Is RWA a product or a transaction?

Source: Ye Kaiwen

What exactly is RWA (real-world asset tokenization)?

Crypto fundamentalism jumps out to say that RWA should not be so vulgar. We have long said that the premise of the RWA discussion is that RWA is a pragmatic and moderate compromise between traditional finance and Crypto.

Many people say that the concept of RWA is too abstract. Real-world assets are tokenized, and everything is put into RWA, but there is no real RWA thing.

This question should be asked from the word: Is RWA a product or a transaction?

If it is a product, then RWA is a T-Bill product similar to Bitcoin spot ETF or US Treasury bond mortgage interest-bearing assets?

If it is a transaction, is it a transaction of RWA products? Or is it a transaction of encrypted financial assets like TradFi's financial asset exchange?

If combined with the core essence of RWA that we have always emphasized, it is corporate financing and institutional markets. The product is similar to a corporate bond product, and the transaction is similar to a financial asset transaction, with an institutional market ecosystem around the asset package and product of corporate financing.

Compared with specific cases, such as Bitcoin spot ETF, tokenized money market fund, RWA stablecoin, etc., they are basically product directions, not corporate financing; while those tokenized corporate bonds, fixed income bonds and digital REITs (tokenized cash distributions), etc., are corporate financing.

Why do we need to discuss the different angles of products and transactions?

The former is more Web3.0 in terms of product perspective, while the latter is more RWA in terms of transaction perspective. Why do you say that?

Products are mostly from the perspective of retail investors, especially Web3.0 retail investors, who are used to investing (speculating) in a certain token. At present, there are already many crypto token projects with the concept of RWA. At the same time, products tend to be more standardized, and they focus more on product design, TGE issuance, etc. Whether it is T-Bill of U.S. debt interest-bearing assets or RWA concept tokens, or DePIN and AI as infrastructure to participate in concept narratives, they are all routines and ecosystems of standardized products.

Transactions, mostly from an institutional perspective, financial asset transactions, mostly corporate financing and institutional investment, it is a non-standardized product trading ecosystem, although the transaction subject will be designed as a financing product, but the asset transaction issuance is only the first step under the table, followed by the inter-bank market, OTC bond market and institutional margin trading, reverse repurchase and equity redemption, etc., sometimes there will be local markets for retail investment.

If you look at it from the perspective of Crypto, it is more like an industrial transaction triggered by corporate financing and the digitization and encryption of upstream and downstream channels.

So it sounds a bit like nonsense: RWA is like a product but not a product, a model but not a model, the tokenization of real-world assets is a transfer from traditional financial investment and financing to the world of virtual assets and tokenization, and the old money and old users attracted and leveraged by real-world assets mean that RWA is either in the form of real-world assets that old money can understand, or a new form of things supported by real-world assets.

RWA model integrating products and transactions

The integration of the old and the new may be a compromise and moderation in the early stage of RWA.

Traditional bonds (RA) are all institutional clients, block transactions and over-the-counter markets; while Web3.0 exchanges mainly focus on retail clients, individual (leeks) households (vegetables).

If RWA that integrates products and transactions may solve this problem: take RWA products (high-quality assets such as US Treasury ETFs and Bitcoin ETFs) as basic assets, iterate new income or arbitrage tokens (or protocols), and multi-level trading markets for primary and secondary arbitrage, and further expand RWA derivative tokens such as pledge financing and interest rate swaps based on RWA tokens.

This integration model can be aimed at both institutional clients and retail investors.

At present, the RWA projects that are licensed and compliant in Hong Kong are basically either real estate fixed income bonds or corporate credit bonds in the early stage, and then a tokenized shell is used. This is considered the most basic and simple product.

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

From this perspective, RWA may have several directions:

1) In the direction of corporate financing, most of them are in the form of RWA products, and the design of products such as digital bonds and digital REITs for corporate financing may be diversified, including credit bonds, income rights, cash flow and other different design models;

2) In the direction of industrial transactions, the business design of RWA exchanges will be highlighted, how to combine trade and cash flow to realize the tokenization of futures and spot transactions and arbitrage, and gradually transfer the token pricing power and Crypto leverage of real-world assets, replace interbank business to OTC exchange markets and mortgage lending agreements, design liquidity pools and draw on airdrop and mining models, develop digital investment banking business to support the first and second level linkage of Crypto Funds. The key is to attract and realize the linkage between upstream and downstream industries.

3) Investment and financial management: Design RWA investment and financial management products, or Crypto fixed income products, or hedging arbitrage, or priority and TRS, or yield tokens, to replace traditional financial investment and financial management products.

4) Native token: Tokenization of emerging assets that cannot be valued by traditional finance, such as renewable energy and AI computing power, especially renewable energy combined with DePIN and VPP (virtual power grid), to achieve P2P trading of renewable energy and green energy stablecoins, which will be a huge market opportunity, because in May this year, G7 member countries jointly promised to gradually eliminate the existing and increasing coal-fired power generation in the energy system in the first half of 2035.

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

Because the traditional corporate bond market is a 2B market, and 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 realize the transformation from 2B market to 2C market?

This is also the reason why the elites with Web3.0 attributes in the early licensed and compliant exchanges only look forward to the retail market in the currency circle and look down on the traditional centralized institutional market. However, RWA inevitably means compromise and moderation. Under the education of Bitcoin spot ETF, more and more licensed and compliant exchanges, including native cryptocurrency exchanges, have begun to pay attention to RWA and the institutional market.

Isn't it difficult to understand: how can the institutional market be transformed into the retail market?

a) TRS is the basis of arbitrage or arbitrage familiar to the cryptocurrency circle. Institutional clients and retail investors have different funding costs and risk strategies, so there is naturally a market space for interest rate swaps between institutions and retail investors;

b) The traditional bond market is the private placement, war matching, issuance (wholesale) and secondary market (retail) of the institutional market. The retail retail market is at the end, and there is arbitrage space for wholesale and retail as well as priority and inferiority, but RWA tokenization may enable retail investors and institutions to enter the market at the same time through different modes such as NFT, airdrops, and mining, and even the possibility of entering the market earlier than institutional clients based on the DAO community, DEX and AMM;

c) The institutional market must have locked positions and prohibited sales and cash out, or quantitative arbitrage. If there is cash out, there will be retail investors taking over, and it is not ruled out that institutions will take over retail investors' chips and liquidity.

Therefore, RWA products and trading ecology are basically in the form of assets and products familiar to financial institutions and funds, but uplift in the new form of tokenization and virtual asset trading and new liquidity, especially the diversified secondary market (token trading market), which continues to attract more traditional financial institutions and old money.