The challenge of tokenizing real world assets | TradFi to DeFi Episode 22
Bank reserves found product/market fit on the blockchain, but what about yield-bearing debt instruments?
It’s the biggest narrative in crypto right now and everybody is asking “What are RWA’s”? In today’s episode we explore what it takes to integrate Real-World Assets (RWAs) into the DeFi ecosystem. From the revolutionary approach of FRAX and their newly launched custodian FinresPBC, to the parallels between traditional investments like mutual funds, this episode offers a high-level overview of the present and future of asset tokenization. The evolving role of intermediaries on the blockchain presents challenges but also opportunities for an improved experience. With RWA’s, we’re moving further along the journey from TradFi to DeFi.
Check out the full episode on Spotify, Apple Podcasts, or YouTube:
Let’s explore some of the top highlights.
The Rise of Real-World Assets (RWAs) in DeFi
Every massive leap forward in blockchain adoption can be explained by a product/market fit that electrifies a new user base. For RWA’s, that story begins with stablecoins.
It’s clear that stablecoins are the “killer app” of Decentralized Finance. (Special thanks to Nic Carter’s research on this topic.) With only 10% market penetration, stables are responsible for 70% of on-chain transaction volume:
It’s clear that stablecoins are responsible for the rise of Real World Assets on-chain. Circle, Gemini, and Paxos have all proven this use case in the market, but there’s an interesting experiment being done that’s marrying stablecoins with additional real world assets like T-Bills. Let’s look at a case study.
FRAX: A Case Study
Frax is fractional reserve stablecoin project. They’ve created a perfect example of a RWA to DeFi integration with their recent RWA proposal. This would be a truly innovative step forward for an American-based stablecoin project, but it’s not without some anticipated challenges from a regulatory perpsective.
They are proposing the creation of a Deleware-based entity called FinresPBC, a public benefit corporation with the stated mission of earning yield across a variety of investments, and sharing that yield with tokenholders.
The specifics are yet to be released in an upcoming whitepaper, but from conversations within the community it seems the yield isn’t being shared directly (as that might violate existing securities laws), but instead will be shared with FinresPBC bond holders. Think of it like a tokenized corporate bond rather than a tokenized t-bill.
This introduces a lot of important questions to consider about the evolving role of intermediaries that provide these crucial services.
The role of intermediaries in in RWA-DeFi
Today if you a buy a T-Bill, you interact with a variety of counter-parties and intermediaries. You typically need a broker, who works with a broker-dealer, who in turn holds the T-Bill in a segregated account with a bank custodian, oh and don’t forget about the government that is issuing the debt, which is financed by the ability of said government to tax its citizenry… We’ve moved well into the realm of “TradFi” and it’s important to recognize this as such.
Putting that T-bill on the blockchain introduces a whole new realm of complexity (and opportunity). During the podcast, we discussed the steps FinresPBC will go through to achieve their 4-tiered objective for earning yield:
This creates a delicate balance between the decentralized nature of the Frax project with the real-world need for intermediaries that can get you access to debt instruments.
Future of Asset Tokenization
Tokenization encourages transparency and capital formation outside centralized intermediaries. But, the assets themselves still need to be held by a trusted custody solution.
If we hope to end up in a world where your tokenized real estate can be used as collateral in a DeFi lending protocol, there will be massive hurdles to overcome from an audit, reporting, and security perspective. Companies like FinresPBC are making strides in this area, and will be setting the standard that other projects can study and learn from before implementing their own strategies for tokenization.
Listen to the podcast for a full breakdown of the FinresPBC case study as well as our thoughts on RWA’s in general. It’s a good place to start if you’re just getting your feet wet with RWA’s.
Oh, and did we mention we’re workign on a top-secret RWA project from within TradFi to DeFi? Stay tuned for more details soon!
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