The concept of RWA is not unfamiliar in the blockchain industry. The earliest RWA project was the BTM Bytom Chain, which "puts assets on the chain". At present, the most successful RWA is the digital dollar USDT and USDC, which maps the US dollar to the chain and tokenizes it. Stablecoins have subtly influenced the entire crypto industry and have now become an important cornerstone.

The full name of RWA is real world assets-tokenization, which is the process of converting the ownership value (and any related rights) in tangible or intangible assets into digital tokens. This makes the digital ownership, transfer and storage of assets without the need for a central intermediary, and the value is mapped to the blockchain and traded. RWA can be tangible or intangible assets.

Tangible assets include: real estate, artwork, precious metals, vehicles, sports clubs, horse racing, etc.

Intangible assets include: stocks and bonds, intellectual property, investment funds, synthetic assets, income sharing agreements, cash, accounts receivable, etc.

There are many types of RWA projects, most of which are DeFi-based. There are three main categories:

• 1. Fixed income projects based on off-chain assets such as US bonds, stocks, real estate, and artworks;

• 2. Public credit projects based on public market issuance or trading;

• 3. Trading market projects based on virtual assets such as carbon credits. In addition, there are infrastructure projects such as vertical public chains.

Fixed income projects are based on US bonds and stock markets and provide loans to individuals and institutions. The only difference between these projects and other DeFi lending projects on the chain is that the collateral can be real-world assets.

Public credit projects can establish investment funds for crypto users to invest by tracking US bonds or other bonds.

In terms of data, according to statistics from the RWA.xyz website, 8 RWA lending protocols including Centrifuge, Maple, GoldFinch, Credix, Clearpool, TrueFi, and Homecoin have issued a total loan amount of $4.38b, and users can obtain an average APR of 10.52%, mainly serving countries with a medium or lower level of development. These credit lending protocols offer higher returns than most DeFi lending, but in the 2022 institutional crash, Maple Finance defaulted on $69.3 million in debt.

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According to the Dune data analysis panel, the number of currency holding addresses of $wCFG, $MPL, $GFI, $FACTR, $ONDO, $RIO, $TRADE, $TRU, and $BST in the Ethereum RWA project is also increasing, currently reaching 3.9k.

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Ideally, any valuable asset can be tokenized. The advantages of asset tokenization are also based on decentralization and the underlying blockchain technology, creating some ecological applications to solve the drawbacks of traditional finance. Specifically:

(1) Bringing a huge potential market to attract investors and retail investors

As leading financial institutions hope to benefit from the efficiency and economic possibilities brought by blockchain, the tokenization of real-world assets is being noticed by institutions and some tokenized products have been developed. The RWA project will also stimulate investment returns in DeFi.

Through the tokenization of real-world assets, enterprises can use the DeFi ecosystem to obtain capital in a low-cost manner and benefit from lower entry barriers and new financing methods, especially for emerging markets. At the same time, the DeFi ecosystem has obtained investment returns, entered a variety of off-chain markets, and expanded the traditional financial customer base.

(2) Improving the efficiency of capital flow and promoting positive feedback of asset tokenization

The traditional financial trading market is labor-intensive. Blockchain technology can provide instant settlement, 24-hour trading, etc., which reduces the operating costs and market access of participants. In addition, asset tokenization can turn real-world assets with poor liquidity into small-share investment portfolios, and investors do not need a lot of paperwork, money and time consumption. This leads to a fairer market while creating new business and social models, such as shared property ownership or shared rights.

In terms of securities, tokenization can be a useful tool for securitization, or refinancing assets from low-liquidity assets to more liquid security instruments.

Bringing real-world assets to the chain and into the DeFi ecosystem will bring unique collateral or investment opportunities, market efficiency, and liquidity that is not available in traditional markets. The improvement of capital efficiency will further promote the development of the RWA track, forming a positive feedback.

(3) Lowering the entry threshold for retail investors and increasing the liquidity of physical assets

Tokenization eliminates the current barriers that hinder the segmentation of real-world assets, making it possible for most retail investors to access asset classes that are usually limited to some high-net-worth individuals or institutional investors. In particular, in terms of physical assets, retail investors can invest in cross-regional products, or collectively invest in a property or a piece of art, which requires extremely high barriers in the traditional financial field. These physical assets may have extremely low liquidity in small markets, but once they are on the chain, they will be accessible to investors all over the world. In addition, issuers can access a wider group of investors and create new asset classes. Retail investors can enter markets that were previously inaccessible and make smarter investment decisions based on transparent data.

(4) Relying on the advantages of blockchain technology, RWA transactions are more efficient and secure

Blockchain technology ensures the transparency of on-chain payments and data flows, the immutability of transaction records, traceability, higher efficiency and lower operating costs, more robust risk management, clear ownership and other advantages, as well as more composability and a fairer market environment. In the future, as blockchain technology continues to develop, there will be higher-performance public chains or layer2 solutions, stricter smart contract review mechanisms, and privacy projects based on zk technology to protect transactions, all of which provide a solid foundation for the development of the RWA track.

Asset chaining is the only key point of the RWA track. Solving this key point also requires two foundations, one is the improvement of blockchain infrastructure, and the other is legal supervision. Blockchain involves the interoperability, security, and privacy of various protocols and tokens. Legal supervision is whether there are corresponding laws and regulations to support off-chain assets and on-chain identities. Many issues are being actively discussed, and two are mainly discussed here: token standards and censorship.

• Diversification of token standards

According to the on-chain token standards, there are ERC-721 and ERC-20 on Ethereum, corresponding to indivisible NFT and divisible token standards respectively. In traditional finance, asset attributes vary, including tangible assets and intangible assets. For use on the blockchain, we also need to create corresponding token standards to tokenize assets based on the attributes of the assets. Fungible tokens and non-fungible tokens have the following characteristics:

Fungible tokens: Interchangeable, each unit has the same market value and validity, which means that token holders can exchange assets with each other and be sure that their value is the same; divisible, the asset can be divided into as many decimal places as it is issued, and each unit will have proportional value and validity.

Non-fungible assets are non-interchangeable and cannot be replaced because each unit represents a unique value and has unique information and attributes. Non-fungible tokens are also generally indivisible, although there are ways to split the investment cost to provide partial ownership, such as in commercial real estate.

Most assets can also use the fungible token standard, and some assets, such as bonds and derivatives, may be better tokenized through non-fungible tokens. As the RWA project gradually rises, more abundant forms may appear, and at this time, simple ERC-20 and ERC-721 can no longer meet the needs of RWA tokenization. Many RWA vertical public chain projects have thought of this and started to create RWA tokenization standards, such as Polymesh. Judging from the development of the RWA project today, most projects are built on Ethereum, so it is more universal to develop a wider range of ERC token standards. ERC-3525 is currently the most discussed, and it is possible that more token standards will appear in the future, especially after the baptism of BRC-20. We believe that the token standard that can serve the RWA project well needs to have the following two characteristics:

It has good operability and flexibility for the RWA token issuer, and has the dual characteristics of ERC-721 and ERC-20;

It has a certain degree of privacy and can protect transaction information and user information.

• Strict review system

Security is an important part of tokenized real-world assets, especially when they serve as a source of collateral. It is important for issuers and investors of RWA to conduct due diligence on DeFi protocols and choose technologies or services that prioritize secured lending, provide strict regulatory compliance, and are built with high-quality open source code. For RWA-related project teams, two necessary solutions may need to be provided:

Avoid KYC/AML risks-perform KYC (know your customer) or AML (anti-money laundering) checks on users and/or transactions on the platform. Avoid users from interacting or trading directly or indirectly with counterparties or politically exposed persons listed on OFAC and other sanctions lists.

Provide effective monitoring means-products and services that monitor and detect suspicious activities of DeFi users.

As a result, the project needs to set up a dedicated compliance team to review and approve or deny user access to the platform based on customer identity, risk assessment, verification, and due diligence. In addition, continuous monitoring of customer activities is performed to detect any suspicious activities or behaviors that may be fraudulent or money laundering.

Although the Ethereum ecosystem is huge, most of the current RWA projects are also built on Ethereum. However, Ethereum is not completely suitable for the development of the RWA track, including the node's anti-censorship and insufficient public chain performance. In particular, various real-world assets need to be implemented in token standards and smart contracts, which requires a brand-new infrastructure support to meet the characteristics of programmability, verifiability, and compliance with the existing regulatory system.

At present, RWA's vertical public chains have taken the above needs into account. However, the entire track is currently developing slowly, with few users and developers participating, and the underlying public chain is still based on existing public chain technology development, such as Polkadot and Cosmos. The existing public chain competition landscape seems to have been finalized, and attracting users still requires the support of upper-level applications.