Is RWA a product or a transaction?

Source: Ye Kaiwen

What is RWA (Real World Asset Tokenization) after all?

The original intention of encryption came out to say that RWA should not be so vulgar. We have previously stated that the premise of the RWA discussion is a compromise between the pragmatism and moderation of TradFi and crypto under Consensus.

Many people say that the concept of RWA is too abstract, tokenizing real-world assets, putting everything into RWA, but nothing real comes out of RWA.

This question needs to be traced back to the wording: Is RWA a product or a transaction?

If it’s a product, then RWA is similar to BTCSpotETF or T-Bill products, which are interest-bearing assets collateralized by US Treasury bonds?

If it’s a trade, is it a trade of RWA products? Or is it a trade of financial assets similar to the exchange of TradFi’s financial assets in encryption?

If we combine the core essence of RWA that we have always emphasized, it is corporate financing and institutional markets. Then the product is similar to a corporate bond product, and the trading is similar to financial asset trading, revolving around the asset package of corporate financing and the institutional market ecosystem of the product.

In contrast to specific examples, such as BTCSpotETF, money market funds for tokenization, and RWA stablecoins, they are basically product directions, not corporate financing. On the other hand, tokenized corporate bonds, fixed income bonds, and digital REITs (tokenized cash distributions) are corporate financing.

Why discuss different angles of products and transactions? **

The former is more Web3.0-oriented in terms of products, while the latter is more RWA-oriented in terms of transactions. Why do we say that?

Products, from the perspective of retail investors, especially Web3.0 investments for retail investors, are used to investing (speculating) in a certain Token. Currently, there are already many encryption Token projects that are promoting the concept of RWA. At the same time, products are more inclined towards standardization, focusing more on product design, TGE issuance, etc. Whether it is T-Bills as interest-bearing assets of US Treasury securities, RWA concept Tokens, or DePIN and AI participating in conceptual narratives as infrastructure, they are all strategies and ecosystems of standardized products.

Trading, mostly from an institutional perspective, involves the trading of financial assets, mainly for corporate financing and institutional investment. It is a non-standardized product trading ecosystem. Although the trading targets are all designed as a financing product, asset issuance is just the first step under the table. There are also interbank markets, OTC bond markets, inter-institutional financing and securities lending, reverse repurchase agreements, and equity redemptions, etc. Sometimes, there are local markets for retail investor investment.

From a crypto perspective, it is more like the digitization and encryption of industrial transactions and upstream and downstream channels triggered by enterprise financing.

So it’s a bit like a platitude: RWA is like a product but not a product, a model but not a model. It’s the tokenization of real-world assets, a shift from TradFi to the world of virtual assets and tokenization. And the old money and users attracted and leveraged by real-world assets mean that RWA is something that old money can understand in the form of real-world assets, or something new that supports real-world assets.

RWA Mode Integrating Products and Trading

The fusion of the new and the old walking in opposite directions may be a compromise and moderation in the early stage of RWA.

Traditional bonds (RA) are mainly institutional clients, Block Trading and OTC market; while Web3.0 exchange mainly follows retail clients, individual investors.

If the integration of RWA products and transactions may solve this: based on RWA products (high-quality assets such as US Treasury ETFs, BTC ETFs, etc.), iterate new income or Arbitrage Tokens (or protocols), multi-level transaction markets for primary and secondary arbitrage, further expand staking financing based on RWATokens, RWADerivativesTokens such as Interest Rate swaps.

This integration model can serve both institutional clients and retail investors for coin trading (Arbitrage).

Currently, the licensed Compliance in Hong Kong has launched RWA projects, which are basically either real estate fixed income bonds or corporate credit bonds in the initial stage, and then trap them in a tokenization shell. This is considered the most basic and simple type of product.

In fact, complex products of real world assets are combined with the industrial transactions of the real world assets, combined with industrial finance and capital. Asset tokenization is not just tokenization of a real world asset, but the tokenization of the industrial chain and fund chain associated with this asset.

From this perspective, there may be several directions for RWA:

1）Corporate financing direction, mostly in the form of RWA products, around corporate financing digital bonds, digital REITs and other products, the design may be diversified, one is credit bonds, one is income rights, one is cash flow and other different design patterns;

2. Industrial Trading direction, will highlight the business design of RWAexchange, how to combine trade and turnover to achieve tokenization of spot transactions and Arbitrage, gradually transfer the token pricing right of real-world assets and Crypto leverage, replace interbank business with OTC exchange market and collateralized lending protocol, design liquidity pools and learn from Airdrop and Mining models, develop digital investment banking business with Crypto Fund linkage at levels one and two, the key is to attract and achieve upstream and downstream linkage of the industry.

3. Investment and financial management direction, around the global funds and institutional funding cost and Intrerest Rate swap demand, design RWA investment and financial management products, or Crypto fixed income products, or hedging arbitrage, or senior and junior and TRS, or yield Token, to replace the investment and financial management products of TradFi investment.

4. In terms of native token direction, tokenization of emerging assets such as renewable energy and AI computing power that cannot be valued in TradFi, especially the combination of renewable energy with DePIN and VPP (Virtual Power Plant), to achieve P2P trading of renewable energy and stablecoin of green energy. This will be a huge market opportunity, as the G7 member countries jointly pledged in May this year to gradually phase out the existing, ever-increasing coal-fired power generation in the energy system by the first half of 2035.

How to achieve the transition from the 2B market to the 2C market?

As the traditional corporate bond market is a 2B market, while Web3.0 is a 2C market. RWA’s products are standardized, and the trading ecosystem is more non-standard. At this time, the key to the success of RWA is: how to achieve the transition from a 2B market to a 2C market?

This is also an early licensed Compliance exchange with Web3.0 attributes, only optimistic about the retail investor market in the crypto world, and not optimistic about the traditional centralized institutional market. However, RWA inevitably means compromise and moderation. Under the education of BTC Spot ETF and others, more and more licensed Compliance exchanges, including native Cryptocurrency exchanges, have begun to pay attention to RWA and the institutional market.

Is it not easy to understand: how does the institutional market transform into the retail investor market?

a) TRS is the basis for Arbitrage or crypto world’s familiar brick-moving. Institutional clients and retail investors have different capital costs and risk strategies, so there is a natural market space for Interest Rate swaps between institutions and retail investors;

b）The traditional bond market is the private sale, allocation, issuance (wholesale), and Secondary Market (retail) of institutional market, while the retail investor market comes at the end, with the possibility of arbitrage space between wholesale and retail as well as priority and inferiority. However, RWAtokenization may enable retail investors and institutions to get on board simultaneously through different modes such as Non-fungible Token, Airdrop, Mining, etc., and there is even the possibility of DAO community, DEX, and AMM getting on board earlier than institutional clients.

c) Institutional markets inevitably involve Lock-up Position prohibitions and dump for cashing out, or quantitative Arbitrage, where there is cashing out, there is retail investor dumb buying, and institutional acquisition of retail investor chips and Liquidity cannot be ruled out.

So, RWA products and trading ecosystem, basically with the assets and products familiar to Financial Institutions and funds, but uplift to the new form and new Liquidity of tokenization and virtual asset trading, especially the diversified Secondary Market (Token trading market), continuously attracting more traditional Financial Institutions and old money.