Written by: Will Awang, Diane Cheung

With the arrival of the crypto winter in 2022 and the continuous thunder of regulatory crackdowns and CEX defaults, the high APR of the crypto market in the past is no longer present. Investors who are still active in the market are beginning to explore risk-free returns. Coinciding with the changes in the macroeconomic environment and the rise in US bond yields, the tokenization of real-world assets has become an important channel for capturing value in the current crypto market.

This article attempts to clarify the current logic of the RWA narrative by examining the implementation paths of major RWA projects holding underlying assets (Compound & Superstate, Franklin Templeton, MakerDAO, Ondo Finance, Matrixdock, Centrifuge).

TL;DR

• Being overly concerned with the definition of RWA is not very meaningful. Tokens are the carriers of value, and the value of RWA depends on bringing the rights/ values of underlying assets onto the chain and its application scenarios.
• In the short term, the driving force behind RWA comes more from the unilateral demand of DeFi protocols in the crypto world, such as asset management, diversified investments, and new asset categories.
• DeFi protocols capture the interest value of underlying assets through RWA projects, essentially establishing a U standard, with asset categories carrying real yields, similar to establishing ETH-based interest-bearing assets.
• Therefore, US bond RWAs are sought after. Depending on the different paths to realize US bond yields, they can be divided into (1) the Off-Chain to On-Chain path represented by traditional compliant funds, and (2) the On-Chain to Off-Chain path led by DeFi protocols, but regulatory compliance still poses significant obstacles.
• Mapping interest-bearing assets to the chain is just the first step for RWAs. It will be very worthwhile to explore how to integrate the composability of DeFi, with the potential to further open up the ceiling of RWA + DeFi.
• In the long term, RWA should not be one-way. In the future, it will be a two-way journey, where real-world assets can be brought onto the chain, and TradFi can also leverage the various advantages of DeFi to further unleash potential.
• Key exploration in the future: how to enable investors to enjoy both the Beta returns brought by real-world RWA assets and the Alpha returns of the crypto market.

（ Source: https://blog.isyatirim.com.tr/dijital-dunya-regulasyonlari/）

I. The Narrative of RWA in this Round

For the current $1 trillion crypto market, investors mainly derive returns from on-chain activities (such as trading, borrowing, staking, derivatives, etc.), lacking a stable source of real yield.

Since Ethereum transitioned to POS, liquidity staking based on ETH (LSD) can be considered a native source of real yield in the crypto market, but it currently accounts for a small share of the overall crypto market. To truly break through the bottleneck of the current market, strong external forces are needed to support it.

Therefore, a new source of real yield for assets is entering reality: real-world assets (RWA) existing off-chain are brought onto the chain through tokenization, serving as an important source of real yield for U-based assets in the crypto market.

The entry of RWA onto the chain has an almost revolutionary potential impact on the crypto market. RWA can provide sustainable, diverse, and real yield supported by traditional assets for the crypto market. Additionally, RWA can bridge the decentralized financial system and traditional financial system for DeFi, which means that RWA can not only bring incremental funds into the crypto market but also gain access to massive liquidity, broad market opportunities, and significant value capture from traditional financial markets.

According to BCG and ADDX's research, the tokenization of global illiquid assets will create a market worth $16 trillion (which will be close to 10% of the global GDP in 2030). Citigroup's RWA report "Money, Tokens, and Games" also predicts that a $10 trillion market will be tokenized by 2023.

（ Source: New BCG report: Asset tokenization projected to grow 50x into a US $16 trillion opportunity by 2030）

1.1 What is RWA

RWA stands for Real World Assets Tokenization, which is the process of converting the value of rights in tangible or intangible assets (ownership, income rights, usage rights, etc.) into digital tokens. This allows assets to be stored and transferred without the need for a central intermediary, and their value is mapped to the blockchain for trading and circulation.

RWA can represent many different types of traditional assets (including tangible and intangible assets), such as commercial real estate, bonds, cars, and almost any asset that can store value. Since the early days of blockchain technology, market participants have been seeking to bring RWA onto the chain. Traditional TradFi institutions such as Goldman Sachs, Hamilton Lane, Siemens, and KKR are actively working to bring their real-world assets onto the chain. In addition, native crypto DeFi protocols such as MakerDAO and Aave are also making adjustments and actively embracing RWA.

Compared to the monotonous token financing narrative of ICO/STO in 2018, the current RWA narrative covers a wider range: not limited to the primary market in traditional finance, almost any asset that can be valued can be tokenized. In addition, the DeFi protocols and numerous infrastructures that did not exist in 2018 can open up endless possibilities for today's RWA.

1.2 The Driving Force Behind RWA

Currently, the main driving force behind bringing real-world assets into the crypto world is that real-world assets (especially US bonds) can provide a stable risk-free return for the crypto market in the macro background.

Therefore, the current implementation paths of most mature RWA projects are based on the unilateral demand of DeFi protocols for real-world assets, such as:

• Demand for asset management: Native on-chain returns mainly come from staking, trading, and borrowing activities. However, in the context of the crypto winter, the sluggish on-chain activities directly lead to a decrease in on-chain yields. In the current context of high US bond yields, traditional DeFi protocols are gradually introducing US bond RWAs. For example, MakerDAO, through recent proposals, is gradually converting stablecoin assets in its treasury (with no or low yield) into interest-bearing US bond RWAs (4%-5% risk-free returns). This can ensure the safety of treasury assets while obtaining stable returns.
• Portfolio diversification: In extreme market conditions, the high volatility and high correlation of native crypto assets can lead to misallocation and liquidation of assets. Introducing RWAs with low correlation and stable returns related to on-chain crypto assets can effectively mitigate such issues. Investors can achieve diversification and build more robust and effective investment portfolios.
• Introducing new asset categories: Building on RWA can further unleash the potential of RWA assets. For example, Flux Finance provides lending for Ondo Finance's OUSG, Curve allows trading of MatrixDock's STBT, and Pendle provides AMM trading pools for interest-bearing assets.

In the short term, the realization of this demand is only based on the unilateral journey of the crypto market, and traditional finance in the real world does not have much willingness to enter the crypto market, and those that do are only testing the waters. In the long term, RWA should not be one-way, such as the current unilateral demand of DeFi for TradFi. In the future, it will be a two-way journey, where real-world assets can be brought onto the chain, and the real world can also leverage blockchain technology and various advantages to further unleash potential.

1.3 How to Capture the Value of Underlying RWA Assets

There are various classifications based on the different underlying assets of RWA.

In the short term, we narrowly classify RWA into "interest-bearing RWA" and "non-interest-bearing RWA" because we believe that most RWA projects currently on the market are more focused on capturing the interest value of underlying assets, such as the yields of US bonds, government securities, corporate bonds, REITs, and other interest-bearing assets.

The essence of interest-bearing RWA is to establish a U standard, with asset categories carrying real yields, similar to the logic of establishing interest-bearing assets based on ETH. Although the yield of RWA assets is not high, they can be further combined in DeFi.

Non-interest-bearing RWA is more suitable for capturing the commodity value of underlying assets themselves, such as the value of gold, oil, collectibles, and art, as well as the value of South American players.

II. The Path of Bringing RWA Assets onto the Chain

According to Binance Research's report, the process of implementing RWA is divided into three stages: (1) off-chain packaging; (2) information bridging; (3) RWA protocol demand and supply.

2.1 Off-Chain Formalization

To bring real-world assets into DeFi, it is necessary to first package the assets off-chain to digitize, financialize, and ensure compliance, in order to clarify the value of the assets, ownership, and legal protection of asset rights.

In this step, it is important to clarify: (1) Representation of Economic Value: The economic value of assets can be represented by the fair market value of the assets in traditional financial markets, recent performance data, physical condition, or any other economic indicators. (2) Ownership & Legitimacy of Title: Ownership of assets can be determined through deeds, mortgages, notes, or any other form. (3) Legal Backing: In cases involving changes in asset ownership or rights, there should be a clear resolution process, which typically includes specific legal procedures for asset liquidation, dispute resolution, and enforcement.

2.2 Information Bridging

Next, information about the economic value, ownership, and rights of assets is brought onto the chain after being digitized and stored in the distributed ledger of the blockchain.

This step involves: (1) Tokenization: After packaging the information off-chain, it is digitized and brought onto the chain, represented by metadata in digital tokens. This metadata can be accessed through the blockchain, making the economic value and ownership of assets completely transparent. Different asset categories can correspond to different DeFi protocol standards. (2) Regulatory Technology / Securitization: For assets that need to be regulated or considered securities, they can be brought into DeFi in a legal and compliant manner. These regulations include but are not limited to licensing for issuing security tokens, KYC/AML/CTF compliance requirements for listing on exchanges, etc. (3) Oracle: For RWA, external data from the real world is needed to accurately depict the value of assets, such as accessing performance data for stock RWAs. However, since the blockchain cannot directly bring external data onto the chain, services like Chainlink are needed to connect on-chain asset value data with real-world information for DeFi protocols.

2.3 RWA Protocol Demand and Supply

DeFi protocols focused on RWA drive the entire process of tokenizing real-world assets. On the supply side, DeFi protocols oversee the formation of RWA. On the demand side, DeFi protocols facilitate investor demand for RWA. In this way, most DeFi protocols specializing in RWA can serve as the starting point for the formation of RWA and provide a market for the final products of RWA.

2.4 Specific Implementation Paths for RWA

(Source: https://forum.makerdao.com/t/poll-rwa-working-group-covenant-structure/4836)

In the specific implementation path of bringing RWA assets onto the chain, a similar approach to asset securitization can be taken, with the establishment of Special Purpose Vehicles (SPVs) to support underlying assets, playing a role in control, management, and risk isolation. Additionally, the BCG and ADDX report provides a roadmap for various ecosystem participants (asset initiators, issuance platforms, asset custody, fund settlement, etc.) from the perspective of RWA asset initiators.

3. The Current Implementation Paths for US Bond RWA

It is clear that RWA represents the tokenization of real-world assets off-chain. Therefore, it is crucial to understand how asset rights and values from the real world are converted to the crypto world, or how RWA is explained as a legal representation of real-world assets and how real-world assets are mapped onto the chain.

By examining the most mature RWA project - US bonds, we find two paths: (1) the Off-Chain to On-Chain path represented by traditional compliant funds, and (2) the On-Chain to Off-Chain path led by DeFi protocols. Since the main driving force behind RWA currently comes from the crypto world, DeFi protocols are more mature in exploring RWA projects.

Currently, except for T protocol, which is a permissionless protocol, all other projects have strict KYC/AML verification processes for compliance. The majority of US bond RWA projects do not support transfer and trading functions, and their use cases are very limited, requiring further exploration and discovery.

3.1 Traditional Finance's Off-Chain to On-Chain

Superstate, Founded by Compound Founder

(Source: https://www.axios.com/2023/06/28/defi-robert-leshne-rmutual-fund)

Compound founder Robert Leshner has set his sights on the current hot RWA narrative. On June 28, 2023, he announced the establishment of a new company, Superstate, dedicated to bringing regulated financial products from traditional financial markets onto the chain.

According to documents submitted by Superstate to the U.S. Securities and Exchange Commission (SEC), Superstate will use Ethereum as a supplementary accounting tool and create a fund that invests in short-term government bonds, including U.S. Treasury bonds and government agency securities. However, the documents are very clear that the fund will not directly or indirectly invest in any assets that rely on blockchain technology, such as cryptocurrencies.

In summary, Superstate will establish an off-chain SEC-compliant fund to invest in short-term U.S. government bonds and process the fund's transactions and records on-chain (Ethereum), tracking the ownership shares of the fund. Superstate states that investors must be whitelisted and that smart contracts such as Uniswap or Compound will not be whitelisted, so these DeFi applications cannot use it.

In a statement to Blockworks, Superstate stated: "We are creating an SEC-registered investment product that will allow investors to have a record of ownership of this mutual fund, just like holding stablecoins and other crypto assets."

Franklin OnChain U.S. Government Money Fund

(Source: rwa.xyz & Stellar expert)

Before Superstate, we saw that Franklin Templeton had already launched the Franklin OnChain U.S. Government Money Fund (FOBXX) in 2021, which is the first SEC-approved fund to use blockchain (Stellar) technology to process transactions and record ownership. As of now, its assets under management (AUM) have exceeded $29 billion, and investors can enjoy a 4.88% annualized return.

Although one share of the fund is represented by one BENJI token, there is currently no interaction between the BENJI token on-chain and DeFi protocols. Investors need to undergo compliance verification through Franklin Templeton's app or website to be whitelisted.

Tokenization of Private Equity Funds by Hamilton Lane

Hamilton Lane is a globally leading investment firm with assets under management (AUM) of up to $823.9 billion. The company has tokenized part of the shares of three funds on the Polygon network and made them available to investors on the trading platform Securitize. Through its collaboration with Securitize, part of the fund's shares will form a feeder fund on the platform and will be managed by Securitize Capital.

The CEO of Securitize stated: "Hamilton Lane offers some of the best-performing private market products, but historically, they have been limited to institutional investors. Tokenization will allow individual investors to participate in private equity investments in a digital way for the first time and create value together."

From the perspective of individual investors, although tokenized funds provide a "fair" way to participate in top private equity funds, with the minimum investment threshold dropping significantly from an average of $5 million to just $20,000, individual investors still need to undergo accredited investor verification through the Securitize platform, which still presents a certain barrier.

From the perspective of private equity funds, the advantages of tokenized funds in providing real-time liquidity are self-evident (compared to the traditional 7-10 year lock-up period of private equity funds), and they can also achieve LP diversification and fund allocation flexibility.

Summary

The Off-Chain to On-Chain path is more of an innovative exploration by traditional finance on its compliance foundation. Considering the strong regulation of traditional finance, the current exploration only applies blockchain technology to traditional financial products themselves, using blockchain as its accounting method, rather than directly integrating with DeFi for interaction, and has not expanded externally. However, the ownership certificate of its fund shares is essentially no different from a token. Imagine the difference between holding a certificate and holding a stablecoin.

We look forward to Compound founder Robert Leshner providing more value exploration for the Off-Chain to On-Chain path of RWA from a more crypto-native/DeFi perspective.

3.2 On-Chain to Off-Chain in Crypto Finance

MakerDAO's Monetalis Trust Legal Framework

MakerDAO is a decentralized autonomous organization (DAO) aimed at managing the Maker Protocol running on Ethereum. The protocol provides the first decentralized stablecoin DAI (which can be understood as the dollar on Ethereum) and a range of derivative financial systems. Since its launch in 2017, DAI has been consistently pegged to the dollar.

Due to the high volatility of the cryptocurrency market, relying on a single collateral asset may lead to a large number of liquidations. Therefore, MakerDAO has been actively exploring ways to diversify collateral, with RWA being an important part of it. After years of experimentation, MakerDAO has implemented two mature RWA paths: (1) directly purchasing and holding assets through DAO + trust (MIP65 proposal); (2) directly purchasing tokenized RWA assets (through decentralized lending platform Centrifuge), including New Silver (real estate loans) and BlockTower (structured credit) Valuts currently held.

According to MakerBurn.com, there are currently 11 RWA-related projects used as collateral for MakerDAO, with a total TVL of $2.7 billion.

(Source: https://makerburn.com/#/rundown)

Let's take a look at MIP65: Monetalis Clydesdale: Liquid Bond Strategy & Execution proposal. The proposal was put forward by Monetalis founder Allan Pedersen in January 2022, aiming to invest a portion of the stablecoin assets in the MakerDAO treasury through a trust managed by Monetalis into real-world high-liquidity, low-risk bond assets. The proposal was later approved by the MakerDAO community and implemented in October 2022, with an initial debt ceiling of $500 million. In May 2023, a subsequent proposal increased the ceiling to $1.25 billion.

According to the MIP65 proposal, MakerDAO delegates Monetalis as the executor of the project through voting, responsible for designing the overall legal framework and reporting periodically to MakerDAO. Monetalis has designed a trust legal framework based in the British Virgin Islands (BVI) to unify on-chain governance (MakerDAO), off-chain governance (trust company's authorized resolutions), and off-chain execution (off-chain transactions).

First, MakerDAO and Monetalis authorize a Transaction Administrator to review all transactions and ensure that the execution of transactions aligns with MakerDAO's proposals. Second, MakerDAO's on-chain proposals serve as a precondition for off-chain entities to make resolutions, excluding any matters unrelated to MakerDAO resolutions from the off-chain entity's authorization scope. Finally, based on the flexibility of BVI law, a unified approach to on-chain governance, off-chain governance, and execution is to some extent guaranteed. Through complex legal arrangements and trust authorization, the arrangement between MakerDAO and Monetalis is as follows:

(Source: DigiFT Research, MakerDAO MIP65)

After unifying the on-chain governance and off-chain governance and execution of MakerDAO and Monetalis, the subsequent execution of the purchase of US bond ETFs is carried out by the trust company James Assets (PTC) Limited established in the BVI. The target purchases include BlackRock's iShares US $ Treasury Bond 0-1 yr UCITS ETF and iShares US $ Treasury Bond 1-3 yr UCITS ETF. The specific process is as follows:

(Source: MakerDAO MIP65)

In the overall process, James Assets (PTC) Limited, as the external entity of MakerDAO and Monetalis, handles each transaction under the premise of on-chain and off-chain authorization. Coinbase serves as the fiat-to-crypto exchange for fund inflows and outflows, while Sygnum Bank provides trading and custody of trust assets and maintains a separate account for trust operating expenses (initial expenses amounting to $950,000).

Centrifuge's SPV Tokenization Path

Centrifuge is a decentralized lending platform dedicated to bringing real-world assets into the crypto world, providing more investment opportunities and liquidity through tokenization, fractionalization, and structuring. Centrifuge is one of the earliest DeFi protocols involved in the RWA field and is also the technology provider behind leading DeFi protocols such as MakerDAO and Aave. According to data from rwa.xyz, Centrifuge is currently one of the most comprehensive projects in the RWA field and has its own Centrifuge Chain and main product, the Tinlake protocol.

The implementation path of Centrifuge's RWA can be summarized as follows: (1) Borrowers tokenize off-chain assets into NFTs through asset initiators (underwriting) and lock them in Centrifuge's smart contract asset pool; (2) Multiple NFT assets from borrowers of the same type are pooled together to form an asset pool, with liquidity providers funding the pool collectively rather than individually; (3) Through structuring, the asset pool is divided into junior and senior tranches (corresponding to different ERC20 tokens), with junior tranche investors earning more returns and bearing more risk, while senior tranche investors have lower returns and lower risk, catering to different risk preferences.

Centrifuge has done a considerable amount of work in compliance based on the legal structure of U.S. asset securitization (Reg D under 506(b)(c) of the U.S. Securities Act) and continues to improve. For example, Centrifuge collaborates with Securitize to help investors complete KYC/AML and other compliance verifications; every asset initiator on Centrifuge needs to establish an independent legal entity corresponding to the asset pool, known as a Special Purpose Vehicle (SPV), which serves the purpose of bankruptcy isolation. Legally, these assets have been sold to the SPV, so even if the asset initiator goes bankrupt, it will not affect the assets held by the SPV, thereby protecting the interests of investors; investors sign investment agreements with the SPV corresponding to the asset pool, which include investment structure, risks, terms, etc., and then use DAI to purchase DROPS or TIN tokens corresponding to different tranches.

_(Source: https://docs.centrifuge.io/learn/legal-offering/)

In February 2021, MakerDAO issued the first RWA 002 Vault with New Silver on Centrifuge. The relatively large-scale BlockTower S4 (RWA 013-A) and BlockTower S3 (RWA 012-A) are based on the aforementioned RWA implementation path, with the main underlying assets of BlockTower S4 being consumer loan ABS products.

After this, the MIP6 proposal improved the implementation path of Centrifuge's RWA by introducing the concepts of trustee and lockbox. MakerDAO believes that this transaction structure standardizes asset pool transactions and better protects the interests of investors and the DAO. The two most significant changes are:

1. The asset issuer appoints a third party as a trustee to act on behalf of the DAO and investors. The trustee protects the interests of the DAO and ensures the independence of the assets. In extreme cases of default, the trustee can handle and distribute the assets, removing control from the issuer or liquidator.

2. The concept of a lockbox is introduced. A lockbox means an isolated account that holds the assets outside the control of the asset issuer and the SPV. This structure means that the SPV assets are no longer controlled by the asset issuer but by the trustee. The trustee's responsibility is to receive and handle funds in the isolated account and ensure that the correct party (such as MakerDAO) receives the funds. This means that the asset issuer no longer controls the flow of funds from the borrower to the MakerDAO reserve, reducing the risk of the issuer's fund loss or misuse of funds.

(Source: https://forum.makerdao.com/t/progress-update-on-the-legal-structure-for-centrifuge-rwa-vaults/13307)

In the improved RWA implementation path mentioned above, the underlying assets are first sold to the SPV, which then pledges the underlying assets to the trustee. The SPV then issues DROP and TIN tokens to MakerDAO based on the Tinlake protocol. When cash flow payments occur from the underlying assets, the funds are directly paid to an isolated account called LockBox, independent of the SPV and MakerDAO. Upon receiving the funds, the trustee initiates instructions to pay DROP and TIN to MakerDAO from the LockBox, which is then completed through the Tinlake protocol.

It's important to note that MakerDAO and the SPV do not have any opportunity to touch DAI or US dollar cash flows, as all cash flows are handled through LockBox and the Tinlake protocol. The only role of MakerDAO and the SPV is to sign subscription agreements and make decisions as token holders.

This structure better protects investors and asset issuers from potential litigation claims and provides a consistent and coherent solution for discussions with third-party service providers such as regulatory authorities and custodian banks. Once this structure is widely recognized in the industry and accepted by many traditional financial industry participants, it should make it easier to bring traditional financial industry participants into DeFi, thereby expanding the types and quantities of real-world assets available for Maker and reducing the volatility of DAI.

Ondo Finance's Exemption Path and Flux Finance (DeFi Lending Protocol)

(Source: https://defillama.com/protocol/ondo-finance)

Ondo Finance launched tokenized funds in January 2023, aiming to provide institutional-grade investment opportunities and services to on-chain professional investors. It brings risk-free/low-risk interest rate fund products to the chain, allowing stablecoin holders to invest in government bonds and US Treasury bonds on-chain. At the same time, Ondo Finance collaborates with the DeFi protocol Flux Finance on the backend to provide on-chain stablecoin lending services to OUSG token holders.

According to DeFiLlama's data, as of August 1st, Ondo Finance's TVL is $162 million, and the TVL of its lending protocol Flux Finance has reached $42.78 million, with borrowing amounts reaching $280.2 billion.

Ondo Finance has currently launched four tokenized fund products: (1) US Money Market Fund (OMMF); (2) US Treasury Bonds (OUSG); (3) Short-Term Bonds (OSTB); (4) High-Yield Bonds (OHYG). The most popular fund among investors is OUSG, which holds underlying assets in BlackRock iShares Short Treasury Bond ETF. OUSG is pegged to a stablecoin, and investors in the OUSG fund receive OUSG tokens backed by short-term US Treasury bonds. OUSG token holders can also collateralize OUSG through the decentralized lending protocol Flux Finance developed by Ondo Finance and borrow stablecoins such as USDC and DAI.

_(Source: https://ondo.finance/)

For regulatory compliance reasons, Ondo Finance strictly implements a whitelist system for investors, only allowing investment from Qualified Purchasers as defined by the SEC, which are individuals or entities that have invested at least $5 million. A fund with only Qualified Purchasers can be exempt from registration as an investment company with the U.S. SEC under the Investment Company Act of 1940.

Investors need to go through Ondo Finance's official KYC and AML verification process before signing subscription documents. Eligible investors then invest stablecoins into Ondo Finance's OUSG fund, and fiat inflows and outflows are processed through Coinbase Custody, with US bond ETF trades executed by compliant broker Clear Street.

It's important to note that the concept of Qualified Purchasers is different from Accredited Investors, the latter of which only requires an annual income exceeding $200,000 or a net worth exceeding $1 million excluding the primary residence.

Matrixdock and T protocol (Permissionless On-Chain US Treasury Bonds)

Matrixdock is an on-chain bond platform launched by the Singapore asset management company Matrixport, and Short-Term Treasury Bill Token (STBT) is a product based on US Treasury bonds introduced by Matrixdock. Only KYC-verified qualified investors can invest in Matrixdock's products, and investors deposit stablecoins and mint STBT through whitelisted addresses. The underlying assets of STBT are 6-month US Treasury bonds and reverse repurchase agreements collateralized by US Treasury bonds, and STBT can only be transferred among whitelisted users, including in the Curve pool.

(Source: https://www.matrixdock.com/stbt/home)

The implementation path of STBT is as follows: (1) Investors deposit stablecoins into the STBT issuer, and the STBT issuer mints the corresponding STBT through a smart contract; (2) The STBT issuer converts stablecoins into fiat through Circle; (3) The fiat is held by a qualified third-party custodian and used by the custodian to purchase short-term bonds that mature within six months or to enter the overnight reverse repurchase market of the Federal Reserve through traditional financial institutions.

The STBT issuer is Matrixport's established SPV, which pledges the held US Treasury bonds and cash assets to STBT holders. STBT holders have the first priority claim to the underlying asset pool.

_(Source: https://www.tprotocol.io/)

T protocol was launched in March 2023, and its TBT token is backed by MatrixDock's STBT. T protocol removes the whitelist restrictions of STBT through token wrapping, achieving permissionless US Treasury bond tokenized products. TBT uses a rebase mechanism to anchor its price to $1 and can be traded on Curve.

TBT accumulates stablecoin assets from investors to meet the requirements of the STBT whitelist, and then purchases STBT from partner MatrixDock. TBT indirectly achieves permissionless US Treasury RWA assets.

Summary

In the case of MakerDAO, for the purpose of asset management, it is necessary to convert a portion of its stablecoin assets in the treasury into RWA assets. In terms of implementation path, compared to the large-scale US Treasury bond purchases in the Monetalis trust legal framework path, the RWA asset pools from Centrifuge currently adopted by MakerDAO are relatively small in scale, with the largest BlockTower S4 reaching just over one billion US dollars. The advantage of Centrifuge's RWA solution lies in its simple process and the fact that MakerDAO does not need to build a complex legal framework.

The RWA implementation path of Matrixdock is similar to Ondo Finance, and due to compliance requirements, a strict whitelist system is required. Given the high threshold of the whitelist system, after implementing RWA on-chain, Ondo Finance can improve liquidity by linking to Flux Finance's DeFi lending protocol to enable OUSG lending, while Matrixdock can achieve permissionless circulation of US Treasury RWA through the T protocol.

4. RWA and the Collision of DeFi Lego

We believe that the application logic of RWA interest-bearing assets based on U-based RWA is consistent with the application logic of LSD interest-bearing assets based on ETH. Mapping interest-bearing assets to the chain is just the first step (Staked USD), and the subsequent integration with DeFi and the integration of DeFi Lego will become very interesting.

We also saw the combination of Ondo Finance and Flux Finance, as well as MatrixDock and T protocol and Curve in the above cases. The following will list the "Web3 Yu'ebao" product in the TRON ecosystem - stUSDT, to further understand the application of bringing RWA interest-bearing assets to the chain, and then compare the possible application scenarios of RWA + DeFi with the Pendle project based on the LSD track.

4.1 stUSDT - Web3 Yu'ebao

On July 3, 2023, the TRON ecosystem officially launched the RWA stablecoin collateral product stUSDT, positioning it as the "Web3 version of Yu'ebao," allowing users to collateralize USDT to obtain real-world RWA returns, and the collateral certificate stUSDT will also become an important building block in the DeFi Lego world built on the TRON ecosystem.

Specifically, when users collateralize USDT, USDT can be minted 1:1 into the collateral certificate stUSDT, and stUSDT will be anchored to real-world assets (such as government bonds), and the stUSDT-RWA smart contract will distribute returns to holders through the Rebase mechanism. When designing stUSDT, it referenced the design concept of Lido stETH, so stUSDT is also a wrapped TRC-20 token, which will further enhance the composability of stUSDT in the TRON ecosystem, integrate with DeFi Lego, and unleash the infinite potential of assets.

Sun Yuchen stated in an interview with Foresight News, "The composability of stUSDT is very strong. It can exist in various DeFi lending, yield, and contract protocols, and can also be listed on exchanges for users to trade. In the future, stUSDT will become a basic income anchor for the entire TRON chain's $500 billion in assets, which is also very important for the entire DeFi Lego."

(Source: https://support.justlend.org/hc/en-us/articles/20134645757337)

4.2 Pendle - Interest Rate Swap Protocol

Pendle is an interest rate derivative protocol based on interest-bearing assets, through which users can execute various principal and interest-based yield management strategies according to their risk preferences. Since Ethereum switched to POS, the popularity of the ETH liquidity staking (LSD) track has brought Pendle's TVL to over $145 million.

First, Pendle defines "Yield-Bearing Token" (SY) as any token that can generate returns, such as stETH obtained by staking ETH on Lido. Then, Pendle splits the yield-bearing token (SY) into "Principal Token" (PT) and "Yield Token" (YT), where PT represents the principal portion of the underlying interest-bearing assets, giving users the right to redeem the principal before the maturity date, and YT represents the returns generated by the underlying interest-bearing assets, giving users the right to receive returns before the maturity date.

Subsequently, Pendle AMM (Automated Market Maker) was introduced, setting up trading pairs of Principal Token (PT) / Yield Token (YT) in the Pendle liquidity pool. Users can formulate trading strategies based on market conditions using the constant formula X * Y = K, for example, increasing exposure to yield in a bull market and hedging yield reduction in a bear market.

As an interest rate derivative protocol, Pendle brings the TradFi interest derivative market (worth over $400 trillion) into DeFi, allowing everyone to use it. By creating an interest rate derivative market in DeFi, Pendle unleashes the full potential of interest rates, enabling users to execute advanced yield strategies, such as: (1) Fixed income (earning fixed income through stETH); (2) Long yield (betting on the increase in stETH yield by purchasing more yield); (3) Earning more yield without additional risk (providing liquidity with stETH).

Conclusion

Excessively focusing on the definition of RWA is meaningless. Tokens are the carriers of value, and the value of RWA depends on bringing the rights/value of underlying assets to the chain and its application scenarios.

In the short term, the driving force behind RWA comes more from the unilateral demand of DeFi protocols in the crypto world, such as asset management, diversified investment, and new asset categories. DeFi protocols capture the interest value of underlying assets through RWA projects, establishing a U-based asset category with real yield, which is essentially consistent with the logic of establishing interest-bearing assets based on ETH in the LSD track. Therefore, the popularity of US Treasury RWA can be divided into (1) Off-Chain to On-Chain path represented by traditional compliant funds, and (2) On-Chain to Off-Chain path dominated by DeFi protocols, but regulatory compliance still poses significant obstacles.

Bringing interest-bearing assets to the chain is just the first step for RWA (e.g., TRON ecosystem's "Web3 Yu'ebao" product - stUSDT). Exploring how to integrate with the composability of DeFi Lego in the future is very worthwhile, and it is expected to further open up the ceiling of RWA + DeFi. This can be compared to the Pendle interest rate swap project in the LSD-Fi track, or stablecoin projects based on LSD.

In the long term, RWA should not be one-way, such as the current unilateral demand of DeFi for TradFi. The future will be a two-way journey, where real-world assets can be brought to the chain, and TradFi can also leverage the various advantages of DeFi to further unleash its potential.

REFERENCE:

[1] Citi GPS, Money, Tokens, and Games (Blockchain's Next Billion Users and Trillions in Value)

https://icg.citi.com/icghome/what-we-think/citigps/insights/money-tokens-and-games

[2] BinanceResearch, Real World Assets: The Bridge Between TradFi and DeFi

https://research.binance.com/en/analysis/real-world-assets

[3] BCG ADDX, New BCG report: Asset tokenization projected to grow 50x into a US$16 trillion opportunity by 2030

https://thetokenizer.io/2022/09/12/new-bcg-report-asset-tokenization-projected-to-grow-50x-into-a-us16-trillion-opportunity-by-2030/

• DODO Research, Uncovering the Development of On-Chain Government Bond Ecosystem Projects for RWA
• Huobi Research, RWA Tokenization: The Next Cryptographic Wealth Code?
• Mint Venture, RWA Discussion: Compliance, Niche Markets, and Future Prospects
• DigiFT Insights, RWA Case Study - US T-bill Tokenization
• DigiFT Insights, How do DeFi protocols adopt real-world assets (“RWA”) - An overview of MakerDAO’s RWA layouts
• MakerDAO, [RWA 007] MIP65 Monetalis/Clydesdale Legal Assessment

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