The Underlying Logic of Asset Tokenization and the Path to Large-Scale Application

The most attention-grabbing topic in the blockchain field in 2023 is undoubtedly the tokenization of Real World Assets (RWA). This concept has not only sparked heated discussions in the Web3 world but has also garnered significant attention from traditional financial institutions and government regulators in many countries, being seen as a strategic development direction. For example, several authoritative financial institutions 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 stated in its 2023 annual report that tokenization will play a key role in Hong Kong's financial future. In addition, the Monetary Authority of Singapore, along with the Japanese Financial Services Agency and several financial giants, has launched an initiative called "Project Guardian" to deeply explore the immense potential of asset tokenization.

Although the topic of RWA is currently very popular, there are differing understandings of RWA within the industry, and discussions about its feasibility and future are quite controversial.

On one hand, there are opinions that RWA is just market hype and cannot withstand 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 have sprung up like mushrooms after rain.

This article aims to share perspectives on RWA and conduct a deeper exploration and analysis of the current status and future of RWA.

Core viewpoint:

• The future key development direction of Real World Asset Tokenization will be the establishment of a new financial system based on Permission Chain (, driven by authoritative institutions such as traditional financial institutions, regulatory bodies, and central banks, using DeFi technology. To achieve this system, what is needed is a computational system (blockchain technology) + non-computational system (such as legal systems) + on-chain identity system and privacy protection technology + on-chain legal currency (CBDC, tokenized deposits, legal stablecoins) + complete infrastructure (low-threshold wallets, oracles, cross-chain technology, etc.).

• Blockchain is the first effective technological means to support contract digitization after the development of computers and networks. Therefore, it can be said that blockchain is essentially a platform for digital contracts, and 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 maintained by multiple parties, supports the creation, verification, storage, circulation, and execution of digital contracts, as well as other related operations, addressing the issue of trust transmission. Moreover, as a "computational system," blockchain can meet humanity's demand for "repeatable processes and verifiable results," which is why DeFi has become a "computational" innovation in the financial system, replacing the "computational" aspects of financial activities. The automated execution achieves cost reduction and efficiency improvement while also enabling programmability. However, the "non-computational" aspects, which are based on human cognition, cannot be replaced by blockchain. Therefore, the current DeFi system does not encompass credit, and credit-based unsecured lending has not yet been realized in the current DeFi system. The reasons for this phenomenon include the current lack of an identity system in blockchain that expresses "relationship identity" and the absence of a legal system 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, equities, 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 further 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 situations, empowers enterprises with new possibilities, especially providing innovative solutions for small and medium-sized enterprises (SMEs) in addressing financing challenges, opening a highly promising door for the financial system.

• With the increasing attention and recognition of blockchain and tokenization technologies from the traditional financial sector and governments around the world, as well as the continuous improvement of blockchain infrastructure technologies, blockchain is on the path of integrating with traditional world architecture and addressing the real pain points in real-world application scenarios, providing practical and feasible solutions for actual scenarios, rather than being confined to a "parallel world" that is disconnected from reality.

• In the future, under a landscape of multiple different jurisdictions and regulatory frameworks, cross-chain technology will be particularly important for solving interoperability and liquidity fragmentation issues. Tokenized assets on-chain will exist on public blockchains and permissioned chains operated by financial institutions, and cross-chain protocols similar to CCIP will enable the connection of tokenized assets on any blockchain to achieve interoperability and realize connectivity among 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. In addition, the development of privacy protection technologies, especially the ongoing development of zero-knowledge proof technology, along with the increasing maturity of on-chain identity systems, suggests that we are on the verge of large-scale application of blockchain technology.

( 1. Introduction to the Background of Asset Tokenization

Asset tokenization refers to the process of expressing assets in the form of tokens on programmable blockchain platforms. Assets that can typically be tokenized are divided into tangible assets (such as real estate and collectibles) and intangible assets (such as financial assets and carbon credits). This technology, which transfers assets recorded in traditional ledger systems to a shared programmable ledger platform, represents a disruptive innovation for traditional financial systems and is expected to impact the entire future of human financial and monetary systems.

First, we need to present an observed phenomenon: "There are mainly two distinctly different groups of opinions regarding the tokenization of RWA assets," which can be referred to as Crypto's RWA and TradFi's RWA, while the RWA discussed in this article is from the perspective of TradFi.

)# RWA from a Crypto Perspective

First, let's talk about Crypto's RWA: Crypto's RWA can be referred to as the unilateral demand from the Crypto world for the returns of real-world financial assets. The main background is the ongoing interest rate hikes and balance sheet reductions by the Federal Reserve, which have significantly impacted the valuations in the risk markets. The balance sheet reduction has largely drained liquidity from the crypto market, leading to a continuous decline in yields in the DeFi market. At this time, the risk-free yield of U.S. Treasury bonds, reaching around 5%, has become highly sought after in the crypto market. Among them, the most notable is MakerDAO's massive purchase of U.S. Treasury bonds this year. As of September 20, 2023, MakerDAO has purchased over 2.9 billion in U.S. Treasury bonds and other real-world assets.

The significance of MakerDAO purchasing U.S. Treasury bonds lies in the ability of DAI to diversify the underlying assets supported by external credit, and the long-term additional returns brought by U.S. Treasury bonds can help stabilize DAI's exchange rate, increase the flexibility of its issuance, and incorporating U.S. Treasury bonds into the balance sheet can reduce DAI's reliance on USDC, thereby minimizing single-point risks. Moreover, since the income from U.S. bonds will flow entirely into MakerDAO's treasury, MakerDAO has recently enhanced DAI's demand by increasing its interest rate to 8% by sharing part of its U.S. bond income.

MakerDAO's approach is clearly not something that all projects can replicate. With the soaring price of MRK tokens and the heightened market sentiment around the RWA concept, various RWA concept projects have emerged, aside from a few larger projects taking a compliant route. Various real-world assets are being tokenized and sold on the blockchain, often including some rather outrageous assets, leading to a mixed bag in the entire RWA sector.

The logic of RWA in crypto mainly revolves around how to transfer the rights to the income generated by assets (such as U.S. Treasury bonds, fixed income, stocks, etc.) onto the blockchain, how to use off-chain assets as collateral to obtain liquidity in on-chain assets, and how to bring various real-world assets onto the blockchain for trading (such as sand, minerals, real estate, gold, etc.).

Therefore, we can see 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 essentially that the MakerDAO team deposits and withdraws funds through compliance channels and purchases U.S. Treasury bonds through formal means to obtain their returns, rather than selling these returns on-chain. It is worth noting that the so-called RWA U.S. Treasury bonds on-chain are not the bonds themselves, but rather their rights to returns, and this process also involves converting the fiat currency earnings generated by U.S. Treasury bonds into on-chain assets, which adds complexity and friction costs to the operation.

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 finance sector has also sparked strong reactions in the industry. This report reveals the strong interest of many traditional financial institutions in RWA, while also igniting enthusiasm among a large number of speculators in the market. They are spreading rumors about major financial institutions about to enter this field, further elevating 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 returns of the traditional financial world. If we establish this logic and look at it from the perspective of traditional finance, the scale of funds in the crypto market is basically negligible compared to the tens of trillions of dollars market of traditional finance. Whether it is U.S. Treasury bonds or any other financial assets, it is unnecessary to have an additional sales channel on the blockchain.

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

It is necessary to distinguish the logic of RWA. Because RWA from different perspectives has vastly different underlying logic and implementation paths. First, in terms of the type of blockchain chosen, the two have different implementation paths. Traditional finance's RWA follows the path of permissioned chains, while the RWA in the crypto world follows the path of public chains.

Due to the characteristics of public chains such as no admission requirements, decentralization, and anonymity, the RWA in crypto finance not only faces significant compliance obstacles for project parties, but also lacks legal rights protection for users when encountering adverse events like Rug pulls. Furthermore, the rampant behavior of hackers raises high security awareness requirements for users. Therefore, public chains may not be suitable for the tokenization issuance and trading of a large number of real-world assets.

The permissioned blockchain that traditional finance RWA is based on provides the fundamental prerequisites for legal compliance in different countries and regions, while KYC is established on the chain to create on-chain identities.