RWA: The Elephant in the Room

Preface

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 explore the concept of RWA from a personal perspective in the context of the current era.

1. The Broken Prism

The combination of blockchain and real-world assets can be traced back to Colored Coins on Bitcoin over a decade ago. This protocol, similar to BRC20, represented humanity's first systematic attempt at non-monetary functions on the blockchain, signaling a move towards intelligent blockchain solutions. However, due to the limitations of Bitcoin scripts, Colored Coins rely on third-party wallets for parsing, requiring users to trust these tools' logic for defining the "color" of UTXOs. Factors such as centralized trust and insufficient liquidity led to the initial proof of concept for RWA ending in failure.

The emergence of Ethereum ushered in the era of Turing completeness. Although various blockchain narratives once flourished, RWA has been in a state of much noise but little rain for the past decade, aside from fiat-backed stablecoins. Why is that?

First of all, there are no real US dollars on the blockchain. Tokens like USDT or USDC are essentially just "digital bonds" issued by private companies, which are theoretically more fragile than the US dollar. The success of Tether is due to the urgent need for a stable medium of value in the blockchain world, which it has been unable to create.

In the field of RWA, decentralization has never truly existed. Trust must be built on centralized entities, and the risk control of these entities can only rely on regulation. The anarchistic nature embedded in cryptocurrency is fundamentally at odds with this concept, as the underlying architecture of any public chain is designed to withstand regulation. It is difficult for regulation to exist on top of public chains, which is the main reason why RWA has long been unable to succeed.

Secondly, there is the complexity of assets. RWA, while covering the tokenization of all real-world assets, can generally be divided into financial assets and non-financial assets. Financial assets have a homogenous characteristic, and the connection between the underlying assets and tokens can be established under regulated custodial institutions. Non-financial assets, on the other hand, are much more complex, and solutions mainly rely on IoT systems, but still struggle to cope with unforeseen factors such as human intervention and natural disasters. Therefore, as a prism of real assets, the refractive ability of RWA is limited. In the future, for non-financial assets to exist on-chain for the long term, they must meet the two conditions of homogeneity and ease of valuation.

Third, compared to the highly volatile digital assets, there are very few real-world assets that can match their volatility. The annualized returns in DeFi, which can easily reach tens or even hundreds of percent, make traditional finance look inferior. Low yields and a lack of participation motivation are another pain point faced by RWA.

So, why is the industry paying attention to this narrative again?

2. Policies from above

The advancement of regulation in traditional finance is a key factor for the existence of RWA, and this concept can only progress when the trust assumption is established. Currently, regions that are friendly to the development of Web3, such as Hong Kong, Dubai, and Singapore, have only recently begun to introduce regulatory frameworks related to RWA. Therefore, the journey of RWA has just begun. However, at present, the fragmentation of regulation and the high vigilance of traditional finance towards risks still cast a shadow over this field.

The following is an overview of the regulatory frameworks for RWA in major jurisdictions worldwide as of April 2025:

United States:

• Regulatory bodies: SEC and CFTC
• Core Regulations: Security tokens must pass the Howey test and are subject to the Securities Act of 1933; commodity tokens are regulated by the CFTC.
• Key measures: Strict KYC/AML requirements, expanded scope of securities identification.

Hong Kong:

• Regulatory agencies: Monetary Authority and Securities and Futures Commission
• Core Framework: The Securities and Futures Ordinance incorporates security tokens into regulation.
• Key measures: Testing tokenized bonds and cross-border mortgage of real estate, implementing stablecoin gateway policy

European Union:

• Regulatory Authority: ESMA
• Core Regulation: MiCA (Market in Crypto-Assets Regulation)
• Key measures: liquidity restrictions, increased compliance costs

Dubai:

• Regulatory Authority: DFSA
• Core Framework: Tokenization Sandbox Program
• Advantages: Equivalent to EU regulation, supports DLT applications

Singapore:

• Security tokens are included in the Securities and Futures Law.
• Utility tokens must comply with anti-money laundering regulations

Australia:

• ASIC classifies RWA tokens that grant rights to income as financial products, requiring a financial services license.

Currently, RWA protocols can exist on public chains, but they must be equipped with various compliance modules to adapt to regulatory frameworks. These compliance protocols cannot directly interact with traditional DeFi protocols, and due to differences in jurisdictions, protocols compliant with the regulatory framework of one region cannot interact with compliance protocols of other regions. From the current situation, RWA protocols lack sufficient accessibility and interoperability, akin to "islands," which is contrary to the ideal form.

However, there are still paths to re-decentralization within these frameworks. Taking the leading RWA protocol Ondo as an example, its team has built a lending protocol called Flux Finance, which allows users to use open tokens such as USDC and restricted tokens such as OUSG as collateral for loans. The protocol issues a tokenized bearer note called USDY (a compound stablecoin) designed with a 40-50 day lock-up period to avoid being classified as a security. Ondo also simplifies the circulation of USDY on public chains through cross-chain bridges, ultimately achieving a pathway for interaction with the DeFi world.

However, this complex and non-reversible approach may not be the RWA we ideally envision. Another key to the success of fiat-backed stablecoins lies in excellent accessibility, which is essential to achieving low-threshold inclusive finance in the real world. RWA still needs to explore the isolation problem together with traditional finance and project parties, first achieving interconnection within different jurisdictions and interacting with the on-chain world as much as possible. Only in this way can it align with the common understanding of RWA.

3. Assets and Income

According to data from professional analysis websites, the total on-chain RWA assets currently amount to $20.69 billion (excluding stablecoins), primarily consisting of private credit, U.S. Treasury bonds, commodities, real estate, and stock securities.

From the perspective of asset classes, RWA protocols are primarily aimed at traditional financial users rather than DeFi native users. Leading RWA protocols such as Goldfinch, Maple Finance, and Centrifuge mainly target small and medium-sized enterprises and institutional users. So, why move these businesses onto the blockchain?

1. 24/7 instant settlement: Solving the pain points of traditional finance's reliance on centralized systems, achieving a non-stop trading system.

2. Break through regional liquidity restrictions: By leveraging the global financial network, small and medium-sized enterprises in third world countries can attract external investment at the lowest cost.

3. Reduce marginal service costs: Smart contract management keeps service costs from rising significantly with increased scale.

4. Services for Special Industries: Providing financing channels for mining companies, small and medium exchanges that lack traditional credit records.

5. Lowering the entry threshold: With the introduction of regulatory frameworks, many RWA protocols are beginning to try to segment financial assets and reduce the threshold for investors.

The success of RWA could bring trillion-level market space for the cryptocurrency industry. In the future, the emergence of RWAFi will provide a more solid asset base for DeFi protocols, offering users more asset choices. In the current context of geopolitical turmoil and uncertain economic outlook, some real-world assets may be more attractive than simply holding stablecoins.

Some implemented or potentially available RWA product options include:

• Gold (80% increase over the past two years)
• High-interest fixed deposits (such as ruble fixed deposit rates above 20%)
• Discounted energy assets in sanctioned countries
• Short-term US Treasury bonds (4%-5% yield)
• Nasdaq stocks with good fundamentals
• Subdivided assets such as charging pile income or Pop Mart blind boxes

Four, Sword Bearer

In the science fiction novel "The Three-Body Problem," Luo Ji becomes the sword bearer of Earth, using nuclear deterrence to combat extraterrestrial civilizations. In the real world, RWA may become the sword bearer of the blockchain "dark forest."

Past crypto asset projects, such as PFP (Profile Picture) NFTs, although once popular, did not truly grant holders intellectual property rights. Taking Bored Apes as an example, the core intellectual property rights belong to the issuing party, Yuga Labs LLC. NFT holders only obtain ownership and usage rights of specific avatars, not the copyright itself. In project decision-making and profit distribution, holders have no right to be informed, no decision-making power, and no profit rights.

In contrast, traditional IP investments typically grant investors more rights, including direct usage rights, profit distribution, participation in decision-making, and even development control. If there were a mechanism that allowed project parties to respect the community more, it might improve this situation.

Five, On the Carrier

RWA has the potential to reshape finance, bringing real-world opportunities into the blockchain, and may become a new way to rectify the chaos in blockchain. However, constrained by the current regulatory framework, its form still resembles private protocols on public chains, failing to fully realize its imaginative possibilities. In the future, we hope that there will be guides or alliances that can break through this barrier.

Assets can unleash unimaginable potential on different carriers. From ancient bronze inscriptions to the Ming Dynasty's fish scale atlases, asset rights confirmation has always driven social stability and development. If RWA can reach an ideal state, we might be able to purchase Nasdaq stocks during the day in Hong Kong, deposit funds into a Russian bank at midnight, and the next day invest in Dubai real estate together with hundreds of unfamiliar shareholders from around the world.

This world running on a massive public ledger is the ultimate vision of RWA.