Scaling RWA: The Roadmap for Asset Tokenization vs Digital
Nov 6, 2023
RWAs will evolve along 3 paths as the market matures. Tokenization challenges, onchain financing will challenge and push RWA to improve its adverse selection bias, underdeveloped underwriting and if innovation along digitally native versions of the assets will offer advantages over these tokenized assets.
RWA dominates the conversation
RWAs x tokenization dominate the 2023 DeFi narrative arc. Whether it’s treasuries backed or tangible #assets like homes and watches, we're seeing the momentum cresting.
But what is tokenization? More or less, it's moving your accounting system from tradfi to #onchain. So if we’re just making records on a new system, then we should take a step back and put our #Rune hat on: is this the end game? Or is this the start of web3 tech building blocks for the evolution of onchain financing?
RWAs encompass much more than just an accounting system for real assets onchain. it's a harbinger of maturity in a DeFi space that sorely lacks adults in the room. Think of them as a representation of sustainable DeFi. A series of finance related transactions based on cashflows. Notice how we inserted the magical word cashflows and not unsustainable token games. Yes, tangible profits from the web2 land
Objectively, we're not saying all activities in DeFi have no cashflows. Protocols like GMX clearly demonstrate +ev by monetizing speculation through a first mover perps platform. Instead, our argument stands that very few in DeFi have sustainable cashflows with a general consensus that the majority of protocols are restrained by unsustainable #tokenomics. This maturation is what the “adults” in the room have been wanting for.
RWA is still in its primitive form
Whilst RWA has the potential to amalgamate capital markets and onchain infrastructure, but as it currently stands, it is a primitive. This form of onchain finance is just an early primitive, and like all nascent versions, the kinks still exist that show flaws in the current setup.
Missteps and flaws are inherent part of first generations, be it loans or tokenized assets. This becomes a learning framework for both tradfi and defi to iron out underwriting processes, legal infrastructure and more. Their current weaknesses will be exposed and adverse selection bias made clear. Losses will force the next wave to iterate, and improve.
What we have seen from the failures on Centrifuge & Goldfinch is a question of how founders deduct what are viable opportunities and markets to enter. Lending overall is difficult. Lending in emerging markets is extremely difficult. the risk in these markets is often so high to price for the best institutional players that they choose not to participate at all, whereas those who dare to enter are confronted by borrowers who have identified an opportunity to take advantage of a nascent and naive industry.
Smaller, more agile firms with higher risk tolerance and local knowledge tend to plug these obvious gaps. Others (and often institutional players) just stay away and the gaps remain open. Arbitrage where with risk priced in leads to fair competiiton.
So fundamentally, it is difficult for any foreign source of capital to earn outsized lending returns, at high volumes, in an economically competitive way. Now why would re-creating these loans with tokens permissionlessly change the fundamental status quo?
Centralized, permissioned applications and assets living on decentralized rails is a thin line.
Perhaps decentralization is a playground for experimentation, while permissioned solutions gain mass adoption - Bifurcation. People can continue to experiment and tinker with the limited set of participants willing to risk it on the frontier, while tradfi develops their own definition and execution of onchain financing.
DeFi in its current form lacks the security, scalability and compliance to meet institutional demands for compliance, AML regulation, and general disinterest in the potential of theft of assets. Imagine investing in a sandbox where the Lazarus group phishs $100m from your treasury. While i’m sure the potential for higher investment yields or lower borrowing costs may entice institutions, there exists the uncrossable red lines.
Those due diligence red lines marks the potential start of divergence. Centralized issuing entities capable of blacklisting and reissuing, or private permissioned chains become the key figures in onchain finance catering to the clientele of not tradfi, but regulatedfi.