Explore the current state of RWA applications in the real world

Stablecoins and other tokenized real-world assets (RWAs) were previously thought to be the types of crypto applications that would appeal to the general public. Ten years ago, bitcointalk.org was churning out remittances. A few years ago, with the advent of smart contract chains, our industry began to envision Wall Street replacing the DTCC with on-chain stock settlements.

It turns out that the first wave of stablecoins and RWAs never gained adoption among the average person or crypto agnostic. They had to be adopted by crypto natives first.

For example, stablecoins first found product-market fit through crypto natives who arbitrage across exchanges and need a safe haven from the volatility risk of crypto assets. Once the stablecoin infrastructure is built and battle-tested, crypto-agnostic use cases can follow, including payments, remittances, and inflation hedging against fast-inflating currencies such as the Turkish Lira and the Argentine Peso. These use cases were not crypto-native from the beginning, but on-chain and anecdotal evidence shows that these use cases are growing very fast in the global south.

Other RWAs may follow the same route. US Treasuries are on-chain because crypto natives want a stable yield after the Fed raised rates from 0% to 5%. Many of these crypto natives are DAOs like MakerDAO and crypto startups that need vault diversification. Crypto-agnostic use cases are starting to emerge here as well. Crypto neo-banks that support former US Treasury states for USDC/USDT savings are now competing to offer their customers safe US Treasury yields.

This two-stage adoption curve — crypto-native adoption and crypto-agnostic adoption — is not surprising in hindsight. For any crypto product, it is naturally easier to be adopted first by those who are already familiar with crypto and have the requisite infrastructure (such as self-custody wallets).

The question now is where are the various types of RWAs today on this two-stage adoption curve? What are the most important use cases for these RWAs?

The simple answer is:

Stablecoins are firmly in the crypto-agnostic phase. The most important use cases in this phase are currency hedging and cross-border payments.

Other RWAs, such as treasuries, stocks, real estate, and luxury watches, are in the crypto-native stage. The most important use case is diversification.

1. Stablecoins: Hedging and Payments

Stablecoins settle $10 trillion on-chain every year, a massive amount that dwarfs Paypal, is comparable to Visa, and is on the same order of magnitude as the ACH system. Just a little thought will make you realize what an amazing achievement this is in just a few years of development.

It is also striking that the total supply of stablecoins is around $150 billion. In other words, each dollar circulates on-chain 60-70 times per year.

None of this data would be possible without a borderless and permissionless ledger. A common ideological criticism of stablecoins (and RWAs in general) is that they are not truly crypto-native assets, so they are boring. But pragmatism is very different from ideology. The idea of ​​allowing traditional assets to flow freely on such a borderless and permissionless ledger is something that the market values ​​very much and is a judgment based on experience.

One could reasonably assume that much of this on-chain volume is from speculation rather than “real world usage” like currency hedging and cross-border payments. We’ll never know what the definitive breakdown between speculation and real usage is, but even if only 1% of $100 trillion in annual volume is indeed from real world usage, it would be an astronomical number. Furthermore, our anecdotes are consistent with the data.

Over the years, we have experienced the magic of online payments first-hand, and we often use USDC to fund startups. We also know that many startups use USDC/USDT to pay employees or suppliers. But a year ago, when Felipe from AllianceDAO told us about the p2p stablecoin market in Colombia, we became particularly interested in this area, where people met in real-life shopping malls to exchange pesos for Tron USDT.

Over the next few months, we followed more than 100 stablecoin-related startups that serve users in Latin America, Africa, Southeast Asia, and Eastern Europe. What was most striking was that most of the companies that had launched products had at least early signs of product-market fit (PMF). By PMF, I mean growth of more than 10% per month, regardless of team visibility.

In contrast, the vast majority of crypto startups outside of this vertical have yet to achieve any PMF.

The founder of Accrue, an African payments startup we support, told us that stablecoins are ubiquitous in his family. His sister saved nearly a year’s worth of tuition in stablecoins, which shielded her from the 130% devaluation that the Ghanaian Cedi experienced during that time. She then paid for her master’s degree in Sweden with a stablecoin-backed debit card. His brother regularly converted money from GHS (Ghanaian Cedi) to CAD (Canadian Dollar) via Accrue and Kraken’s stablecoins. His parents in Ghana often sent money to their relatives in Nigeria using stablecoins through Accrue’s agent network.

The founder of GoBankless, another African stablecoin startup we support, tells a painful story of life and death. A South African hospital refused to accept a patient from Mozambique until the payment was cleared. But the fiat payment method could not be settled because it was a cross-border settlement (Mozambique and South Africa) and it was outside normal banking hours. So the patient and the hospital used stablecoins to settle. This was not a one-off incident, as patients from neighboring countries often travel to South Africa for medical treatment due to poor or non-existent medical infrastructure in their own countries.

These are all examples of everyday people using stablecoins to solve important problems in their lives. This is the crypto-agnostic phase of stablecoin adoption.

2. Other RWAs : Diversification

Stablecoins are just the first and most prominent category of RWAs. Other types of assets are also coming to the chain.

There are now $3 trillion (about 1% of global wealth) stored on-chain. This is another staggering statistic. The holders of this wealth can do two things with it. They can use it purely as a store of value, or use it to exchange for other things.

So far in the history of cryptocurrencies, when they exchange cryptocurrencies, they mostly exchange it for another crypto asset in the hopes of selling it at a higher price or generating some gains. The problem with these crypto assets is that they are highly correlated and highly volatile. As the crypto asset class reaches a mature size relative to other asset classes, diversification is bound to occur.

Diversification is a simple but proven need. Bridgewaters, the world’s largest hedge fund, built their entire philosophy (the All Weather Portfolio) on the idea that combining uncorrelated sources of income can produce higher risk-adjusted returns. The fact that they have grown to become the largest asset manager in the hedge fund space is a testament to investors’ need for diversification. By the same token, there is strong demand for the BTC ETF as it provides TradFi asset allocators with an uncorrelated source of income.

RWAs are the crypto natives’ answer to the diversification needs, giving them access to new sources of uncorrelated and less volatile returns. RWAs are to crypto natives what BTC ETFs are to TradFi asset allocators.

We were astounded by MakerDAO growing its RWA portfolio from almost nothing to $4 billion in less than a year in 2023. Today, most of that is US Treasuries. Recently, BlackRock launched a $100 million US Treasuries tokenization initiative with Coinbase. Ondo holds $200 million in US Treasuries. Franklin Templeton also has a $300 million on-chain US Treasury fund. The race is on.

Compared to the $150 billion in stablecoins, $4 billion may seem like small potatoes. But that’s mainly because stablecoins have been around for nearly a decade. On the other hand, by definition, U.S. Treasuries have only become attractive in the post-zero interest rate era that began just two years ago. Users need more time to get used to the reliability of new products. Do they track the index correctly? Is the creation and redemption process seamless? Is there enough liquidity in the secondary market?

After US Treasuries, next up is US Stocks and US Real Estate. The legal challenges are real, but once they are resolved, there is no fundamental reason to suppress demand for tokenized US Stocks and US Real Estate (similar to US Treasuries). We expect that most of the demand for US Stocks and Real Estate will come from overseas. One startup we backed that offers tokenized US Stocks, Dinari, has seen strong demand from China and Russia. International demand for US Stocks and Real Estate is currently unmet, mainly due to capital controls, difficulty in creating brokerage accounts, and friction in global money flows. For example, in China, it is easier to open a Binance account than a US stock brokerage account due to capital controls. In Russia, the average person is banned from participating in US markets by the US due to the war in Ukraine. If US assets can be freely traded on-chain as RWAs, all international investors need to do is find a way to deposit funds from fiat to crypto. No more financial mazes.

A common economic argument against these products is that crypto-native assets and yields offer higher returns. The reality is that these crypto-native assets and yields are too similar. For example, Ethena is actually just an ETH beta because the basis widens when ETH rises. On the other hand, stocks and real estate are both uncorrelated sources of income that can be exploited by $3 trillion in on-chain wealth.

We also think it’s possible that crypto-agnostic use cases will emerge once these RWAs infrastructure matures. For example, the ability to use stocks and real estate as collateral for loans, or the ability for anyone to build a global portfolio on-chain (without having to navigate the legal and banking maze for each asset). But this will be the second phase of RWA adoption — the crypto-agnostic phase.

3. Conclusion

For years, we have been asking ourselves the question - what will be our first non-speculative killer app? What the mainstream media, TradFi/Web2, and even the crypto community itself have not realized is that we actually already have one. It is the use of stablecoins by crypto-agnostics to hedge against currency debasement and make cross-border payments. However, because stablecoins do not fluctuate wildly in price and tend to be adopted by emerging markets, they have been largely ignored by the Twitter discussion.

But stablecoins are just the first type of RWAs. There are early signs of pent-up demand for on-chain assets among crypto natives. The next natural step is to tokenize stocks, real estate, and even luxury watches. These historically uncorrelated sources of high-quality yield can now be tapped into by the trillions of dollars of on-chain wealth hungry for diversification.