Does RWA really have application scenarios? How has it developed recently?

Author: Lao Bai

The previous article discussed the perspectives of Eastern and Western markets from a first-level viewpoint. Today, coinciding with YZi Labs' official announcement of investment in the Plume Network RWA platform, I would like to talk about the recent changes I have observed in the RWA sector.

This topic can be divided into four parts:

1. Does RWA really have application scenarios, or 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 sensed the recent trends in RWA over the past few months?

First, let's discuss 1 - Does RWA really have application scenarios, or PMF - (Here, we first exclude the stablecoin sector of US Treasury bonds, as Usual, MKR, etc., have already found PMF.) Taking US stocks on-chain as an example, this is the most contentious topic on Twitter. Many people believe 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 likely to be more volatile than US stocks, making it unnecessary to play with stocks on-chain.

I have a different opinion. Personally, I believe that US stocks on-chain do have their significance.

1. From the channel perspective - 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 crypto space do not have US stock accounts. Trading US stocks on-chain can at least open up their purchasing channels without barriers.

From another angle, the total market capitalization of stablecoins like USDT/USDC is growing larger, which is another avenue for the diffusion of US dollar hegemony relative to traditional finance. If crypto, through stablecoins + Payfi + a smart wallet experience similar to Alipay, really moves towards mass adoption one day, do you think Americans would be willing to let the whole world take over their US stocks? Would most people in other countries prefer to open accounts with various banks and brokers to buy their own struggling stocks, or would they find it simpler to invest in the world's largest economy with just one click, like shopping on Taobao?

2. From the application scenario perspective, imagine this case: as a junior trader, you recently made a profit of 100,000 U from Mubarak. You know that Tesla has recently halved in value, making it a good time to buy the dip, and you want to convert this 100,000 U into Tesla stock.

Even if you have a US stock account, you first need to OTC this 100,000 U into fiat currency, send the fiat through a bank to the broker's account, and then start buying from the broker. This entire process typically takes 3-5 business days (back in 2017, before I got into Bitcoin, I bought US stocks through FirstTrade in Australia, and just the SWIFT transfer took 4-5 days, plus a hefty fee of over $50). If one day Tesla rises and you want to sell and convert it back to BTC or U, you have to go through this process again… Imagine if US stocks were on-chain, you could instantly convert your meme profits into Tesla. The reduction in friction costs is not just a small improvement; it’s a tenfold or hundredfold enhancement in experience.

Next, 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 the specific target audience.

For the consumer side, stocks are undoubtedly the most suitable. Most retail investors have probably never encountered primary private equity; even if you tokenize the equity of a non-public company, few people would be able to understand, buy, and hold it. Additionally, private credit collateral on platforms like Centrifuge, such as bridge loans in the real estate market or corporate receivables, are also not suitable for consumers. The vast majority of retail users are likely only familiar with stocks. More scenarios for consumers should involve making an asset accessible to users who previously had no channels to purchase it, which is a process from 0 to 1.

On the other hand, for the business side, there are many more things that can be tokenized, but relative to the consumer side's process from 0 to 1, the business side should focus more on reducing friction from 1 to 100. Just as primary private equity already circulates among some institutions and high-net-worth investors, bridge loan collateral placed on Centrifuge is likely to secure loans from banks as well; it’s just that this circulation process is relatively cumbersome and fraught with friction. Putting it on-chain can significantly enhance user experience and flow speed, much like Payfi compared to SWIFT.

Speaking of this, I recall a conversation last year about an RWA project whose parent company is a well-ranked asset management institution in the US. They planned to issue tokenized shares of primary equity from their asset management platform clients, such as Musk's SpaceX, on their own trading platform, allowing the tokens to circulate and be traded easily, ultimately settling in one go when SpaceX goes public. Therefore, for the business side, aside from the limited trading users being institutions and enterprises, the issuing entities are also relatively restricted. Just like the example above, unless you already manage a significant amount of SpaceX equity, if you are merely an STO or RWA platform, attracting SpaceX equity holders to issue tokens representing SpaceX equity involves considerable friction in terms of resource cooperation, legal terms, and more.

There are also many intermediate cases that can be both To C and To B, such as IP on-chain like Story Protocol, or tokenizing royalties from a novel, box office from a movie, or sales from a game. These things feel like they are still in the early exploratory stage, requiring trial and error. For instance, tokenizing influence has seen FT fail while Kaito has been relatively successful. Tokenizing celebrity time, http://Time.Fun, quickly faded after a few days… 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 primarily based on synthetic assets, represented by SNX, Terra's Mirror, and GNS.

This path has essentially been disproven, and the aforementioned three platforms have long since delisted their synthetic US stock assets for two reasons: first, people are not very interested in "fake assets" synthesized from stablecoins or local currencies (like SNX). You can see the comparison of the volumes of BTC, WBTC, and SNX's SBTC. Synthetic assets, to be honest, are less reassuring than "mapped assets" like WBTC. Second, back in the day, the SEC would often investigate without reason; although synthetic assets are fake, the SEC doesn't need a reason to investigate you, so it's better to avoid trouble, leading these platforms to delist 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 two years ago. Currently, there are two solutions for putting US stocks on-chain.

One is to follow the traditional compliant Broker-Dealer route, where the moment a user buys tokenized stocks on-chain, it triggers off-chain compliance brokers to perform corresponding operations in the US stock market. Essentially, it’s like placing orders on Robinhood, where Citadel "buys" on behalf of you in the stock market. The advantage is that the stocks you buy are "real stocks," or at least backed 1:1 by this broker, somewhat similar to WBTC for BTC. The downside is that trading hours are entirely tied to the stock market, and you can't trade 24/7 like in crypto; you also need to establish trust in this broker or platform. Additionally, selling would trigger a taxation event, requiring US citizens to submit tax-related forms, and non-US citizens would at least need to undergo KYC, which is quite cumbersome.

The second approach is that of Ondo Global Market. I looked through their documentation, and they initially intended to follow the Broker-Dealer route but later changed to a stablecoin-like approach, allowing their partnered or authorized issuers to directly issue tokenized stocks (similar to how Tether issues USDT and Circle issues USDC). The advantage seems to be greater flexibility, potentially freeing them from the constraints of US stock trading hours, ultimately settling through the issuer at a certain time. The downside is that it likely can only target non-US users, and there’s the question of whether different issuers will issue different CA for the same stock (similar to how USDC on different chains may not be compatible), but these specific details are not documented, as the product is not expected to launch until next year.

Finally, platforms like Plume feel more like a framework that includes KYC/AML, data storage/execution, consensus, ZKTLS verification, etc. Theoretically, it allows partner institutions to issue various tokenized RWA assets, which brings us back to the previous topic of "which assets are suitable for on-chain," so I won't elaborate further.

Lastly, let's discuss 4 - Have you sensed the recent trends in RWA over the past few months?

If you have been paying attention, the wind for RWA has actually been quite strong in the past two months. Here are a few "news" items I've observed:

1. As mentioned above, Ondo plans to launch Ondo Global Market, an on-chain stock market, by the end of this year or next year, and Ondo has recently been closely collaborating with Trump's WLFI.

2. Sui has also been cozying up to WLFI recently.

3. Frax is actively embracing Cedefi and recently launched frxUSD, a collaboration with BlackRock + Superstate.

4. Ethena today released a new product, Converge, focusing on what they believe are two of the most important scenarios in blockchain - storage and settlement for stablecoins and tokenized assets.

5. AAVE plans to issue a new coin, Horizen, which has sparked a huge uproar in the community. Stani personally came out to clarify - "The Horizen plan aims to fill the current gap in Aave's RWA business segment, and this plan is expected to surpass the revenue of Aave's existing business lines in five years."

6. The South Korean Financial Services Commission plans to release a statement in February 2025, intending to allow corporate entities to engage in virtual asset trading in phases. From friends in Korea, I learned that Korea may restart its STO (the previous term for RWA) plans. You can imagine that allowing "corporate entities to trade virtual assets" is definitely not about letting companies speculate on cryptocurrencies; it is certainly aimed at tokenizing some real financial assets into "virtual assets" for circulation between companies.

7. YZi Labs today officially announced its investment in the recently popular Plume Network RWA platform.

These pieces of news create a momentum that we cannot ignore. Therefore, my current perspective on the next main track, alongside Circle, is PayFI + RWA + Web2.5-like consumer apps. As for AI + Crypto, I can only say there is hope, and I am still discussing and observing. After I finish writing the next article "Things Worth Mentioning on ETH and Solana," I will write a separate piece on my recent thoughts regarding AI + Crypto as the fourth part of this comprehensive collection.