Will RWA be the next decisive opportunity for Binance and OKX?

Original Author: Ye Kai

Articles are often lengthy and tedious, and sometimes once the topic of RWA exchanges is opened, it becomes hard to stop. Since the Hong Kong Web3 conference last year, some big names have been eager to establish exchanges together. At that time, I was not optimistic about the licensed compliance in Hong Kong, but instead researched the regional markets in Dubai and South America and the possibilities of RWA vertical exchanges; of course, I also visited many friends from various exchanges to learn more about the ecosystem of cryptocurrency exchanges, especially the gray washing industry, as well as the core operations involving community members and liquidity. Several friends rushed to submit their licensing applications before the deadline at the end of March this year, but I was not optimistic about the licensing applications in Hong Kong and the subsequent Bitcoin ETF. As expected, in recent days, several applications for the 7th license in Hong Kong have been withdrawn, and I believe more institutions will follow suit.

Setting aside the U.S. actions against certain exchanges, offshore exchanges like Binance, OKX, and Huobi have seen various tokens flying around without anyone picking them up; meanwhile, the licensed exchange HashKey (Hong Kong) has compliance but lacks trading volume and liquidity. The international site only saw some trading volume after its launch, but most of it is still just a share of the existing cryptocurrency market. Amidst this chaos, is there a new opportunity?

Will RWA exchanges be the next decisive opportunity for Binance, OKX, and licensed exchanges?

Those in the know understand that native cryptocurrency exchanges are already very mature, especially those led by the Chinese, represented by Binance, OKX, and Huobi; in terms of trading scale, if Binance does not encounter self-destructive issues like Huobi, OKX basically has no chance of surpassing it, and second-tier exchanges like KuCoin and Gate also find it difficult to surpass or disrupt the leading exchanges.

Creating a new offshore exchange is also quite challenging because this model is already very mature, relying on the gray washing industry, similar to a casino, where the main community members and marketing strategies are the same old players using the same old methods—it's just a difference of fifty steps versus a hundred steps. Starting a new one might slice a small piece of the cake, but it's hard to surpass.

The licensed exchanges in Hong Kong are essentially a false proposition; the regulatory bodies are still those old financial players, and the so-called innovative products like STO securities tokens and Bitcoin spot ETFs are merely the traditional financial institutions' vested interests dividing the cake through intermediaries like the Hong Kong Stock Exchange, making it impossible for the new forces of Web3 to truly gain a foothold.

The new track of Web3 wallets has been pursued by OKX and Binance for a long time, but products like inscriptions and memecoins have only seen temporary popularity without sustaining long-term cycles or trading volume. Even the BTC core has been quite concerned about inscriptions, making it nearly impossible to support a large new ecosystem.

In contrast, the Bitcoin spot ETF in the U.S. is much more robust than Hong Kong's Bitcoin spot ETF. The key takeaway from the U.S. Bitcoin ETF is that if one wants to grow, they need to consider the old money and incremental users in the real world.

Overall, Binance and OKX have already exhausted the existing cryptocurrency market; their only opportunity lies not in the Web3 wallets and new memecoins they've been toiling over, but in the RWA (Real World Asset) tokenization and DePIN (Decentralized Physical Infrastructure Network) exchanges/tracks.

Why is RWA the next decisive opportunity for Binance and OKX?

Why do I say this? Because the largest incremental market lies in real-world assets.

In my first article on RWA, I listed the figures for real-world assets based on global currency and market data from 2020 (in USD): silver at 43.9 billion, gold at 10.9 trillion, stocks at 89.5 trillion, global debt at 253 trillion, real estate at 280.6 trillion, and derivatives at 558.5 (low) to 1000 trillion (high), not to mention emerging assets like AI computing power and renewable energy.

Reflecting on the current BTC bull cycle, what is the core reason for the rise? Most would think of the Bitcoin spot ETF. What is the essence of an ETF? It is a product that connects the real world with Bitcoin; it is a typical RWA model product traded on exchanges like the NYSE, CME, and NASDAQ, while Bitcoin spot trading has been captured by Coinbase, directly driving hundreds of billions of dollars into the market, with daily incremental trading volumes approaching four to five billion dollars.

Currently, the only largest incremental market is real-world assets, funds, and users. We have always emphasized that the essence of RWA is corporate financing, and the core of corporate financing lies in the institutional market, where mainstream real-world assets and funds are held by corporations and institutions. Moreover, RWA products can allow incremental novice users to participate without needing complex digital wallets; they can use conventional credit cards or pension accounts at traditional exchanges, with RWA tokens or digital assets having professional custody and trading platforms.

Returning to the Bitcoin spot ETF, aside from U.S. listed companies, the funds and institutions that follow the ETF, including banks and pension funds in pilot investments, you only need to analyze one thing: look at the proportion of Bitcoin ETF in their investment allocation and the asset allocation categories before they entered, and you will understand the vast space behind RWA assets.

When it comes to real-world assets, RWA exchanges cannot be separated from DePIN.

The combination of RWA and DePIN effectively represents the mapping or anchoring of real-world assets. DePIN serves as the infrastructure for issuing real-world assets on-chain, essentially representing the IoT's on-chain 3.0+ asset tokenization. Leading exchanges have long had DePIN tracks, but looking at the current DePIN projects, if we consider WiFi or data-sharing projects, it is challenging to generate cash flow value directly; however, as the infrastructure for issuing RWA assets, it can directly generate RWA token value during the asset issuance and trading process, and this RWA token cash flow can further combine to form RWA products.

In the realm of real-world assets, the combination of DePIN with DAO and smart contract SPVs (Special Purpose Vehicles) and crypto funds (token dividends or liquidity) can make RWA asset issuance and anchoring more on-chain and more native (the implementation model is complex enough to warrant a detailed discussion in another article).

So let's clarify:

Offshore leaders like Binance, OKX, and Huobi are all native token exchanges, starting from early ICOs and contracts, growing to secure their position in the first tier; the target customer base for offshore exchanges is primarily retail traders.

Coinbase in the U.S. is somewhat half-offshore and half-licensed; when Binance was constrained by the U.S. and through the Bitcoin spot ETF, it successfully captured a massive influx of traffic; Coinbase's customer base is more complex, including not only retail but also a significant number of institutional clients brought in by the ETF.

The licensed exchange HashKey (Hong Kong) focuses on compliance, mainstream tokens, and securitized tokens, primarily serving PI clients, with many restrictions on retail traders, resulting in overall low trading volume, most of which is non-crypto-based, especially focusing on compliant inflows and outflows.

There is also the Hong Kong Stock Exchange, which, despite the decline in trading volume, has managed to seize the dominant position for Hong Kong's Bitcoin spot ETF through conservative regulation, sharing the profits with a group of brokerage intermediaries. I seriously suspect that STOs will follow a similar path; the target customer base for the Hong Kong Stock Exchange is mostly institutional clients and PI investors, essentially traditional investors and investment institutions trading Bitcoin concept stocks.

So, do you still expect any revolution or disruption from Hong Kong's licensed exchanges?

We should seriously consider: Is the RWA exchange the only opportunity to attract old money between offshore exchanges and licensed exchanges?

The Core Key of RWA Exchanges

Although the market space for RWA is vast, bridging or connecting the real world and the crypto world greatly requires correct advocacy, knowledge dissemination, professional education, and consulting incubation, investment advisory, etc. The future popularization of real-world asset tokenization involves a large amount of migration, uplift, trading, and delivery, making RWA exchanges and their ecological institutions crucial.

However, the current licensed exchanges and many claiming to be RWA exchanges or RWA asset protocols have essentially only solved the asset issuance issue, such as STO asset protocols, NFT certificate models, or the standards and processes for STO asset tokenization, but once it comes to tokenization going live, it abruptly stops. Practitioners have yet to address four key issues: market structure, market participants (2B and 2C), native tokens, and liquidity.

From the RWA perspective, drawing on the experiences of traditional exchanges, the market structure of an exchange is quite complex, involving the trading assets and funds on both ends, the trading methods, the classification of market participants, and the trading characteristics, as well as the different levels of trading channel layouts of the exchange.

RWA exchanges must first analyze the funding side strategy. First, compared to the uniqueness of Hong Kong stocks regarding the funds for asset exchange between China and the U.S., the decoupling between China and the U.S. has led to a decline in the role of the Hong Kong Stock Exchange and liquidity, but from the RWA perspective, can these off-the-books funds for China-U.S. asset exchanges be accommodated? Second, compared to ICE, CEX, and LME, as bulk commodities and precious metals in the real-world asset space, if they can be converted into RWA products, surrounding these assets with spot trading, futures, options, derivatives, and contracts, along with leveraged arbitrage funds, the funding scale could be limitless. Third, similar to drip irrigation to the Australian exchange, global funds are seeking investment opportunities in cash cow assets; from the perspective of corporate financing needs and overseas funds pursuing operational cash flow and short-term returns, this also represents a large-scale demand in the RWA field.

The asset side of RWA exchanges needs to reflect the characteristics of asset scarcity, leverage, and arbitrage. Based on current funding preferences, three types of RWA assets are particularly favorable: scarce physical assets, assets that can generate stable cash flow, and efficient productive assets. Real estate has basically been excluded; scarce physical assets include AI computing power, green energy, and efficient new materials. Cash cow assets mainly include: naturally scarce and monopolistic industries, such as energy, minerals, finance, and utilities; cross-economic cycle assets, such as consumer goods, infrastructure, or utilities; and efficient materials or productive assets, such as AI computing power, high-end hardware, and new materials. From the perspective of RWA asset tokenization, it may be more suitable for high-quality growth assets with significant potential to continuously generate stable free cash flow.

RWA exchanges focus on incremental users and industrial users, so market participants will inevitably differ from those of native cryptocurrency exchanges. The expected participants brought in by real-world asset tokenization mainly include: physical enterprises engaged in spot trading, similar to delivery orders and warehouse receipts; asset allocation trading, mostly conducted by fund institutions for macro asset allocation, but the incentive mechanism for why they should come to RWA exchanges for allocation needs to be well designed; speculative trading institutions engaged in quantitative arbitrage, where RWA exchanges may be more suitable for trading strategies and liquidity contracts; intermediary trading service institutions, which is more complex and depends on the market expansion of RWA exchanges, potentially attracting more brokers, dealers, and makers.

The multi-level layout of RWA exchanges is also crucial. The foundation of the exchange is CEX+DEX, with AMM liquidity pools, and it also needs to have OTC bulk trading essential for industrial transactions. Since it involves RWA asset tokenization, it also requires L2 infrastructure, a LaunchPad for asset issuance/launching platforms, and DePIN as the infrastructure for real-world assets. Additionally, NFTs can serve as proof of rights or delivery order certificates, platform tokens can be used for governance, trading incentives, or liquidity, and there can be DAO+Fund support, as well as liquidity or farming mechanisms.

In summary, the key aspects of RWA exchanges include: issuing real-world assets on-chain, based on DePIN IoT's on-chain 3.0 and the tokenization of real-world assets; on-chain native token governance, incentives, or arbitrage, which attract incremental internal value; better facilitation of structuring and liquidity, addressing or improving the shortcomings of traditional finance or exchanges; and achieving multi-level financing and trading markets.

On the funding side, it is essential to establish smooth and acceptable channels from overseas liquidity and financing markets to attract more institutional and corporate clients; design arbitrage space based on the characteristics of RWA assets, ensuring sufficient asset value space and incremental internal value; combine the advantages of blockchain and digital assets like NFTs, tokens, and contracts to further realize the value structuring of traditional stock markets, bonds, derivatives, etc., while integrating the internal value incentives of native tokens; ultimately, build a financial narrative for the RWA trading platform and the financial market value of platform tokens, realizing an RWA industrial blueprint of "DePIN + industrial trading + digital IPO (RWA asset issuance) + digital banking + digital derivatives like industry/platform currencies."

Do not underestimate the scale of real-world assets; let’s not even mention large commodities like those on the CME, just take the electronic trading platform for agricultural products in Shandong, where the electronic trading volume for garlic exceeds 20 billion RMB. This can also be considered an RWA model, based on the garlic planting cycle's arbitrage, spot trading, and cold storage receipts, leveraged and arbitraged to form an electronic trading platform (website + app). This can easily be migrated on-chain, making it an RWA trade.

Once again, I’ve talked too much, and there’s much more to discuss regarding the economic design model of RWA exchanges. So, for now, consider this: Is there an opportunity for RWA exchanges to replace the Hong Kong Stock Exchange as a connecting point in the future multipolar world?