Original Title: "Tokenization of Real World Assets (RWA) Leads the Next Generation Capital Market"

Original Author: DigiFT and HashKey Capital

1. Abstract

Finite scale, infinite potential: Compared to traditional financial markets, the overall market size of RWA (Real-World Assets) is currently only a few billion dollars. However, driven by the efficiency and cost advantages of blockchain technology, the potential market value of RWA could reach tens of trillions of dollars in the next five years.

Supply-side mainstream is fixed-income products, national bond tokens are rising, and private credit is shrinking: According to data from RWA.xyz and Dune.com, the current TVL (Total Value Locked) of major RWA is concentrated in US Treasury-related products, growing from $100 million at the beginning of 2023 to a total market value of $784 million, showing a rapid growth trend in the crypto market winter. The TVL of private credit products has dropped from its peak of $1.5 billion in mid-2022 to only $500 million currently due to the FTX, 3AC, Luna and other project defaults.

The demand side is mainly institutional investors, used for short-term cash management and portfolio diversification: By analyzing the wallet addresses related to government bond tokens, we can see that the main holders are institutional investors. Currently, the demand for RWA is mainly focused on the short-term cash management needs of investors in the cryptocurrency market. In addition, DeFi protocols such as stablecoin protocols and lending protocols have also introduced RWA to achieve portfolio diversification and reduce overall system risk.

Regulatory Challenges Remain Severe: RWA faces diverse regulatory environments worldwide. The United States implements strict securities laws and has global influence. In contrast, Switzerland, Singapore, and the Hong Kong Special Administrative Region have shown positive support, providing a more friendly regulatory environment for RWA.

Innovative model combines RWA with DeFi: By adopting innovative business models such as lending and tokenization, RWA with high investment thresholds can be integrated into DeFi. However, challenges such as anti-money laundering compliance, sales restrictions, and unresolved asset ownership issues have yet to be resolved. The integration of RWA and DeFi will to some extent guide DeFi towards compliance.

Outlook: In the short to medium term, due to the lack of stable income products in the cryptocurrency market and the demand for risk diversification, RWA market products will still be dominated by fixed income products. In the long term, as the market's understanding of compliant assets deepens and relevant legal frameworks are improved, we will see more diversified RWA assets and may witness the next generation of capital markets driven by blockchain and tokens.

二、前言：加密原生和真实世界

Chapter 2: Preface - Cryptography in the Native and Real World

Like the concept of "stablecoins," the emergence of the concept of "Real World Assets" is a metaphor proposed by people in the development of encrypted assets based on blockchain technology. These metaphors are not intended to be novel, but to allow people with different backgrounds and experiences to intuitively understand new things through imagination and symbols, without requiring too much background knowledge and overview. In the process of technological innovation, metaphors are a management tool, and people consciously or unconsciously create metaphors and use them to start communicating explicit and implicit knowledge.

Real estate, gold and other tangible assets exist in the physical world. These physical tangible assets cannot exist in electronic form compared to the widely used electronic systems. In order to embed them into the electronic system, there are corresponding issuers for traded gold. For the electronic system, these physical tangible assets also belong to "real world assets", but their existence is already commonplace and not considered a special concept by the public.

The "real-world assets" discussed in the encryption world are actually tokenized, allowing token holders to have legally recognized ownership of the underlying assets. These "real-world assets" include tokenized equity, bonds, and real estate, which exist outside the world of encryption. However, the categories of "real-world assets" are too diverse, and the implementation methods are also varied. If you want to define "real-world assets", the simplest way is to define "encryption-native assets" and thus distinguish between the two types of assets.

"Real world assets" from a technical perspective, is nothing more than mapping the original asset types onto the blockchain through technological and legal means, representing the ownership of the "underlying assets" with "tokens", in order to enjoy the high efficiency and low cost brought by new financial settlement tools.

If new technologies do bring breakthrough efficiency improvements and cost reductions, and there are no fatal flaws, then the new technologies will eventually be adopted. The medium of financial transactions, from paper tickets on the New York Stock Exchange counter a hundred years ago to electronic trading systems widely adopted today, is likely to evolve towards token forms based on blockchain technology.

Before the bridge between the virtual and real worlds is established, the world of encryption and the real world are disconnected. Therefore, the concept of "real world assets" is widely discussed as a metaphor that can help the two worlds understand each other.

This research report will focus on the most important and mainstream part of real-world assets (RWA) - financial securities, to study the current status of the on-chain capital market and explore the next generation of capital markets.

These metaphors serve as an intermediate form, facilitating the integration of the crypto world from its primitive assets to the real world; blockchain is a new financial infrastructure, and the essence of finance should not change. This research report will focus on the most important part of real-world assets (RWA) at present, and will also be the most mainstream part in the future - financial securities, to study the current status of the on-chain capital market and explore the next generation of capital markets.

These metaphors serve as an intermediate form, facilitating the integration of the crypto world from its primitive assets to the real world; blockchain is a new financial technology infrastructure, and the essence of finance should not be changed.

Three, Introduction: What are Real World Assets (RWA) and how do they work?

Native encrypted assets are mostly implemented through smart contracts, and the related asset operation logic and business are run through the code on the chain. Typical native encrypted assets include public chain tokens, DeFi tokens, etc. In comparison, real-world assets (RWA) are more complex and diverse. RWAs can be of any type, and their business and revenue do not come from on-chain assets. For example, wine, cars, (traditional) financial securities, and precious metals can all be classified as RWAs.

Native encrypted assets define rules through smart contracts, which is commonly referred to as "code is law" in the encrypted community. However, for "real-world assets", the implementation process is completed through tokenization. Since more asset relationships occur in the real world off the chain, what we commonly refer to as tokenization is not simply an action of issuing on-chain tokens, but a series of processes, including the purchase and custody of underlying assets, the legal framework for linking underlying assets and tokens, and the issuance of tokens. Through tokenization, combined with off-chain legal regulations and related product operation processes, token holders have the right to claim the underlying assets legally. Therefore, especially for financial assets, off-chain legal regulations are the more important part, and the occurrence of RWA tokenization is also inseparable from the framework of the traditional world.

RWA Implementation Structure

RWA tokenization implementation mainly consists of three parts. According to the asset type, each part will have different roles to undertake their respective responsibilities.

·Real world: asset initiator, asset custodian, asset purchase channel.

·Information Bridge: Oracle, Legal Framework, Token Standard, Third-Party Audit, Deposit and Withdrawal Payment Channel.

·On-chain section: RWA token issuer, issuance platform, smart contract.

Figure 1: RWA Implementation Structure Diagram

Four, Issuance Models: Direct Issuance Model and Asset-Backed Model

Legal and regulatory requirements for securities-based financial assets are relatively strict. Discussing from the perspective of securities-based assets can cover most situations that assets may encounter. Here, we mainly discuss the issuance and trading of securities-based tokens.

From the perspective of issuance mode, encrypted assets are all issued directly on the blockchain, and the registration of asset ownership occurs directly on the blockchain. As there are no real-world businesses or underlying assets, it is difficult to define the nature of these assets. Generally, securities-type assets require registration and registration with relevant authorities. Except for Switzerland's DLT (Distributed Ledger Technology Act, DLT Act) bill, there is currently no law that clearly allows securities products to be issued directly on the blockchain. Due to the lack of relevant precedents for reference, the securities issued under the direct issuance model are mostly experimental in nature, including typical examples such as DigiFT and Diners Club Singapore's Diners Club 1-month note.

The world of encryption assets is highly homogeneous and relatively volatile, while the volatility of RWA assets is relatively low and weakly correlated with encrypted assets. Therefore, investors in the world of encryption have a certain demand for RWA. In order to better accept the concept of RWA in the world of encryption, there needs to be a widely accepted asset, with the US dollar, also known as stablecoin, as the preferred option; followed by US Treasury bonds, which are currently the mainstream of RWA and belong to security tokens. These assets cannot be issued through direct issuance unless the sovereign authority, the US government, issues them on the chain (such as CBDC). Therefore, another issuance model has emerged, which is to obtain corresponding assets in the traditional capital market as support and issue corresponding tokens, called the asset-backed model.

The private credit market also has cycles. When the market has a good foundation of trust, borrowers are willing to borrow at appropriate interest rates, and lenders are willing to take risks and provide funds. However, after the Luna and FTX incidents, multiple lending pools in the private credit market were affected by defaults, leading to a significant decrease in TVL and currently being in a relatively low cycle.

On the other hand, due to the high interest rates of the external macro market in US dollars and the lack of returns in the internal cryptocurrency market, tokenized US Treasury assets have emerged. According to data from DeFi Llama, the TVL of RWA projects related to US Treasury bonds is in a continuous growth phase in the market with clear demand.

Figure 5: Total market value of US Treasury bond-related token chains, source: rwa.xyz, data as of November 27, 2023

Compared to DeFi assets, from the perspective of returns and gameplay, RWA itself is not sexy enough, but due to the security of underlying assets, it attracts institutional investors who pursue stable returns and high liquidity. Due to its connection with real-world assets, most platforms have KYC and AML requirements. If it is a security-type asset, the legal requirements are even stricter, and there is generally a requirement for qualified investors. These compliance restrictions and factors affecting returns make RWA assets more difficult to enter the hands of retail users. Currently, the main RWA TVL is concentrated in US Treasury-related products. US Treasuries, as the most market-consensus, stable-return, and liquid asset class, have been adopted by many DeFi protocols and cryptocurrency investors in the context of macro bear markets.

We observe that the main RWA holdings are held by institutions and agreements, either for direct short-term liquidity management needs or as underlying financial assets to realize structured products (which will be covered in the "Innovative Business" module later). We directly observe the on-chain data and query the current major US Treasury-related token holdings. The data comes from Ondo Finance OUSG, Maple Finance USDC Cash Management, Backed Finance bIB01/bIBTA, OpenEden Tbill, and MatrixDock STBT token on-chain information. It was found that 29.1% (valued in USD) of tokens are held in multi-signature addresses, which can be understood as being held by institutions/companies. 16.9% (valued in USD) are held in contracts for DeFi applications, such as the Ondo Finance OUSG token in the Flux Finance lending platform. These DeFi projects are designed to transmit the income of RWA to the DeFi ecosystem through permissionless means such as lending. In addition, 53.9% (valued in USD) are held in EOA addresses. Considering that companies/institutions hold assets through MPC wallets, third-party custody, or hardware wallets, the on-chain address format is still EOA addresses, so there may be a larger proportion of tokens held by institutions.

Figure 6: Distribution of US Treasury bond-like tokens by address type, source: Dune Analytics, 21co, data as of November 27, 2023

RWA Status Summary: Transitioning from 2B mode to B2B2C mode

We believe that in the short term, direct sales of RWA assets will still be mainly focused on 2B. We can also see RWA being combined with DeFi as underlying assets for various structured products. Examples include Angle Protocol (backed by Backed Finance bC3M), Spark Protocol (backed by government bonds purchased through a trust structure by MakerDAO), USDV (backed by MatrixDock STBT), TProtocol (backed by MatrixDock STBT), Mantle mUSD (which can be exchanged for Ondo Finance USDY), and Flux Finance (collateralized by Ondo Finance OUSG), implementing a B2B2C model. These combinations can accelerate the promotion and application of RWA while meeting compliance requirements.

Figure 7: RWA Asset Supply Chain

Sixth, dilemma: Why can only qualified investors be targeted?

Except for a few projects that can issue RWA schemes to retail investors under certain restrictions through compliance with specific local laws, special prospectuses, and specific securities registrations (see RWA Innovation Module for details), most of the RWA schemes currently on the market can only be offered to qualified investors. Depending on the regulations in different regions, investors are required to have a certain amount of financial asset proof to be considered as qualified investors, such as Singapore's requirement of SGD 1 million (approximately USD 730,000) in personal financial assets.

Most RWA products, including US Treasury-related products, can only be offered to qualified or institutional investors because issuing them in compliance with retail investors would incur high costs.

These costs arise from the lack of correlation between underlying assets and the tokens ultimately issued. Relevant securities laws have strict requirements for issuing securities to retail investors, including preparing and registering a prospectus. In addition, the laws of most jurisdictions require ownership of assets such as stocks and bonds to be recorded in a specific manner (for example, in a register maintained by the issuer). Currently, authoritative agencies do not accept tokens and blockchain directly as tools for ownership registration, which means that token ownership cannot directly represent ownership of underlying assets under these laws and regulations.

Using the asset-backed model, RWA tokens are issued. For example, RWA tokens with US Treasury bonds as underlying assets require a "bridge" between the underlying assets and the expected RWA tokens. The RWA token is a new security, and this "bridge" can be established by treating the RWA token as its own independent security. However, this also means that the RWA token needs to independently comply with all relevant securities laws, and the issuer needs to prepare and register additional prospectuses for the RWA token as a security.

To understand these, we can take a look at the traditional model of issuing securities for retail users. Whether it is issuing stocks or bonds, it needs to go through:

During the internal preparation phase, the company decides on the various characteristics of the company's securities, selects and hires investment banks (underwriters) and other financial professionals such as lawyers and accountants to assist in the IPO process.

·Select underwriters. Underwriters will assist the company in preparing and executing bond issuances.

·Due diligence, auditing, and rating (for bonds), reviewing internal controls and governance structures to ensure compliance; for bonds, ratings will affect the credit quality of the bonds.

·Prospectus, if targeting retail investors, must be approved by regulatory agencies to ensure investors have sufficient information.

·Pricing, working with underwriters to determine valuation and issuance price, among other conditions.

·Market marketing, conducting roadshows, interacting with potential investors, and explaining the company's business situation.

·Issuance and listing require compliance with the listing requirements and standards of the exchange.

·Post-trade management, such as financial information disclosure, announcements, etc.

You can see that if securities assets are to be sold to retail investors, a complex process must be undergone. In these processes, there are two reasons why RWA is difficult to directly face retail investors:

1. High costs and insufficient returns. The entire process of securities issuance for retail investors can cost millions of dollars and requires regulatory approval. However, the overall size of the cryptocurrency market is relatively small compared to traditional markets, which cannot meet the large-scale financing needs. Therefore, compliant issuance has high costs and insufficient returns.

2. Insufficient infrastructure. There are no compliant securities exchanges offering trading services for tokens, and securities registration agencies do not currently support token registration as ownership, and so on.

If the issuer does not want to incur such high costs and transaction frictions, they can only issue the product to qualified investors and institutional investors. The mainstream RWA assets in the current crypto market are issued by SPVs established by start-up companies. If traditional capital market securities, such as US Treasury bonds, are used as underlying assets and issued through an asset-backed model, investors who purchase these bonds are essentially buying corporate bonds issued by the SPV with US Treasury bonds as underlying assets. This structure poses very high counterparty risks, which turns the originally AA+ rated US Treasury bonds into BBB investment-grade corporate bonds. Other directly issued corporate bonds are also mostly issued by smaller companies and have not gone through a complete issuance process aimed at retail investors, resulting in cost savings and only being available to qualified investors.

Seven, Driving Force: Two-way Travel between the Real World and the Cryptocurrency World

RWA simultaneously involves both the real world (for securities products, that is, the traditional financial world) and the crypto world. From the performance of current market participants, there is sufficient driving force on both sides.

Traditional world driving force:

·Reg A Type 2: Allows companies to raise up to $75 million within 12 months with stricter ongoing reporting requirements, and can be used to offer to both qualified and non-qualified investors.

·Rule 504: Allows companies to raise up to $5 million within a 12-month period. Can be used to offer securities to both accredited and non-accredited investors.

·Rule 506(b): Allows for the unlimited raising of funds from accredited investors and up to 35 non-accredited investors. General solicitation or advertising is prohibited.

Unlike the United States, the European Union and Asia do not have a comprehensive securities framework - instead, securities laws vary by specific jurisdiction. Within the European Union, Switzerland is one of the few countries that clearly supports tokenized securities and legally recognizes and regulates tokens as valid proof of ownership through Digital Ledger Technology (DLT).

Nine, Main Participants: Participation Methods, Models, and Current Situation

MakerDAO

Figure 9: MakerDAO Monetails Clydesdale Trust Structure Diagram

Currently, the MakerDAO community is considering the possibility of tokenizing US Treasury bonds. This proposal was put forward by strategic consulting advisor Steakhouse and has received proposals from multiple platforms.

MakerDAO passes national debt returns to Dai holders through Spark Protocol's Dai Saving Rate (DSR). Previously, the DSR was raised to 8% and maintained for about a month, attracting a large amount of assets (mainly USDC) to be minted as Dai. Currently, the DSR rate has been lowered and there are 1.62 billion Dai in the DSR pool.

·Issuance Model: Off-chain Trust Model

Investor requirement: No license required.

·DeFi protocol integration: borrowing and lending protocol Spark Protocol, and other protocols also indirectly gain RWA revenue through direct investment in sDai.

DigiFT

Currently, DigiFT offers a variety of products, including the single US Treasury bond token DUST (DigiFT US Treasury bond token; DUST is a series of tokens backed by AA+ rated US Treasury bonds as underlying assets, supported by highly liquid investment-grade short-term US Treasury bills, designed to generate returns while ensuring asset safety and liquidity to meet cash management needs), US Treasury bond funds, bank notes, and ETH collateral products that comply with regulatory requirements.

Figure 10: DigiFT Product Process Diagram

·Supported currencies: USDC, USD

·Investor requirements: Qualified investors and institutional investors.

Backed Finance

Backed Finance is a platform that tokenizes real-world assets such as ETFs and stocks into RWA tokens, which can be transferred on-chain. The tokens issued by Backed Finance track the price of the underlying assets and are backed 1:1 by the underlying assets. Backed Finance aims to build a decentralized platform that can integrate with various DeFi protocols and support multiple blockchains.

Backed Finance token design is quite unique, without a whitelist mechanism, users can freely transfer after subscription; tokens can be sold on-chain through licensed resellers, and some tokens have liquidity on Uniswap. The specific implementation will be detailed in the "Innovation Module".

Figure 11: Backed Finance Product Process Diagram

·Region: Europe

·Product: US Treasury Bond ETF Token, Eurozone Treasury Bond ETF Token, Stock Token, etc.

·Supported currency: USDC

·Issuance Model: Asset-backed Model

·Investor requirements: Subscription: Qualified investors; Redemption: KYC is required and can be for retail investors; Secondary market purchase: No license required.

·DeFi protocol integration: Angle Protocol integrates the Eurozone government bond ETF token bC3M as collateral to generate its Euro stablecoin.

Ondo Finance

Ondo Finance provides tokenized ETFs for investors, including bond funds, US Treasury bond funds, and US money market funds, among others. Its main products are aimed at qualified investors. Currently, Ondo Finance's main product is the tokenized short-term US Treasury bond fund OUSG.

Figure 12: Ondo Finance Product Process Diagram

Ondo Finance issued USDY in August 2023, with short-term US Treasury bonds and bank current deposits as underlying assets. USDY is registered under SEC Reg S and can be sold to non-US retail investors.

·Product: US Treasury ETF, US Money Market Fund, High Yield Bond

·Supported currency: USDC

·Issuance Model: Asset-backed Model

Maple Finance

Centrifuge

MatrixDock

·Product: STBT

·Issuance Model: Asset-backed Model

OpenEden

OpenEden is a platform that builds on-chain US short-term Treasury bond products through a structure of bankruptcy isolation. The only current product is TBILL VAULT. OpenEden operates and manages through a professional fund registered in BVI, investing in short-term US Treasury bonds and placing them in compliant institutional custody.

·Product: TBILL

· Investor requirements: targeting qualified investors and institutional investors.

Securitize

·Product: Mainly various types of funds.

·Issuance mode: Direct issuance mode.

Investor requirements: mainly targeting qualified investors and institutional investors.

Goldfinch

·Region: United States

·Product: Asset-backed securities

·Supported currency: USDC

·DeFi protocol integration: N/A

This section's data is accurate as of November 27th, 2023. Some tokens may be deployed on multiple chains, but this report only examines data on the Ethereum blockchain.

其中：

Where:

·Total amount: 111.29 M USD

· Average subscription amount: 836,721 USD

·Total redemption count: 106

Openeden TBILL (issued in March 2023):

·Total amount: 11.64 M USD

·Position address count: 28

·Average subscription amount: 219,186 USD

· Average redemption amount: 68,720 USD

·Total subscription count: 67

·Total redemption count: 43

Figure 22: Openeden Tbill Position Distribution

· Total amount: 17.23 M

·Average subscription amount: 472,312

·Total subscription count: 98

图 23：Maple Finance Cash Management USDC 持仓分布

Figure 23: Maple Finance Cash Management USDC Position Distribution

Backed Finance bIB01 (to be issued in March 2023):

图 27：MatrixDock STBT weekly trading volume data, source: Dune.com, compiled by DigiFT, data as of November 28, 2023

From the above data, we can observe:

·The holding of national debt token is relatively concentrated. For the above five projects, the sum of the top three addresses' holdings for each project exceeds 50% of the total amount. 

Due to the fact that most securities-related RWA assets can only be offered to qualified investors, the market space is very limited. Many RWA protocols are exploring innovative business models from legal and operational perspectives to bring RWA into DeFi, allowing users to obtain returns on US Treasury bonds without permission or to build infrastructure similar to on-chain Yu'ebao.

Ondo Finance has designed a lending protocol, Flux Finance, for its US Treasury bond token, OUSG. Flux Finance has copied the code of the Compound V2 lending protocol and made a series of modifications to support assets with whitelist restrictions as collateral, as well as modifying its interest rate curve and collateral ratio to suit the characteristics of OUSG. Currently, the only collateral available on Flux Finance is OUSG, with a collateral ratio of 92%.

TProtocol v1

Figure 28: T Protocol V1 wTBT token, source: Etherscan, data as of November 27, 2023

TProtocol v2

Figure 29: T Protocol V2 Product Flowchart

In September 2023, TProtocol and MatrixDock reached a partnership agreement to provide a lending pool for MatrixDock's STBT. The STBT token operates on a dynamic rebasing model, with each individual STBT token anchored to 1 USD. The underlying assets of the STBT token are a basket of short-term US Treasury bonds and money market funds, providing holders with returns that are reflected through the dynamic rebasing model. The number of tokens is updated daily based on the underlying asset prices.

The yield provided to USDC users by the lending pool is variable and will not exceed the interest rate of STBT itself. The protocol design will try to pass on as much interest as possible to USDC users.

The rUSTP tokens obtained by depositing USDC correspond to a rebasing token, with each rUSTP anchored to 1 US dollar. The interest rate is reflected through daily quantity increases. In theory, according to the design of the lending rate, the yield of rUSTP will follow the yield provided by STBT.

MatrixDock currently holds a certain amount of USDC in the lending pool. If users need to redeem their USDC, they will be redeemed first through these USDC. If the amount exceeds the reserved amount, and the quantity is small, it will be directly sold on Curve through STBT. If the redemption volume is large, it will be realized through STBT redemption on MatrixDock, and it will take T+3 to redeem according to the current design.

rUSTP can be converted into a stablecoin USTP that does not include profits. The remaining interest income does not indicate where it will go (possibly to TProtocol itself). Users can also exchange it for iUSTP based on the internal exchange rate, which is an interest-accumulating token. The quantity of the token itself will not change, and its value will accumulate over time, making it easier to integrate with various DeFi protocols.

The overall process is as follows:

Stablecoin based on RWA: MatrixDock - USDV

Generally, stablecoin issuers obtain US dollars and mint corresponding stablecoins. They use the US dollars to purchase US Treasury bonds or high-rated bank bonds as one of their sources of income. Some stablecoin issuers, such as Circle, distribute a certain percentage of their income to their ecosystem partners. USDV adopts a similar approach, directly sharing the underlying asset's income with ecosystem participants through smart contracts to promote the development of stablecoin ecosystem, such as issuers, market makers, and liquidity providers.

Holders of STBT who have undergone KYC certification can become USDV minters by depositing STBT into the contract to mint new USDV. USDV can identify the minters of this stablecoin on the chain through a special coloring design, similar to the UTXO mechanism of Bitcoin. The profits generated by the dynamic adjustment of the underlying asset STBT will be kept in the contract, with 50% of the profits distributed to the minters of these stablecoins and the other 50% distributed to market operators and liquidity providers. Market participants of these USDVs can earn profits or further incentivize the development of the ecosystem based on these profits.

Unidentified Bills: Backed Finance Unidentified Bills Design (Bearer Instrument)

The above solutions are to transfer profits to DeFi protocols through packaging and borrowing, and to transfer profits to another related party without permission, while retaining the compliance requirements of the original subject. The models of Backed Finance and subsequent Ondo Finance USDY are more of a breakthrough in the legal and regulatory aspects.

Before understanding the implementation of Backed Finance, let's first understand the difference between registered and bearer notes:

·Registered instruments: Generally, the negotiable instruments circulating in the market, especially securities assets, are registered instruments. The issuer or the authorized registration agency needs to register the holder of the instrument for each transaction and transfer.

·Bearer instruments: The identity of the holder of the bill is only required by the issuer or registrar when necessary, such as during subscription/redemption/trading. The holder of the bill does not need to be recorded in real time during the flow process.

Backed Finance issues "tracker certificates", a type of derivative that tracks the price of underlying real-world assets. Each token represents a "tracker certificate", and token holders have related rights to the value of the underlying assets in the contract.

Backed Finance has registered the "tracking certificate" prospectus with the financial market supervisory authority in Liechtenstein. As Backed Finance is a company registered in Switzerland, it can only promote to qualified investors under Swiss law. "Authorized participants," licensed banks, securities firms, and non-Swiss regulated financial institutions, can purchase Backed Finance's products from Backed Finance and sell them to retail customers. On the Backed Finance platform, the purchase of its tokens is only available to qualified professional investors, but retail investors who purchase Backed Finance-related products from other sources can also redeem them after KYC verification by Backed Finance.

In the prospectus, the tokens issued by Backed Finance are designed as bearer instruments, and only have a blacklist mechanism in the token contract design. Therefore, after issuance, transfers can be made without permission or directly interact with various DeFi protocols. Only the process of subscription and redemption with Backed Finance requires identity authentication.

Figure 31: Transaction records of Backed Finance token on Ethereum, showing liquidity on Uniswap. Source: Etherscan, data as of November 27, 2023.

From the perspective of subscription and redemption, there are only two subscription addresses, 0x43 and 0x5f, for the Backed Finance Short-term Treasury Bond ETF token bIB01, and no redemptions. After subscription, they were transferred through token transfer to other investors, so the above two addresses may be authorized dealers who transfer Backed's tokens to DeFi protocols or users. Tokens sold through dealers may only need to meet KYC requirements, thereby bypassing the restrictions that end users and institutional investors may encounter.

Stablecoin: Ondo USDY - Mantle

Ondo Finance has recently launched USDY on Layer 2 network Mantle as a stablecoin for the network's yield farming. Users of Mantle network will be able to purchase USDY directly on DEX. While Backed Finance embeds RWA into DeFi through special European laws, Ondo Finance has chosen a different approach.

Figure 32: USDY Product Structure Diagram

USDY is issued by Ondo USDY LLC, a wholly-owned subsidiary of Ondo Finance Inc., and is a bankruptcy-isolated SPV. USDY is a token with short-term US Treasury bonds and bank current deposits as underlying assets. It is registered through US Reg S and can be sold to non-US retail users under certain restrictions. Currently, there is a restriction on USDY that there is a 40 to 50 day lock-up period after sale, which means that users have to wait for the lock-up period to end after purchase before they can obtain the on-chain tokens, and cannot sell them to US investors within one year.

We expect RWA to continue to develop steadily, including:

From the perspective of market supply and demand, RWA assets will compete with native crypto assets. In the context of macro high interest rates, US Treasury products with strong consensus and considered risk-free assets of the US dollar will still be core. During the interest rate reduction cycle, the market will prefer risk assets, thereby reducing the attractiveness of fixed-income RWA. However, as the crypto world further understands compliance, more on-chain assets issued in compliance will compete with native crypto assets.

Meanwhile, more and more traditional financial institutions are exploring the direct issuance of assets on public chains, accumulating practical cases and legal regulations through repeated experiments and practices, and ultimately bringing compliant financial assets onto the chain.

As one of the fields that is sensitive to cost and efficiency, the financial industry will continue to iterate existing technologies and gradually enter a new generation of capital markets, and derive new ecosystems and market structures under the attraction of the advantages of blockchain.

Special thanks to Siya Yang, Scarlett Xiao, Amos Song, James Pek, Wee Ping Lim, Evelyn Xiong, Marilyn Cher, and Holly Chen for their help and support. Without their suggestions and assistance, this report would not be as comprehensive and complete. 

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