requirement across the board.

The revenue generation potential here is fantastic. So from a pure business lens, yeah, it looks like the current approach to RWAs is sound. But when you place that next to what crypto and public-ledger blockchains at large are supposed to be, it doesn’t paint the rosiest picture.

Keep in mind RWAs can be censored and seized. The real asset exists in the traditional system — the tokenized variant is simply a representation of that asset in an on-chain environment. Regulators could theoretically clamp down on issuers/vault owners on Maker and force them to wind down their DAI loans and kill the RWA. Yes, they can be a source of new capital inflows to the ecosystem. But they also pose a significant risk to the integrity of several protocols. Personally, I’m not super interested in RWAs. They are a cool narrative, but I would prefer to spend my time on projects trying to onboard real people rather than financial institutions. I can’t deny what RWAs are trying to do is important for the ecosystem in the long-run. I just think my time is better spent looking at other kinds of products.

All signs point towards the RWA space consolidating power in a few players and becoming a TradFi-friendly path into crypto. If it acts a means of creating fresh capital in digital asset markets (like Maker), then the net effects are still positive. The way I see this playing out positively is for large investors to own traditional assets on-chain, take out leverage against them in stablecoins, and use that to play the real crypto-native markets.

However, creating a closed-KYC-only ecosystem is a net negative for the high-level goals of this technology. I guess we just have to wait and see how this all plays out.

 

In all these RWA discussions, don't forget to look at IPOR which is building out a defi<>tradfi interest rate bridge. You covered IPOR in various updates (v well done actually!).

What I like about IPOR is that you don't have to take RWA B/S risks but only speculate on the RWA product (ie the yield). DeFi rates looks pretty mispriced vs tradFi risk-free rates. I see IPOR as the only real protocol that's building something incredibly scalable that can work in rising or falling interest rate environments.

Great point, Theo. I've personally spoken to the IPOR team pretty extensively and I'm very excited about what they're building. I think what they are trying to do is very ambitious and they are about a year or two ahead of the market so PMF will come slowly.

I don't think this is a super retail-oriented product. Degens don't care much for speculating on yield -- that's something the big boys would be interested in. Given retail dominance over trading volume has increased in the past 9 months, they probably won't see much growth in the foreseeable future. But that also means they have a great opportunity to use the time until institutional capital starts flowing again to build a solid product.

I agree their approach is scalable and IPOR is an all-weather product. Would be really cool to establish a crypto native LIBOR/SOFR that acts as a benchmark for yield markets.

I agree with most of your sentiment here. I was skeptical of the early RWA hype when the main focus was on tokenizing assets like real estate - just because an asset is tokenized doesn't automatically mean it will reap the potential benefits like increased liquidity (it's not as simple as "build it and they will come").

Private credit offers some interesting opportunities (though still very early). Tokenized Treasuries have more potential to attract demand in the short to medium-term given they're a staple in traditional portfolio construction, and with yields >5% they offer competitive rates vs. what you can earn in DeFi lending stables. But their use will likely be concentrated among those looking for stable yield + add'l collateral to borrow against. IMO it's going to take a while for tokenized USTs to become more widely used because their function as pristine collateral today operates in a separate financial system. In other words, you can't use tokenized USTs in DeFi the same way they can be used in today's global financial system since the infrastructure most FIs use them within doesn't exist on Ethereum (or any other blockchain network).

I do think perps that track certain RWAs could gain traction more quickly (e.g. gold, oil, commodities, index funds, etc.), though the regulatory hurdles likely keep a cap on these as well for the time being.

I think treasuries as collateral will exist in on-chain environments. When that happens is really up to market demand i.e. the demand to borrow against treasuries in stablecoins to deploy into on-chain strategies

Sure, the way FIs use leverage against their treasuries is not possible via crypto today. I think as the opportunity set expands and markets like Aave allow owners of tokenized treasuries to lever up against it, this just naturally happens. Having low vol collateral that is earning yield in the back is pretty helpful inside crypto -- where collateral tends to be subjected to 20-40% drawdowns fairly often.

I also agree the current approach to RWAs is not exciting -- as you can tell from the post!

Maple, imo, is positioned very well to take advantage of private credit opportunities by allowing credit managers to access crypto capital.

Great comments ashwath. I agree with you that RWA on-chain are sort of the antithesis of what blockchains are supposed to be - permissionless and censorship resistant etc etc. But I had no considered that onboarding tradfi through RWA is a new source of capital inflows and could increase liquidity in the space, so a net benefit overall.

Are there any projects which are taking a unique approach to RWA?

Not particularly, it's tough to deviate from the set playbook of having asset owners tokenize their portfolio to access crypto-centric liquidity against it

Maybe one day, we'll be able to migrate AAPL shares to Ethereum to borrow DAI against. But i doubt that happens anytime soon :D