The favorite of cryptocurrency enthusiasts, is putting RWA assets on the blockchain a dream or an illusion?
Human history is not good at repetition, but it excels at reenactment. Hard work pays off; from the piles of old documents, everyone has found a new narrative logic: RWA (Real World Asset).Author: Liu Honglin, Shanghai Mankun Law Firm
Faith in the Crypto World Needs to Be Recharged
The crypto world needs faith, and faith needs to be recharged.
It's becoming increasingly difficult to make money with traditional projects; what can be used to sell dreams?
The profits for retail investors are dwindling; how can we fool the institutional old hands into stepping down?
Traditional funds want to go overseas; how can they find a sexy and legitimate reason to do so?
These three nakedly direct questions strike at the heart, constantly testing various project teams and crypto service providers, making them toss and turn, pondering deeply.
What to do? Flip through historical documents for information. See if there’s anything like a DAO organization that sounds grand and concerns the fate of humanity but is vague in specifics, something everyone can participate in but seems like no one is doing the same thing—a large-scale social experiment.
This is the beauty of social sciences; it can only confirm, not falsify. You can say what I’m doing isn’t good, but you can’t say it’s wrong, firmly grasping the moral high ground of the industry.
Human history is not good at repetition but excels at re-enactment. Hard work pays off; from the piles of old documents, everyone has found a new narrative logic: RWA (Real World Asset).
I once tried to seriously learn about RWA.
But a friend in the circle told me, "Don’t waste your effort; you lawyers don’t understand what Web 3.0 or RWA is."
I said, "Friend, we have no enmity; why do you say that?"
He said, "The ideal RWA in the crypto world is when someone points to a set of unsellable real estate or a bad debt in their hands and says: 'It needs to go on-chain.'"
Thus, the asset goes onto the blockchain, forming an immutable token.
As a result, netizens scattered around the globe, under the decentralized ideology and based on their high recognition of the project team’s efforts, are unstoppable in giving you their USDT or BTC.
You start to feel melancholic with the virtual currency raised from fundraising, pondering whether to throw a party in Singapore or become a digital nomad in Bali.
If the project makes money, you say, "Follow me, and we’ll feast together; then we can play big again." If the project loses money, you say, "We are all adults; this matter is not legally protected; profits and losses are to be borne by ourselves."
I said: "I’m not sure if what you’re talking about is RWA, but it sounds like illegal fundraising."
He said: "I told you, you lawyers don’t understand RWA; this is called consensus."
Not understanding the consensus of the crypto world doesn’t prevent us from learning common sense. Let’s discuss three points regarding RWA:
First: What is RWA?
Second: How are successful RWA cases done?
Third: Is it reliable to do RWA in China?
Once again, I declare that this article comes from a very unprofessional Web 3.0 lawyer and represents only the personal views of Lawyer Honglin, not constituting legal opinions or advice on specific matters. Some expressions and content in this article may make the original Web 3.0 big shots uncomfortable.
What is RWA?
RWA (Real World Asset) refers to assets that exist in the real world, not on the blockchain network, such as real estate, stocks, bonds, and artworks, which are mapped onto the blockchain network in certain ways to interact with DeFi protocols, providing users with more asset choices and sources of income.
For example, USDT is one of the earliest RWAs, where real-world dollars are tokenized, resulting in the dollar token USDT appearing on the blockchain.
For instance, users can use their real estate as collateral to borrow stablecoins through a DeFi platform, or they can tokenize their stocks and trade or invest through a DeFi platform.
Why should good real assets be RWA on-chain?
Because it’s beneficial. Tokenization can provide real assets with higher liquidity, transparency, and efficiency, while also bringing more value and diversity to the blockchain ecosystem. For example:
Reducing transaction costs and time, improving transaction efficiency and convenience. For instance, through blockchain technology, fractional trading of real estate can be realized, allowing more people to participate in real estate investment without paying high intermediary fees and handling costs.
Increasing asset liquidity and accessibility, broadening the audience and market size for assets. For example, through blockchain technology, graded trading of artworks can be realized, allowing more people to appreciate and collect artworks without worrying about authenticity and preservation issues.
Enhancing asset transparency and traceability, increasing trust and value in assets. For example, through blockchain technology, the traceability of gold can be realized, allowing more people to know the source and quality of gold without relying on centralized institutions and standards.
In pursuing RWA, humanity has always been relentless. In January 2017, RealT was established on the Ethereum platform, allowing users to purchase partial ownership of U.S. real estate and tokenized asset ownership. In June 2017, Centrifuge was established on Ethereum, enabling businesses to tokenize their commercial invoices, accounts receivable, and other assets for financing through DeFi platforms. In October 2017, MakerDAO launched the DAI stablecoin on Ethereum, allowing users to generate DAI by collateralizing different types of assets.
Let’s take MakerDAO as an example to look at its narrative story.
How Does MakerDAO Work?
The MakerDAO project was established in 2014 and is one of the earliest decentralized autonomous organizations on Ethereum. MakerDAO can be understood as a decentralized financial system based on the Ethereum blockchain, providing a stablecoin DAI (a cryptocurrency pegged to the dollar), a governance token MKR, and a collateral loan platform Maker Vault.
The goal of MakerDAO is to create a public infrastructure that is not influenced by centralized power institutions or managers, providing economic freedom and opportunities for individuals globally. The assets of MakerDAO have the following characteristics:
Diversity: MakerDAO supports various types of collateral, including cryptocurrencies (such as ETH, WBTC, BAT, etc.), physical assets (such as real estate, artworks, etc.), and fiat currencies (such as USDC, TUSD, etc.). This reduces the risk of a single collateral type and enhances the liquidity and credibility of DAI.
Flexibility: MakerDAO allows users to freely choose the type and proportion of collateral, as long as they meet the minimum collateralization ratio and stability fee requirements. Users can adjust their asset allocation based on their risk preferences and return expectations.
Transparency: The asset allocation of MakerDAO is completely public and verifiable; anyone can view the current types and proportions of collateral, as well as the parameter settings (such as minimum collateralization ratio, stability fee, liquidation penalties, etc.) through blockchain explorers or third-party tools. This increases the trust and traceability of DAI.
Governance: The asset allocation of MakerDAO is decided by MKR holders through voting, allowing them to adjust the parameters of each collateral type or add new types of collateral. This makes DAI more adaptable to market changes and demands, and allows MKR holders to participate in the governance of the system.
Throughout the development of MakerDAO, important events include the following, with RWA-related parts highlighted:
In 2014, the MakerDAO project was established, one of the earliest decentralized autonomous organizations on Ethereum.
In 2015, MakerDAO released its first white paper, introducing the system for generating DAI by collateralizing Ether through smart contracts.
In December 2017, single-collateral DAI (Sai) officially launched, becoming the first asset-backed cryptocurrency soft-pegged to the dollar.
In January 2018, MKR tokens began listing on exchanges, serving as MakerDAO's governance token for participating in risk management and parameter settings.
In March 2020, due to market turmoil caused by the COVID-19 pandemic, congestion on the Ethereum network led to failures in Maker Vault's liquidation mechanism, resulting in significant losses for some users. The MakerDAO community voted to initiate an MKR minting plan to compensate affected users and restore the system's capital adequacy ratio.
In May 2021, MakerDAO announced a partnership with Paxos to include Paxos stablecoins in the collateral list for multi-collateral DAI, and planned to introduce physical assets (such as gold, real estate, etc.) into the system.
In July 2021, MakerDAO announced a partnership with Centrifuge to include Centrifuge's Tinlake assets in the collateral list for multi-collateral DAI, marking the first time physical assets were tokenized and used to generate DAI.
On August 4, 2021, MakerDAO announced a partnership with Centrifuge, incorporating Centrifuge's Real World Assets into its collateral system, increasing the supply of DAI by approximately $5 million and providing more real asset backing for DAI.
In May 2022, MakerDAO released a new governance model, MIPs (Maker Improvement Proposals), dividing the governance process into three stages: proposal, approval, and execution, increasing community participation and transparency.
In July 2022, MakerDAO became the first stablecoin project to achieve full decentralization, with all key decisions made by MKR holders through a decentralized autonomous organization (DAO).
In November 2022, MakerDAO completed support for RWA (Real World Assets), allowing users to collateralize physical assets such as real estate, cars, and artworks to generate DAI, increasing the types and value of DAI's collateral.
In January 2023, MakerDAO released a new risk parameter adjustment mechanism, RWAU (Real World Asset Units), entrusting the risk assessment and management of RWA to professional asset management institutions, reducing the risk exposure of the Maker protocol.
In May 2023, MakerDAO successfully integrated with CBDC (Central Bank Digital Currency), allowing users to use central bank-issued digital currencies to generate or exchange DAI, enhancing DAI's compliance and credibility.
In July 2023, MakerDAO announced partnerships with global mainstream payment platforms such as Visa, Mastercard, and PayPal, enabling users to use DAI for cross-border payments, e-commerce, peer-to-peer transfers, and various financial activities, enhancing the convenience and popularity of DAI.
According to data from makerburn.com, as of June 29, 2023, Maker is expected to generate an annual profit of $73.67 million, and apart from stablecoins and exchanges, there are few decentralized applications as profitable as MakerDAO. Currently, the market capitalization of MKR is approximately $820 million.
With fame comes controversy; throughout the development of MakerDAO, doubts about it have naturally arisen, mainly in the following three areas:
For example, is the governance of MakerDAO truly decentralized? Some question whether the governance process of MakerDAO is manipulated by a few large holders or the core team, and whether it can adequately reflect the will and interests of community members.
For example, is MakerDAO's stability mechanism reliable? Some point out that MakerDAO's stability mechanism relies too heavily on market mechanisms and liquidation penalties, which could lead to system collapse or token devaluation in extreme situations.
For example, is the choice of collateral for MakerDAO reasonable? Some believe that MakerDAO's choice of collateral is either too conservative or too aggressive, failing to fully utilize the diversity and innovation of blockchain, and not effectively controlling risk exposure and leverage.
Is RWA Feasible in China?
According to a statistic from BCG Boston Consulting Group, the RWA sector is expected to reach an overall scale of $16 trillion by 2030.
The future looks bright, but I often see a painful expression on the faces of some blockchain practitioners in China, as if they feel that their homeland is unworthy of their ambition to change the world and become wealthy.
So they often wander in different countries, holding Chinese passports, wanting to be global nomads. Their social circles focus on global markets, discussing the Federal Reserve's interest rate cuts and the latest speeches from ministers in Dubai, but they never consider one question: whether Web 3.0 or blockchain, where are the biggest market dividends and opportunities? How can they be seriously implemented?
Before answering this question, we may need to digress and discuss a basic legal logic.
A person is the sum of a series of social relationships. If we were to roughly categorize these social relationships from a legal perspective, there are generally two types: one is property rights, and the other is creditor rights.
Property rights can be understood as the phone you hold in your hand or the monitor you are staring at; if it can move, it is called movable property (like a phone or car); if it cannot move, it is called immovable property (like a house).
Creditor rights can be understood as your right to demand something from others, whether because someone borrowed money from you or because someone beat you up and owes you medical expenses. The former arises from a lending relationship, so it is called contractual debt; the latter arises from personal injury, so it is called tortious debt.
In the world, everything can be simplified; social relationships are roughly like this. Represented in a mind map:
The biggest difference between property rights and creditor rights is: property rights are determined by you, while creditor rights depend on whether the other party agrees.
For example, if you really can't stand reading this article, you can throw your phone on the ground; no one can stop you because the phone is yours, and you are the owner of the property; you have that right.
However, creditor rights are different; if someone owes you money and refuses to pay, no matter how much you try to use your mind to make them pay or draw circles to curse them, ultimately, it still depends on them to repay.
Now the question arises, is RWA a property right or a creditor right?
To untie the knot, we need to look at how RWA tokenization is conducted. Generally speaking, we see RWA mainly in two ways:
One is to transfer the ownership or income rights of physical assets to a specific blockchain address through a trust or legal contract, and then issue corresponding tokens; this method is called off-chain anchoring.
The other is to map the attributes or status of physical assets to the blockchain through smart contracts and then issue corresponding tokens; this method is called on-chain mapping.
Regardless of the method, a trusted third-party institution is needed to verify and supervise the relationship between the physical assets and the tokens to ensure the authenticity and security of the tokens.
But friends who truly love blockchain and are extremely unenthusiastic about humanity understand: once someone intervenes, it becomes a bit unreliable.
Cryptographic assets based on blockchain technology aim to solve the core problem of allowing users to control and manage their digital assets without relying on any third party. However, according to the narrative logic of RWA, traditional assets, which may include unfinished real estate or bad debts owed by a company to others, are essentially converted into fragmented creditor rights through the RWA blockchain packaging process.
And exercising creditor rights requires the trust and execution of a third party. As a consumer user or holder of RWA, when you purchase RWA assets, from a legal perspective, you cannot directly exercise your rights but need to rely on centralized institutions offline.
After all, in the process of putting real assets on-chain, no matter how compliant it is, it merely involves lawyers working extra days during the due diligence phase to build various legal structures, and having the project party sign a few more pledge or guarantee agreements legally; there is proof of compliance workload and progress, but there won't be a qualitative difference.
In addition to initially deviating from the decentralized ideology of blockchain and the original intention of a trustless mechanism, RWA also faces some legal difficulties and obstacles. According to my unprofessional and superficial understanding, there may be several issues that need to be addressed by talented individuals in the circle.
1. The Confirmation and Registration Issues of RWA.
RWA are assets in the real world, and they usually need to be registered with relevant ownership registration agencies to prove their ownership and value. For example, when you buy a house in China, you need to register at the real estate center and obtain a small booklet to prove that the house belongs to you; if you want to sell the house to someone else, both parties need to register again. This, from a legal perspective, is called the principle of property registration. Everything verbal is useless; it only matters who is registered with the housing authority.
If the salesperson selling the house tells you that you have reached a consensus with me, you pay the money, and I verbally promise to give you the house, I estimate your whole family would not agree.
On the blockchain network, RWA exists in a digital or tokenized form, and transactions are quite fluid. If RWA undergoes transfer or change on the blockchain network, will it affect its ownership and value in the real world? For instance, if a user tokenizes their real estate and sells it to others on the blockchain network, do they still own that real estate in the real world? If disputes or controversies arise, which legal system should be used to resolve them?
2. The Evaluation and Audit Issues of RWA.
Assets in the real world are evaluated and audited by professional evaluation agencies or third-party institutions to determine their authenticity and value before being put on the blockchain and existing in tokenized form. At this point, an interesting question arises: how to ensure that the value of RWA on the blockchain network is consistent or close to its value in the real world? How to prevent excessive volatility or manipulation of RWA on the blockchain network? How to ensure the authenticity and credibility of RWA on the blockchain network?
3. The Regulatory and Compliance Issues of RWA.
RWA are assets in the real world, and they are usually subject to relevant regulatory agencies or legal regulations to ensure their legality and security. If they exist in tokenized form, they often transcend existing regulatory boundaries and categories, leading to the question: how to maintain the innovation and flexibility of blockchain technology while complying with relevant regulatory requirements and compliance standards? How to achieve effective regulation and management of RWA on the blockchain network without compromising user interests and privacy rights? How to intervene and handle issues promptly in case of risks or crises?
These issues not only relate to the feasibility and sustainability of the combination of RWA and DeFi but also concern the development and application of blockchain technology in China's financial sector. To solve these problems, it requires the joint efforts of regulatory agencies, legal experts, evaluation institutions, blockchain companies, DeFi platforms, users, and other parties. Only by establishing a comprehensive legal compliance system can RWA be integrated with DeFi, providing more possibilities and opportunities for financial innovation and development in China.
Conclusion
RWA is an idealism that crypto enthusiasts are fond of, just as DAO organizations are the ideal businesses for many project teams. However, the narrative logic of RWA that most people are currently discussing is contrary to the original intention of cryptocurrency. Everyone hopes that asset trading is decentralized, freely flowing globally, and can lead to wealth through speculation, but also hopes that asset on-chain processes are centralized, assets are compliant, and asset appreciation is reliable. Such operations leave non-Web 3.0 individuals a bit confused.
The narrative story and demand of RWA, rather than being a wealth fantasy for crypto enthusiasts, is more like the clinking of traditional financial institutions' abacuses. Traditional asset management companies and fund groups have harvested most of the big holders; how can they tell a sexy good story to investors again? The story of RWA seems like a good scene in the movie "Let the Bullets Fly," where the county magistrate joins forces with Huang Silang to fight bandits; the name is not important, but fundraising is key. Once the money is in hand, it’s a 60-40 split.
The legal compliance of RWA involves issues such as confirmation, registration, evaluation, auditing, and regulation, currently facing problems like unclear regulations, imperfect laws, insufficient liquidity, and bad debt risks. There is feasibility for RWA in China, but the road ahead is evidently long and arduous. Friends who want to make money safely in the long term should not rush; it might be better to let the bullets fly a little longer.
