Author：PSE Trading Analyst, @Yuki

With the Federal Reserve raising interest rates, the United States has entered an era of high interest rates. In the face of rising U.S. bond yields, the low-risk returns in the DeFi world are obviously unattractive. The crypto market is in a dilemma where money is slipping away and pouring into traditional financial markets.

"Introducing real-world asset income into DeFi" will become an important measure to retain funds on the market and attract external funds. Based on this, the crypto market has refocused on the concept of RWA (Real World Assets) that has emerged in 2020, trying to explore the best method for mutual circulation of funds between traditional financial markets and crypto markets through different business models.

This article will start from the underlying assets that are most suitable for RWA in the short and medium term, sort out and analyze the existing RWA business models in the crypto market.

1.The Underlying Assets of RWA

1.1Background & Current Situation

At present, although the total market value of the crypto market remains around one trillion US dollars, there is a lack of stable sources of low-risk returns. Only ETH-based liquidity staking based on the PoS mechanism has been recognized and supported by funds on the market. This also illustrates the inevitability of the rise of LSDFi in disguise.

Data from ultrasound.money shows that since Ethereum switched to PoS, it has generated 1.4 million ETH staking rewards, and its current staking rate is only 22.03% of the total supply. This means that Ethereum has become an interest-bearing asset with 5.3% (Staking Rewards/ETH staked) interest, which has brought a basic income of $2.4 billion to the market (ETH was $1,720 at the time of writing the article).

Then, following the same idea, RWA Tokenization directly maps the "equity value" in various assets in the real world to the blockchain in the form of digital currency, which give the "equity value" transaction circulation attributes. In other words, RWA introduces the income of real assets into the crypto industry, which can be used as the real income of USD-based assets to inject better liquidity and vitality into the entire market.

Currently, the scale of stablecoins in the entire crypto industry is around $74.3 billion, but most of the stablecoins (USD-based assets) anchored to the US dollar do not have stable real returns (compared to the 5% staking rewards of ETH).

If RWA can bring the same level of real income to USD-based assets (similar to the annualized rate of 5%), it can stimulate further growth in the scale of stablecoins in addition to the basic income of $3.7 billion per year.

According to rwa.xyz statistics, the existing RWA private credit protocols have a cumulative borrowing volume of only more than $500 million (MakerDAO is not counted), and the scale of tokenized U.S. debt is only $640 million (the indirect introduction mode is not counted), and the total scale is less than $1.2 billion.

Taking Treasury Bills as an example, the average interest rate was 5.219%, overall size is $4.769 trillion. If RWA can introduce this part of the revenue into the crypto market, it will ideally generate a revenue scale of $248.89 billion.

For the crypto industry with an overall market value of less than $1 trillion, this flood of liquidity will irrigate the entire industry and revitalize it.

A report released by BCG and ADDX also predicts that global tokenized assets (such as real estate, stocks, bonds and investment funds, etc.) will grow to $16.1 trillion in 2030, bringing more effective attention to the crypto market.

To sum up, RWA is still in the early stage of development, but it has huge potential. Just as the real income of ETH-based assets has triggered the brutal growth of LSDFi, RWA can also be used as the real income of USD-based assets to promote the incremental development of the entire crypto market.

The crypto market has also keenly sensed the huge potential behind RWA, and DeFi OG projects led by MakerDAO and Compound are actively deploying RWA.

1.2Best Underlying Assets in the Medium Term: Bonds

Since RWA needs to tokenize traditional off-chain assets, the selection of underlying assets will become the core issue. The reason is that the underlying assets have an inseparable and important impact on the complexity and flexibility of subsequent tokenization, as well as the difficulty of asset management and risk management.

Based on the above logic of "RWA as the real income of USD-based assets in the crypto market", the author directly divides the underlying assets of RWA into two major categories:

1. Interest-bearing RWA (similar to PoS ETH): bond assets, mainly short-term U.S. Treasury bonds or bond ETFs

2. Non-interest-bearing RWA (similar to PoW ETH): real estate, art, gold, etc.

Upon on basis, and taking into account the liquidity, standardization, security, and yield of the underlying assets, we can find that although interest-bearing RWA (mainly bonds) may lag behind non-interest-bearing RWA in terms of yield ( Real estate and art have higher yield caps), but they have obvious advantages in the more important aspects of liquidity and standardization. Only underlying assets with better liquidity and higher degree of standardization can support the large-scale application and expansion of RWA.

In addition, interest-bearing RWA is similar to ETH-based interest-bearing assets. Even if the yield of the underlying assets is not high, the stable "interest-bearing" can further improve the composability of the protocol layer, thereby promoting more DeFi innovation.

To sum up, the author believes that the best RWA underlying assets in the medium term are debt assets based on short-term U.S. Treasury bonds or bond ETFs. Its interest-bearing attribute not only perfectly satisfies the desire for low-risk income sources within the crypto market, but its good liquidity and high degree of standardization are also conducive to the large-scale application of RWA.

Therefore, below, the author will conduct an in-depth discussion on the "business model" of representative RWA projects based on U.S. bonds or bond ETFs as underlying assets.

2.Business Model of RWA Based on U.S. Bond/Bond ETFs

Starting from RWA with on U.S. bond as the underlying asset, it can be found that the current mainstream RWA has a three-tier business model, which are:

1. Underlying infrastructure business: Responsible for the U.S. bond tokenization

2. Middle layer Mixed business: Responsible for U.S. bond tokenization and introducing U.S. bond income into DeFi

3. Upper layer DeFi business: Introduce U.S. debt income directly or indirectly into project income

The difficulty and flexibility of RWA tokenization corresponding to the three-tier business model, as well as the customer groups each targets, are very different.

Specifically, the RWA tokenization business mainly operated by the underlying infrastructure does not need to directly contact C-end users, but takes B-end projects as the main customer group. The step of "creating an on-chain representation of off-chain real-world assets" not only requires solving the identity problem between on-chain and off-chain, but also takes into account asset security issues, regulatory risks, and implementation costs. Often this type of business is the most difficult and complex, but it is also an essential part of RWA.

As upper layer DeFi native applications, they do not have to consider the "tokenization" event itself. Instead, they can directly or indirectly introduce RWA income on the basis of the completed RWA tokenization. Most of the methods are to choose to cooperate with infrastructure projects or create DeFi products based on RWA tokens, so they are also mostly directly oriented to C-end users.

The middle layer is a combination of the two. While they realize the tokenization of RWA, they also create suitable on-chain products for their own RWA tokens to directly introduce the benefits of RWA and integrate into the DeFi world.

Generally speaking, as long as the project involves the RWA tokenization business, there are relatively strict KYC requirements. On the one hand, this is due to the requirements of safety and supervision, but on the other hand, it is contrary to the free spirit core of DeFi, which virtually raises the entry threshold of RWA.

2.1Underlying Infrastructure Business: RWA Tokenization

An essential step in bringing real-world assets onto the chain is to encapsulate the assets so that they can be presented in digital form on a compliant basis while retaining important information about the assets such as value, ownership, term, etc. The importance of this layer of business is equivalent to laying a solid foundation for building a building.

2.1.1Business Model 1: SPV Tokenization

The current most mainstream way of realizing RWA tokenization is to refer to the idea of asset securitization, and set up a special purpose vehicle (Special Purpose Vehicle, SPV) to hold the underlying assets and achieve control, management and risk isolation.

Representative project：Centrifuge

• Centrifuge

Although Centrifuge is a RWA lending protocol, its SPV tokenization path has important implications for many DeFi protocols to implement RWA. The Centrifuge Prime it launched is also to provide the technical and legal framework for DAO to invest in RWAs.

MakerDAO and New Silver released the first RWA002Vault through Centrifuge as early as February 2021. Since then, the larger-scale introduction of RWA has been based on the SPV tokenization path.

Centrifuge’s RWA business model implementation path is as follows:

1. The Asset Originator sets up a legal entity, the SPV, for each pool. The purpose is to isolate financial risks and provide funds for a specific RWA as the underlying asset of a specific Centrifuge pool;

2. The Borrower tokenizes off-chain assets into NFT through AO and uses them as on-chain collateral;

3. The Borrower signs a financing agreement with the SPV and requires the AO to lock its NFT in the Centrifuge pool bound to the SPV;

4. After the NFT is locked, DAI is withdrawn from the Centrifuge reserve and transferred to the SPV wallet, and the SPV wallet then converts DAI into US dollars and transfers the money to the borrower's bank account;

5. The Borrower repays the financing amount plus financing fees on the NFT maturity date. The repayment method can be directly using DAI to repay onchain, or it can be transferred to the SPV in USD. The SPV converts USD to DAI and pays it to the Centrifuge pool. After full repayment, the locked NFT will be returned to AO and destroyed.

Although Centrifuge adopts SPV to isolate risks and also cooperates with Securitize to spend a lot of thought on KYC/AML compliance verification, its RWA asset pool still has some bad debt problems. According to rwa.xyz data, Centrifuge has a total of $13,210,882 in defaulted loans, accounting for 3.01% of the total loans ($438,341,921).

2.1.2Business Model 2: Fund Shares Tokenization

Another common RWA tokenization method is to launch a compliant fund based on short-term U.S. debt, record the transaction data of the fund onchain, and "tokenize the fund share".

Representative projects：Superstate、Franklin Templeton

• Superstate

Robert Leshner, the founder of Compound, announced the establishment of a new company Superstate in June, officially entering RWA. Superstate plans to launch a fund based on short-term government bonds, and has submitted relevant application materials to the SEC, awaiting approval. It is worth noting that Robert Leshner has a background related to the Treasury Department of the US government, so he has certain advantages to a certain extent.

Superstate’s RWA business model implementation path is as follows:

1. Superstate launches funds based on U.S. debt and government agency securities for U.S. residents;

2. Users subscribe to the fund and become shareholders of the fund;

3. Shareholders can convert their fund shares into the on-chain Token form and keep the records on Ethereum;

4. Fund share Token holders need to register their address as the fund’s whitelist, and transactions cannot be executed on non-whitelist addresses;

5. Official records of fund transfer agents are still managed through book-entry forms. When on-chain records conflict with off-chain records, the fund manager will update the on-chain records based on the off-chain records.

• Franklin Templeton

Franklin Templeton, a listed fund management company with over one trillion US dollars in assets under management, has implemented a RWA business model similar to Superstate. It also launched a government money market fund(Franklin OnChain U.S. Government Money Fund - FOBXX) on the Stellar chain in 2021 through "tokenization of fund shares". Unit shares are represented by BENJI tokens.

2.2Middle Layer Mixed Business: RWA Tokenization + Integration with DeFi

Compared with the underlying infrastructure, the business model of RWA projects in the middle layer has an additional part that is directly connected and circulated with DeFi.

Similar to the "self-produced and self-sold" model, you can decide the design from the infrastructure to the top layer by yourself, which makes it easier to expand the project scale while controlling risks. However, since the tokenization process of U.S. debt still needs to comply with strict legal regulations, KYC is still unavoidable.

2.2.1Business Model 3: Fund Shares Tokenization + DeFi Protocols

Representative project：Ondo Finance

• Ondo Finance

Ondo Finance has adopted an exempt issuance approach to serve institutional-level users. Exempt issuance has stricter requirements for users who need to meet the requirements of "qualified investors" and "qualified buyers" defined by the SEC.

Ondo’s RWA business model implementation path is as follows:

1. Users invest USDC (or other stable coins) into Ondo’s fund products and obtain the corresponding number of fund tokens;

2. Ondo converts stablecoins into USD (hosted by Coinbase) and then keeps them in a bank account;

3. Then purchase the U.S. Treasury Bond ETF through Clear Street, which has brokerage and custody qualifications;

4. When these underlying assets earn income, that income is reinvested in purchasing more assets, thus achieving automatic compounding;

5. At any time, if the user wants to redeem his USDC, the corresponding fund tokens will be burned and USDC will be received.

Ondo currently provides four RWA products for US users, backed by different underlying assets, providing diversified choices for investors with different risk preferences.

Among them, the largest fund is OUSG. In order to expand the usage scenarios of OUSG, Ondo has developed its own decentralized lending protocol Flux Finance. OUSG holders can mortgage OUSG through Flux and borrow USDC, DAI, FRAX and other stablecoins.

Flux itself has no KYC restrictions, but uses a whitelist clearing mechanism. The significance of Flux’s existence is to help Ondo Finance further integrate RWA into the native DeFi world and strive to create an “ecological closed loop”.

For non-U.S. users, Ondo Finance plans to launch a new USDY product, a tokenized note backed by short-term U.S. Treasury and bank demand deposits. 40-50 days after purchasing USDY, users can transfer it on the chain.

2.2.2Business Model 4: SPV Tokenization + DeFi Protocols

Representative projects：Matrixdock、Maple Finance、Kuma Protocol

• Matrixdock

Matrixdock is an on-chain bond platform launched by Matrixport, which launched STBT (Short-term Treasury Bill Token) products based on short-term U.S. debt. STBT is an ERC 1400 standard token that resets the interest base every working day, and the underlying assets are U.S. Treasury bonds and reverse repurchase agreements due within 6 months.

Matrixdock’s RWA business model implementation path is as follows:

1. The SPV established separately by Matrixport acts as the STBT issuer;

2. The investor deposits the stablecoin into the SPV, and the SPV mints a corresponding amount of STBT through the smart contract;

3. SPV converts the stablecoin into US dollars through Circle, and pledges the US debt and cash assets held to STBT holders;

4. The USD is handed over to a qualified third party for custody, and the qualified third party purchases short-term bonds due within six months through the U.S. debt trading account of a traditional financial institution, or invests them in the Federal Reserve's overnight reverse repurchase market;

5. STBT holders have the first priority to repay the entity asset pool.

It should be noted that only investors who have passed KYC can invest in Matrixdock products, and STBT is only allowed to be transferred between whitelisted users, including STBT in the Curve pool. The decentralized RWA lending protocol——T Protocol has built a fund pool for unlicensed investment in U.S. debt with STBT.

• Maple Finance

Maple Finance used to be an unsecured lending project based on RWAs, but the high risks of the unsecured lending model left Maple with huge bad debts of more than $50 million. So in April 2023, Maple changed its strategy and launched a new cash management pool (similar to the Matrixdock model), allowing non-U.S. qualified investors and entities to directly participate in U.S. debt investments through USDC. The implementation path of the RWA business model is similar to that of Matrixdock, and will not be repeated here.

Notably, Maple recently closed $5 million in funding, which it will use to fuel the expansion of its lending business, Maple Direct. Maple Direct aims to provide clients such as DAOs and web3 companies with simplified on-chain access to U.S. Treasury yields.

• Kuma Protocol

Kuma Protocol is a RWA protocol launched by Mimo Labs that brings RWA income into DeFi through the issuance of regulated NFT-backed interest-bearing tokens KIBT. Currently, Kuma only accepts NFTs backed by sovereign bonds (U.S. Treasuries).

In essence, KIBT is an interest-bearing stablecoin, and its balance will increase as the interest on the underlying assets increases. The significance of KIBT is that "users can enjoy the interest of the underlying real word assets and put it into use in the DeFi world.”

Kuma Protocol’s RWA business model implementation path is as follows:

1. Mimo Labs set up a SPV：Mimo Capital AG, and issued KUMA NFT backed by sovereign bonds;

2. Users purchase KUMA NFT through stablecoins, and then mortgage NFT through KUMA Swap to mint the interest-bearing token KIBT;

3. KIBT is the ERC20 rebase token, currently there are two kinds of KIBT.

   • EGK: supported by KUMA NFT backed by 740-day Euro sovereign bonds

   • USK: supported by KUMA NFT backed by 1-year US sovereign bonds

The key to Kuma Protocol is to expand the usage scenarios and liquidity of its interest-bearing token KIBT. At present, the project is still in the early stage, and its feature of not requiring KYC is the biggest highlight at this stage.

2.3Upper Layer Business: DeFi Native Applications that Introduces RWA Income

As upper layer DeFi native applications, they do not need to consider the "tokenization" event itself and the potential risks of KYC when conducting RWA business. Instead, they can directly or indirectly introduce RWA income on the basis of the completed RWA tokenization. The implementation path is mostly to cooperate with infrastructure projects or build DeFi products based on RWA tokens.

2.3.1Business Model 5: Introduce RWA Income Indirectly

DeFi native applications generally have two ideas if they want to develop RWA business: one is to build projects directly based on RWA income, and the other is to indirectly introduce RWA income as protocol revenue. The most successful model of "indirect introduction" currently is MakerDAO.

Representative projects：MakerDAO、Frax Finance

• MakerDAO

Although Dai has a market cap of billions, it has never been able to break through to a larger scale. To this end, MakerDAO’s co-founder Rune proposed to introduce RWA as a transition.

According to MakerBurn data, MakerDAO has now introduced a total of 10 RWA projects, with assets of $2.413 billion as collateral. These RWA assets contributed more than 50% of MakerDAO’s revenue. The rise in DSR interest rates is also inseparable from RWA income.

The largest RWA asset currently held by MakerDAO is Monetalis Clydesdale. This was formed by the MIP65 proposal put forward by Monetalis founder Allan Pedersen in January 2022.

The purpose of MIP65 is to use some of the stablecoins held by MakerDAO to obtain more stable income by investing in highly liquid, low-risk bond ETFs.

MakerDAO's RWA business model implementation path using Monetalis Clydesdale architecture is as follows:

1. After MakerDAO passes the vote, Monetalis is entrusted as the executor and reports to MakerDAO regularly;

2. As the project planner and executor, Monetalis designed a complete set of trust structures based on BVI (as shown below) to open up the synergy between on-chain and off-chain;

3. All MKR holders of MakerDAO are the overall beneficiaries, who issue orders on the purchase and disposal of trust assets through governance;

4. Coinbase provides USDC and USD exchange services;

5. Funds are used to invest in two types of ETFs: BlackRock's iShares US$ Treasury Bond 0-1 yr UCITS ETF and BlackRock's iShares US$ Treasury Bond 1-3 yr UCITS ETF;

6. The income of the U.S. bond ETF belongs to MakerDAO, and MakerDAO distributes the protocol revenue to DAI holders by adjusting the deposit rate of DAI.

Although this complex and feasible trust structure indirectly introduces U.S. debt income into MakerDAO, it also comes with high expenses, including initial fees and ongoing fees paid to relevant institutions to maintain the operation of the trust. As the scale of RWA gradually expands, MakerDAO needs to explore a feasible way with lower costs.

• Frax Finance

Sam, the founder of Frax Finance, recently made it clear that Frax V3 will enter the RWA track, and initiated a proposal on the governance forum to expand RWA business through FinresPBC. And its realization path (according to the proposal) is nothing more than setting up an SPV off-chain to hold RWA assets, and convert the income into the revenue of the project itself, so as to expand the scale of FRAX stablecoin.

Obviously, after MakerDAO has proved that the RWA is feasible, more and more old DeFi projects will follow suit to find a reasonable risk-free return for the idle funds of the treasury. In addition, for stablecoin projects such as Frax Finance, if they want to increase their market share, RWA income is indeed an opportunity that cannot be missed.

2.3.2Business Model 6: Introduce RWA Income Directly

Representative projects：T protocol、AlloyX

• T Protocol

T Protocol is a RWAFi protocol based on STBT issued by MatrixDock. The project hopes to remove the whitelist restrictions of STBT through token encapsulation, realize permissionless U.S. debt tokenization products, and lower the threshold for U.S. debt investment for users.

T Protocol’s RWA business model implementation path is as follows:

1. T Protocol launched TBT, which is a packaged version of STBT. TBT uses a rebase mechanism to issue U.S. bond proceeds, with the price anchored at $1;

2. Investors invest USDC into T Protocol(T Protocol mints TBT), and obtains the deposit certificate rUSTP;

3. T Protocol purchases STBT through its partners, that is, MatrixDock mortgages STBT and lends USDC;

4. rUSTP accumulates income in the form of rebase, and rUSTP can be exchanged with the protocol stable currency USTP at a ratio of 1:1;

5. T Protocol exchanges USDC out of the curve liquidity pool (suitable for small transactions) or exchanges it for USDC through OTC with MatrixDock (suitable for large transactions), and returns it to the user.

The idea of T Protocol is to become an intermediary between non-Matrixdock users and Matrixdock, lowering the threshold for investors and allowing U.S. bond proceeds to enter native DeFi more smoothly. T Protocol's KYC-free strategy may become a mainstream in the future, and the TBT issued by it may also be a potential competitor for the stablecoin track.

• AlloyX

AlloyX is a RWA-based DeFi protocol that mainly provides investors with different combinable investment strategies by integrating other credit protocols. The protocols AlloyX has integrated include: Credix, Goldfinch, Centrifuge, Flux Finance and Backed Finance, etc.

AlloyX’s RWA business model implementation path is as follows:

1. AlloyX decides specific investment strategies through DAO voting and launches corresponding treasury products;

2. Lenders provide funds to treasury products in the form of USDC, while receiving treasury tokens based on floating exchange rates and earning income;

3. Lenders can exchange Vault Tokens back to USDC.

The most special thing about AlloyX is that it integrates many credit protocols, which can flexibly allocate user funds to different protocols to maximize returns, minimize risks, and have super composability.

But the problem also stems from the integration of third-party credit protocols. Once the credit protocol defaults (AlloyX cannot guarantee the security of third-party credit protocols), AlloyX investors will bear greater risk exposure.

3.Thoughts and Summary

There can be many underlying assets of RWA, but the most suitable for the crypto industry at the moment must be bonds (mainly short-term U.S. bonds and ETFs). Compared with real estate, art, gold and other assets, bond-type underlying assets have the strongest comprehensive advantages in terms of standardization, liquidity, and tokenization costs.

Therefore, in the short and medium term, the direction of RWA with bonds as the underlying assets deserves more in-depth attention. With the purpose of establishing a USD-standard interest-bearing asset in the crypto market, it can be found that the U.S. bond RWA has its own risk-free returns in the era of high interest rates, which perfectly meets the needs of the market.

Based on U.S. debt RWA, there are currently three layers of mainstream business models, namely the underlying infrastructure business, the middle layer mixed business, and the upper layer DeFi business. The difficulty and flexibility of RWA tokenization corresponding to the three-tier business model, as well as the customer groups each targets, are very different.

However, taking into account legal regulatory risks and development ceilings, the ceiling for upper layer DeFi business is higher. The tokenization of U.S. debt is only the first step of the foundation, but it is more worthwhile to explore the composability of "interest-bearing attributes" and native DeFi. At present, there are different attempts in the market, such as stablecoins based on U.S. debt RWA, permissionless lending protocol, and more.

In the long term, RWA will become an important carrier to completely connect TradFi and DeFi, forming liquidity interoperability, capital conversion without (low) threshold, and value sharing.

4.Reference

1. https://foresightnews.pro/article/detail/38819?utm_source=substack&utm_medium=email

2. https://foresightnews.pro/article/detail/39779

3. https://www.chaincatcher.com/article/2096718

4. https://www.chaincatcher.com/article/2099020

5. https://foresightnews.pro/article/detail/39256

6. https://docs.centrifuge.io/getting-started/privacy-first-tokenization/

7. https://tprotocol.gitbook.io/tprotocol-documentation-v2/white-paper/tprotocol-v2-documentation

8. https://matrixdock.gitbook.io/matrixdock-docs/v/english/

9. https://makerburn.com/#/

10. https://foresightnews.pro/article/detail/37687

11. https://tprotocol.gitbook.io/tprotocol-documentation-v2/white-paper/tprotocol-v2-documentation

12. https://docs.openeden.com/category/introduction