Does RWA really have application scenarios? How has its recent development been?

Despite the poor market conditions, the wind for RWA is actually quite strong.

Author: Lao Bai

The previous article discussed the perspectives of Eastern and Western first-level views on the market. Today, taking advantage of YZi Labs' official announcement of investing in the RWA platform Plume Network, I would like to share my observations on the recent changes in the RWA track.

This matter needs to be broken down into four parts.

1. Does RWA really have application scenarios, or in other words, PMF?
2. Which RWA assets are suitable for on-chain and which are not
3. What were the past solutions, and what are the current solutions?
4. Have you noticed the trend of RWA in recent months?

First, let's discuss whether 1 - RWA really has application scenarios, or PMF - (here we first exclude the stablecoin track of US Treasury bonds, Usual, MKR, etc. which have already found PMF) using US stocks on-chain as an example, this is the most hotly debated topic on Twi. Many people think that putting US stocks on-chain is redundant; those who really want to trade US stocks have their own channels, and any asset on-chain is more volatile than US stocks, so there is no need to trade stocks on-chain.

I have a different opinion on this; I personally believe that the US stock market has its significance on the blockchain.

1. From the perspective of channels - indeed, most big players above A8 and A9 use securities platforms like Futu and FirstTrade for diversified investments in cryptocurrencies, stocks, gold, etc. However, I believe that most retail investors in the circle do not have US stock accounts. On-chain US stock trading can at least open up their purchasing channels without any barriers.

From another perspective, the total market value of stablecoins like USDT/USDC is growing, which represents another avenue for the spread of dollar hegemony relative to traditional finance. If Crypto, through stablecoins and a smart wallet experience similar to Payfi or Alipay, really moves towards mass adoption one day, do you think Americans would be willing to let the whole world take over their stock market? Would most people in other countries prefer to open accounts with various banks and brokers, struggling for days to buy their own country's barely alive stocks, or would they rather invest in the world's largest economy's seven sisters with a simple one-click order like shopping on Taobao?

2. From the perspective of application scenarios, imagine such a case: as a P junior player, you made a profit of 100,000 U from Mubarak in the past few days. You know that Tesla has recently halved, making it a good time to buy the dip, and then you want to exchange this 100,000 U for Tesla stocks.

Even if you have a US stock account, you first need to convert this 100,000 U OTC into fiat currency, send the fiat through the bank to the broker's account, and then start buying at the broker. This whole process usually takes about 3-5 business days (in 2017, before I got into Bitcoin, I bought US stocks in Australia through FirstTrade, and just the Swift transfer took 4 to 5 days, plus a hefty fee of dozens of US dollars). If one day Tesla rises and you want to sell to exchange for BTC or U, this whole process has to be repeated... Imagine if US stocks are on-chain, you could instantly exchange the U you earned from memes for Tesla. The reduction in friction costs is not just a small improvement; it's a tenfold or even hundredfold enhancement in experience.

Then let's talk about 2 - Which RWA assets are suitable for on-chain

Similarly, T-Bills, which have already proven themselves, are not under discussion. Other RWA assets actually depend on who the specific target audience is.

For the C-end, stocks are undoubtedly the most suitable. Most retail investors have probably never been exposed to primary private equity. Even if you tokenize the equity of a non-listed company, it's likely that very few people would understand it, buy it, or hold it long-term. Similarly, private credit collateral on platforms like Centrifuge, such as bridge loans in the real estate market and corporate receivables lending, are also not suitable for the C-end. The vast majority of C-end users are likely only familiar with stocks. More scenarios for the C-end should involve connecting an asset to users who previously had no channels to purchase it, which is a process from 0 to 1.

For the B2B sector, there are many more things that can be tokenized. However, compared to the B2C sector's journey from 0 to 1, the B2B sector should focus more on reducing friction from 1 to 100. Just as private equity originally circulated among certain institutions and high net worth investors, bridge loan collateral placed on Centrifuge is likely to secure loans from banks. The circulation process is relatively cumbersome and frictional. Placing it on the blockchain can significantly enhance user experience and transfer speed, much like Payfi compared to Swift.

Speaking of this, it reminds me of an RWA project we talked about last year. Their parent company is a relatively top-ranked asset management institution in the United States. They plan to issue tokens based on the primary equity of their clients on their asset management platform, such as Musk's SpaceX, so that the tokens can circulate and be traded easily, and ultimately settle in one go when SpaceX goes public. Therefore, for B2B, apart from the targeted trading users being limited to institutions and enterprises, the issuing entities are also relatively constrained. Just like the example above, unless you already manage a large amount of SpaceX equity, if you are merely an STO or RWA platform, attracting SpaceX equity holders to issue tokens representing SpaceX equity with you involves a lot of friction in terms of resource cooperation, legal terms, and other aspects.

There are still many intermediate states, which can be To C or To B, such as the IP on-chain like Story Protocol, or the royalties of a certain novel, the box office of a certain movie, the sales of a certain game, all these things being tokenized. It feels like we are still in the early exploration stage, needing to try one by one and to falsify. For example, the tokenization of influence, FT failed, while Kaito was relatively successful. The tokenization of celebrity time, it became popular for a few days and then disappeared... These things need to be approached gradually.

Next is 3 - What were the past solutions, and what are the current solutions?

Still taking US stocks as an example - the past solutions were mainly based on synthetic assets, represented by SNX, Terra's Mirror, and GNS.

This route has basically been debunked at this point, and the three platforms mentioned above have long removed the synthetic US stock assets they previously offered. There are two reasons for this. First, people are not very interested in "fake assets" synthesized from stablecoins or local currencies (like SNX). You can see the comparison in volume between BTC, WBTC, and SBTC of SNX. To be honest, synthetic assets are less reassuring than "mapped assets" like WBTC. Second, back in the day, the SEC would often check up on things; although synthetic assets are fake, the SEC doesn't need a reason to investigate you, so it's better to avoid trouble. Therefore, these platforms have also removed these synthetic US stocks.

Now that Trump is in office and the SEC chair has changed, the regulation in this area is clearly much better than it was in the past two years. Currently, there are two solutions for the new US stock on the blockchain.

One is to take the traditional compliant Broker Dealer route, where the moment users buy tokenized stocks on the chain, it triggers the corresponding operations of the off-chain compliant Broker in the US stock market. Essentially, it is similar to the buy and sell orders on Robinhood, where Citadel acts as a proxy buyer in the stock market. The benefit is that the stocks you purchase are "real stocks," or at least 1:1 backed by this Broker, somewhat akin to WBTC in relation to BTC. The downside is that trading hours are fully aligned with the stock market, making it impossible to operate 24x7 like Crypto, and you also need to build trust in this Broker or platform. Additionally, selling will trigger a Taxation Event, where US citizens may need to submit tax-related forms, and non-US citizens will at least have to perform KYC and the like, which can be quite cumbersome.

Secondly, regarding Ondo Global Market's approach, I looked through their documentation. They initially intended to pursue the aforementioned Broker Dealer route but later switched to a model similar to stablecoins, allowing their cooperating or authorized issuers to directly issue tokenized stocks (just like Tether issues USDT and Circle issues USDC). The advantage seems to be greater flexibility, potentially allowing them to bypass the trading hours restrictions of US stocks, ultimately settling through the issuer at some point. The downside is that it is highly likely to only target non-US users, making it unusable for American users. Additionally, there is a concern about whether different issuers will issue the same stock with different CAs (similar to how USDC on different chains is incompatible with each other), but these specific details are not documented, as the product is not set to launch until next year.

Finally, platforms like Plume, which are RWA platforms, feel more like a Framework. They include KYC/AML, data storage/execution, consensus, ZKTLS verification, etc. In theory, this allows partner institutions to issue various Tokenized RWA assets here. This brings us back to the previous topic of "which assets are suitable for on-chain," which I won't elaborate on further.

Finally, let's talk about the trend of 4 - RWA in the past few months. Have you noticed anything?

If you pay close attention, the wind of RWA has actually been quite strong in the past two months. Let me casually mention a few "news" items I've observed.

1. The Ondo plan mentioned above will launch the Ondo Global Market, an on-chain stock market, by the end of this year or next year, and Ondo has been closely collaborating with Trump's WLFI, which will result in a partnership.

2. Sui has recently been leaning on WLFI.

3. Frax actively embraces Cedefi and recently launched frxUSD, in collaboration with BlackRock+Superstate.

4. Ethena's newly released product Converge today - focusing on one of the two scenarios they believe is the most important in blockchain - Storage and settlement for stablecoins and tokenized assets.

5. AAVE plans to launch a new coin, Horizen, causing a stir in the community, and Stani personally came out to clarify - "The Horizen project aims to fill the current gap in Aave's RWA business segment, with the expectation of surpassing the revenue of Aave's existing business lines in 5 years."

6. The Financial Services Commission of South Korea plans to release a document in February 2025, aiming to gradually allow corporate entities to engage in virtual asset trading. I learned from friends in the South Korean blockchain community that there is a possibility of restarting the STO plan (the term used in the previous cycle for RWA). You see, allowing "corporate entities to trade virtual assets" is certainly not about letting your business speculate on cryptocurrencies; it is definitely to tokenize some real financial assets into "virtual assets" for circulation design among companies.

7. YZi Labs officially announced today that it has invested in the recently popular Plume Network RWA platform.

The momentum created by these messages cannot be ignored. Therefore, my personal view on the main track of the next Circle is PayFI + RWA + Web2.5-like Consumer APP. As for AI + Crypto, I can only say there is hope, and I am still discussing and observing. After I finish writing the next piece "Things Worth Mentioning on ETH and Solana," I will write a separate article on my recent thoughts about AI + Crypto as the fourth part to conclude this comprehensive collection.