Asset Tokenization: Analysis of Underlying Logic and Exploration of Large-Scale Application Paths

The most关注 topic in the blockchain field in 2023 is undoubtedly the tokenization of real world assets (Real World Asset Tokenization, RWA). This concept has not only sparked heated discussions within the Web3 community but has also received significant attention from traditional financial institutions and regulatory bodies in many countries, being seen as a strategically important direction for development. For example, well-known financial institutions such as Citibank, JPMorgan, and the Boston Consulting Group have successively released their own research reports on tokenization and are actively promoting related pilot projects.

At the same time, the Hong Kong Monetary Authority clearly pointed out in its 2023 annual report that tokenization will play a key role in the financial future of Hong Kong. In addition, the Monetary Authority of Singapore, together with the Financial Services Agency of Japan, JPMorgan, DBS Bank, and other financial giants, has launched an initiative called "Project Guardian" to deeply explore the immense potential of asset tokenization.

Although the topic of RWA is in full swing, there are differences in understanding of RWA within the industry, and discussions about its feasibility and prospects are quite controversial.

On one hand, there are views that RWA is merely market hype and does not stand up to in-depth discussion.

On the other hand, some people are full of confidence in RWA and are optimistic about its future.

At the same time, articles analyzing different perspectives on RWA are emerging like mushrooms after rain.

This article aims to share perspectives on RWA and to conduct a more in-depth discussion and analysis of the current state and future of RWA.

Core viewpoint:

• The future key development direction of Real World Asset Tokenization will be a new financial system using DeFi technology, driven by authoritative institutions such as traditional financial institutions, regulatory bodies, and central banks, built on a permissioned chain (. To achieve this system, it requires a computational system (blockchain technology) + a non-computational system (such as legal frameworks) + an on-chain identity system and privacy protection technology + on-chain legal tender (CBDC, tokenized deposits, legal stablecoins) + a comprehensive infrastructure (low-threshold wallets, oracles, cross-chain technology, etc.).

• Blockchain is the first effective technological means to support the digitization of contracts, emerging after the development of computers and networks. Therefore, it can be said that blockchain is essentially a platform for digital contracts, where contracts are the basic expression of assets. The token )Token( is the digital carrier of assets after the formation of contracts. Thus, blockchain has become the ideal infrastructure for the digital expression/tokenization of assets, namely digital assets/tokenized assets.

• Blockchain, as a distributed system jointly maintained by multiple parties, supports the creation, verification, storage, circulation, and execution of digital contracts and other related operations, solving the problem of trust transfer. Moreover, as a "computational system", blockchain can meet human demands for "repeatable processes and verifiable results"; therefore, DeFi has become a "computational" innovation in the financial system, replacing the "computational" aspects of financial activities. Automated execution not only reduces costs and increases efficiency but also allows for programmability. However, the "non-computational" aspects, which are based on human cognition, cannot be replaced by blockchain. Consequently, the current DeFi system does not encompass credit, and unsecured lending based on credit has yet to be realized in the current DeFi framework. The reasons for this phenomenon include the lack of a system expressing "relational identity" in blockchain and the absence of a legal framework to protect the rights and interests of both parties.

• For the traditional financial system, the significance of Real World Asset Tokenization ) lies in creating digital representations of real-world assets (such as stocks, financial derivatives, currencies, equity, etc.) on the blockchain, thereby extending the benefits of distributed ledger technology to a wide range of asset classes for exchange and settlement.

• Financial institutions enhance efficiency by adopting DeFi technology, using smart contracts to replace the "computational" aspects of traditional finance, automatically executing various financial transactions according to predetermined rules and conditions, thereby enhancing programmability. This not only reduces labor costs but also, in specific contexts, it can provide new possibilities for enterprises, especially offering innovative solutions to financing challenges for small and medium-sized enterprises (SMSE), which opens a door full of potential for the financial system.

• As the attention and recognition of blockchain and tokenization technology from the traditional financial sector and governments around the world continue to strengthen, and with the ongoing improvement of blockchain infrastructure technology, blockchain is moving towards integration with traditional world architecture and addressing real pain points in real-world application scenarios. It aims to provide practical solutions for actual scenarios, rather than being confined to a "parallel world" that is disconnected from reality.

• In the future, under the pattern of multiple different jurisdictions and regulatory systems of permissioned chains, cross-chain technology will be particularly important for solving the issues of interoperability and liquidity fragmentation. Tokenized assets on the chain will exist on public blockchains and on permissioned chains operated by financial institutions, and cross-chain protocols similar to CCIP can connect tokenized assets across any blockchain to achieve interoperability and enable seamless communication between all chains.

• Currently, many countries around the world are actively promoting legal and regulatory frameworks related to blockchain. At the same time, blockchain infrastructure, such as wallets, cross-chain protocols, oracles, and various middleware, is rapidly being improved. Central Bank Digital Currency (CBDC) is also being continuously implemented, and token standards that can express more complex asset types, such as ERC-3525, are emerging. Coupled with the development of privacy protection technologies, especially the ongoing advancement of zero-knowledge proof technology, as well as the increasing maturity of on-chain identity systems, we seem to be on the brink of large-scale application of blockchain technology.

( 1. Introduction to Asset Tokenization Background

Asset tokenization refers to the process of expressing assets in the form of tokens on programmable blockchain platforms. Typically, tokenizable assets are divided into tangible assets (such as real estate, collectibles, etc.) and intangible assets (such as financial assets, carbon credits, etc.). This technology, which transfers assets recorded in traditional ledger systems to a shared programmable ledger platform, is a disruptive innovation for the traditional financial system and may even impact the entire future of human finance and monetary systems.

First, an observed phenomenon must be proposed: "There are mainly two distinctly different groups regarding the understanding of RWA asset tokenization," referred to as Crypto RWA and TradFi RWA. The RWA discussed in this article is from the perspective of TradFi.

)# RWA from a Crypto Perspective

First, let's talk about RWA in Crypto: RWA in Crypto is referred to as the one-sided demand for returns on real-world financial assets in the Crypto world. The main background is under the context of continuous interest rate hikes and balance sheet reductions by the Federal Reserve, where high interest rates significantly affect the valuation of risk markets, and the balance sheet reduction has greatly extracted liquidity from the crypto market, leading to a continuous decline in yields in the DeFi market. At this time, a risk-free yield of around 5% on U.S. Treasuries has become very attractive to the crypto market, with the hottest topic being MakerDAO's massive purchase of U.S. Treasuries this year. As of September 20, 2023, MakerDAO has purchased over 2.9 billion in U.S. Treasuries and other real-world assets.

The significance of MakerDAO purchasing U.S. Treasury bonds lies in the ability of DAI to diversify the assets it supports through external credit, and the long-term additional income generated from U.S. Treasury bonds can help stabilize DAI's exchange rate, increase the elasticity of its issuance, and incorporating U.S. Treasury bonds into its balance sheet can reduce DAI's dependence on USDC, thereby minimizing single point risks. Moreover, since the income from U.S. Treasury bonds will flow entirely into MakerDAO's treasury, MakerDAO has recently increased DAI's interest rate to 8% by sharing part of its treasury bond income to boost the demand for DAI.

The approach of MakerDAO is clearly not something that all projects can replicate. With the explosive rise in the price of the MRK token and the heightened market sentiment surrounding the hype of RWA concepts, various RWA concept projects have emerged, aside from a few larger projects that follow compliance routes. Various assets from the real world are being tokenized and sold on the blockchain by any means possible, including some rather absurd assets, leading to a mixed bag in the entire RWA track.

The RWA logic of Crypto mainly revolves around how to transfer the rights to the income generated by assets (such as US Treasury bonds, fixed income, stock income rights, etc.) onto the blockchain, how to collateralize off-chain assets to obtain liquidity for on-chain assets, and how to bring various real-world assets onto the blockchain for trading (such as sand and gravel, minerals, real estate, gold, etc.).

Therefore, we can find that the RWA of Crypto reflects the one-sided demand of the crypto world for real-world assets, which still faces many obstacles in terms of compliance. MakerDAO's approach is actually for the MakerDAO team to deposit and withdraw funds through compliant channels (such as Coinbase and Circle) and to purchase U.S. Treasury bonds through formal means to obtain their yields, rather than selling these yields on-chain. It is worth noting that the so-called RWA U.S. Treasury bonds on-chain are not the U.S. Treasury bonds themselves, but rather their rights to income. Additionally, this process involves converting the legal currency income generated from U.S. Treasury bonds into on-chain assets, which increases the complexity of operations and friction costs.

The rapid rise of the RWA concept is not solely attributed to MakerDAO. In fact, a research report titled "Money, Tokens, and Games" released by Citibank from the traditional financial sector has also generated strong reactions in the industry. This report reveals the significant interest many traditional financial institutions have in RWA and has sparked enthusiasm among a large number of market speculators. They are spreading rumors about major financial institutions soon entering this field, further raising market expectations and the atmosphere of speculation.

RWA from a TradFi Perspective

From the perspective of Crypto, RWA mainly expresses the unilateral demand of the crypto world for the asset yields of the traditional financial world. If we establish this logic and look at it from the perspective of traditional finance, the scale of capital in the crypto market is basically negligible compared to the traditional financial market, which often amounts to trillions of dollars, whether it is U.S. Treasuries or any other financial assets. If it is just to add another sales channel on the blockchain, it is unnecessary. From the visual comparison of market scale, we can see the scale difference between the crypto market and the traditional financial market.

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From the perspective of traditional finance (TradFi), RWA represents a two-way approach between traditional finance and decentralized finance (DeFi). For the traditional financial world, DeFi financial services, which are automatically executed based on smart contracts, are an innovative financial technology tool. The RWA in the traditional finance sector focuses more on how to integrate DeFi technology to achieve asset tokenization, empowering the traditional financial system to reduce costs, improve efficiency, and address the pain points in traditional finance. The focus is on the benefits that tokenization brings to the traditional financial system, rather than merely finding a new sales channel for assets.

It is necessary to distinguish the logic of RWA. Because the underlying logic and implementation paths of RWA differ greatly from different perspectives. First, in terms of the type of blockchain chosen, the two have different implementation paths. The RWA in traditional finance follows a permission chain path, while the RWA in the crypto world follows a public chain path.

Due to the characteristics of public chains, such as no admission requirements, decentralization, and anonymity, the RWA of crypto finance not only faces significant compliance obstacles for project parties, but users also lack legal rights protection when encountering bad events like Rug. Furthermore, the rampant behavior of hackers places a high demand on users' security awareness. Therefore, public chains may not be suitable for large-scale applications.