Design analysis of a universal framework for RWA products

Author: Ye Kai; Source: Ye Kai Wen

Centered around the core of RWA: “Controllable Assets, Trustworthy Asset Management”, we have designed a general framework for RWA Trustworthy Asset Management products. It serves as a reference for ComplianceRWA product design in Hong Kong and is also applicable to offshore RWAtokenization design.

The entire product’s general framework is as shown in the figure, divided into six links: asset pool, structuring, asset tokenization and mezzanine, tokenization assets, and management.

(Figure 1) General Framework of RWA Products

Among them, the intermediate structure is generally the SPV of Fund or Trust, which is the core of trusted asset management for RWA. Whether it is the requirement for Hong Kong compliant RWA in the form of Fund, or the trusted SPV codified with Smart Contract and protocol in offshore tokenization.

This intermediate layer is O2O, offchain2onchain, which is both isolation and connection. The significance of the intermediate layer lies in isolating assets. When direct tokenization of physical assets cannot solve the problem of imperfect mapping between physical assets and virtual assets, the existence of the intermediate layer is very meaningful. RWA is the financial productization of this intermediate layer, while direct tokenization of Web3.0 is the codification and contractization of the intermediate layer. The trustee of the intermediate layer manages and operates assets through traditional methods under licensed supervision and industry norms, and achieves asset O2O management through the credit and regulatory constraints of Financial Institutions.

Several core elements of this RWA product framework, including underlying asset pool, cash flow analysis, ProgrammabilitySPV (cash flow, credit enhancement, custody), trusted asset management manager, Liquidity incentives, etc., form the design prototype of RWA products.

Underlying Assets

The primary element of RWA is the underlying assets of the asset package. The underlying assets of RWA are no longer traditional physical assets such as real estate, but trusted assets in digitalization and blockchain, and can also be native assets generated on-chain in the blockchain. These digital assets are the reconstruction of real-world physical assets based on the atomic level and can be further combined. Real-world physical assets need to meet the basic infrastructure conditions such as asset due diligence and equity confirmation, data on-chain, and asset pooling to become on-chain underlying assets and enter the RWA asset pool, and these underlying assets in the asset pool can or can generate continuous and stable cash flow.

Physical asset data on-chain, asset securitization, etc. require a series of asset protocols, based on the on-chain RWA asset protocol, to transform real-world physical assets into various RWA basic assets on-chain, thereby further becoming the basic assets of on-chain digital financial scenarios such as asset tokenization, lending, insurance, income products, etc.

The underlying assets must have clear property rights, which is also one of the most basic prerequisites for asset securitization assessment. Whether it is ‘ownership’, ‘usufruct’, or further independently separated ‘operating rights’, ‘leasing rights’, ‘mortgage rights’, ‘income rights’, ‘disposal rights’, all need to have sufficient legal authorization procedures. Secondly, the underlying assets must be transferable. The initiator may need to explicitly or implicitly transfer the underlying assets with clear ownership to the SPV through RWA asset-trusted asset management. This link cannot have legal flaws, so it is necessary to confirm whether there are restrictions such as third-party rights.

Cash Flow Analysis

The equity structure of RWA products is essentially expected cash flow, and its structure design mainly comes from cash flow analysis. We need to conduct detailed analysis on the transaction structure, earnings cycle, cash flow nodes, etc. of the underlying assets, including the hierarchy and efficiency cost of the transaction structure, the time axis decomposition of the original earnings cycle, the analysis of the cash flow generation process nodes and time nodes, as well as the cash flow aggregation method, based on the business scenarios and transaction payment backgrounds of the underlying assets.

The transaction structure of many physical assets in the real world is very complex and layered with intermediaries. The design of RWA products needs to optimize and eliminate intermediaries in the transaction structure, and it can also be a disruptive design, such as user-side reverse trading.

The income cycle will affect the income structure. For example, the income cycle of agricultural and animal husbandry is 6-9 months. Cash will be returned only after financing, breeding, and finally selling for Settlement. A new income structure needs to be designed. Can the income cycle be pre-designed? Can it be pre-sold or pre-collected? In addition, a new cash flow Node and cash flow aggregation method need to be further designed. The cash flow Node should be pre-placed. In addition, it can be combined with trustworthy asset management (RWA) to design Token payment Settlement, clearing, and automatic aggregation to achieve on-chain cash flow.

Cash flow must have a certain level of stability. Sales revenue of general merchandise, land transfer revenue, mineral resource development revenue, etc. are not suitable as the underlying assets for RWA trusted asset management due to their unstable cash flow. However, if the products sold are water, electricity, gas, heat, or other types of essential goods, and downstream user demand is strong and stable, or long-term supply contracts have been signed, they can be securitized as underlying assets.

Secondly, cash flow must be predictable. The essence of RWA credible asset management is the discounting of future cash flow income from assets. Therefore, when conducting securitization operations, it is necessary for professional institutions to predict the future cash flow generated by underlying assets, to help investors establish reasonable expectations for future income, and through the trust channel, transform non-specific cash flow assets into specific trust income rights, thereby making the underlying assets meet the requirements of securitization.

Basic Asset Income Rights

The most common thing in the income right is the lease rights of real estate, the owner of the real estate transfers the lease income to the investors, and it can be divided into corresponding 1m2 daily or weekly lease income, simple and straightforward. Lease income includes simple lease income, such as rent or annuity; it can also be designed as complex lease income, such as sublease rights, including a low-risk fixed income and a high-risk floating income, to achieve different Intrerest Rate and different priority future cash flow through asset tokenization. The design of complex lease rights can allocate some lease rights (such as fixed income) to investors, while at the same time reserving or conditionally allocating some remaining asset rights (such as floating income) to other investors.

As previously mentioned, a trust channel can be established based on the projected rental income to isolate the rental income from the value fluctuations of the underlying assets, converting the non-specific cash flow assets of the lease into specific trust lease income rights (a simple T-REITs).

Sandwich Layer and ProgrammabilitySPV

The biggest difference in the design pattern of RWA from asset securitization and REITs lies in its full utilization of blockchain technology innovation and Smart Contract, achieving ProgrammabilitySPV of mezzanine, that is, a special purpose entity based on the Programmability of blockchain.

As in a block to achieve a DeFi financial business combination of ‘mortgage-lending-Liquidity income’, the value of RWAtokenization is on-chain, and the on-chain combination of ‘assets + cash flow + income model + people’ of real-world assets is achieved through the Programmability of SPV (Block+Smart Contract+Consensus code). The code ‘SPV’ can achieve intelligent credit enhancement (such as hierarchical grading, mortgage, insurance, etc.).

The subordination and priority of a Fund can basically be achieved through one or a group of Li Jia Tu-like contracts. The core design concept of ProgrammabilitySPV is to aggregate and reorganize the asset elements of tokenized RWA assets through the blocks of the blockchain, thereby replacing off-chain SPVs and realizing a true on-chain native tokenization structure. Another core of ProgrammabilitySPV is composability, where SPVs of different RWA assets can be combined to achieve Lego Money in finance.

Trusted Asset Management Manager

The design pattern for tokenizing RWA assets requires a core asset manager: the Token Asset Manager, which is also the custody pool for tokenizing RWA assets. It governs different RWAToken assets, SPVs and allocation mechanisms, information disclosure, etc., through Consensus Algorithm, platform tokens, Smart Contracts, and Programmability codes, and may gradually achieve DAO distributed autonomy in the future. However, in the early stages, it may still require delegated management and operation through managers (GPs) and custodians (Trustees) in TradFi; in the mature stage, trusted and programmable management will be implemented.

The Token Asset Manager is a one-stop custody for RWAToken assets, with issuance, pricing, investment, trading, clearing, and more all managed in one manager, using a combination of protocols. It also allows for the management of the composability of RWA assets, enabling synergy between underlying assets and programmability development, achieving consistency in risk control, and achieving collaborative synergy from different perspectives such as system, assets, and protocols.

Liquidity Incentives

Unlike traditional asset securitization designs, RWA asset tokenization can fully leverage the characteristics of tokenization to enhance liquidity. By incentivizing investors to continuously invest or trade RWA asset tokens in the secondary market, it promotes more secondary market liquidity. This is a unique liquidity incentive that RWA asset tokenization can innovate based on blockchain and smart contracts.

Liquidity incentives, similar to ‘Liquidity Mining’ in Defi, are essentially a form of multi-level distribution. It further exchanges value for participation in the Secondary Market’s Liquidity without affecting the profitability of the original RWA asset tokenization. Investors can not only continue to enjoy the original Dividend income from real estate tokens but also obtain new Liquidity tokens, thereby achieving multi-level distribution and Liquidity value exchange.

The division and grading of some basic asset shares will promote Liquidity, and also increase price Fluctuation, while the price Fluctuation brings about spreads, leading to more Liquidity, thereby creating Arbitrage opportunities. For example, taking real estate as an example, as the real estate RWA assets are no longer large assets with high fullness, but fragmented small assets, a complex Liquidity market is formed among investors, buyers, sellers, and market makers. Long-term investors will consider stable and sustained returns rather than prices, while short-term investors will focus on spreads and Arbitrage, but the relatively stable income characteristics of real estate will gradually turn over short-term investors.

Of course, in the actual RWA project, flexible application is needed. Currently, the cooperating exchange of securities firms generally starts with the perspective of issuing encrypted bonds to see how the credit of the project party or issuer is. What is the yield of the asset package? How is the cash flow? What collateral or credit enhancement measures are there? First, make a simple judgment on whether it is feasible. If it is OK, further analysis is carried out. An RWA product framework is only used for reference and guidance to better promote the orderly development of RWA!