The following blog post is an excerpt from the Real-World Zine – a limited print publication offering insights into the 2023 tokenization, crypto, and credit industry, co-created by Real-World Asset Summit partners.
When we started to contribute to MakerDAO in late 2020, Centrifuge was already hard at work with the Maker Foundation to onboard real-world assets (RWA) as collateral onto the world’s fastest-growing decentralized stablecoin, Dai. RWAs are the hot topic of 2023, but the sudden intense focus on onchain RWAs was not a given and it took significant efforts to get it off the ground.
Back in the heady days of rolling lockdowns and sub-$1,000 Ether, the focus of the day was how to overcome the enormity of the legal challenge to creating RWA collateral backing for a decentralized stablecoin. How could an entity, a smart contract, without legal personhood or even the ability to adopt a legal status, invest in highly structured, regulated financial assets?
Put simply, how do you sign a contract when you don’t exist? It took us, our team, and our infinitely patient collateral partners (such as New Silver) a lot of work and legal bills to develop a clean, systematic way to invest MakerDAO collateral into the real world, and thereby bring into focus a vision where MakerDAO could make a positive impact in people’s lives as the world’s most transparent form of cash.
The way to square the circle was to take a leaf out of the asset-backed securitization and SPV playbook from traditional finance. We developed and created legal structures in Cayman and BVI that could execute onchain DAO resolutions through local corporate service partners (CSPs).
As orphaned entities, they don’t have shareholders and are immune from the politics of the DAO. The articles of association limit the CSPs to only executing actions voted on through onchain resolutions approved by DAO token holders.
In a real sense, these entities and the way they function are the closest thing one could develop that resembles a trustless smart contract in real life. They aren’t the DAO but they are third parties, mission-driven, intermediaries that are extending DAOs to deal with the realities of the real world.
In only a short time, there are already many benefits to the current state of RWA investing onchain. Centrifuge’s platform allows structured product parties (asset originator, junior and senior lender) to remove the need for a calculation agent. No more manually maintained spreadsheets that need to be updated to know who gets what cash flow. It’s all real-time.
Traditional asset managers, such as Franklin Templeton, believe “blockchain technologies have the potential to reshape the investment management industry by providing greater transparency and lower operational costs for traditional financial products.”
Transparency is improved as positions, transfers, draws and repayments are all publicly auditable. Again, who needs a transfer agent to maintain a spreadsheet of who owns what, when you have the blockchain?
Neutral and open-access blockchains that run decentralized financial infrastructure protocols are a condition for this increased transparency to garner cryptographic trust and acceptance across a broad stratum of market participants. It would not be possible to provide the same improvement in financial transparency and stability through KYC gates, private blockchains, or disguised centralized databases.
Our vision for future resilient financial infrastructure is one where it is no longer possible for imbalances and insolvencies to metastasize in the darkness of opaque black boxes or walled gardens with unaccountable gatekeepers. Rather, we are firmly persuaded that regulatory objectives for greater consumer welfare and protection are achieved through the oversight and accountability on the part of the public that is only possible on trustless infrastructure and open protocols.
Let's not fool ourselves, the re industry has a lot of room for improvement. MakerDAO has invested a lot of money and many years of work and the protocol is only just starting to reap the benefits. Most RWA projects are permissioned, not permissionless. TVL is still low. Much still remains to be done.
In 2023, the ecosystem made a big push on tokenized T-Bills, achieving a $600m market cap as of writing. But that’s just a drop. The US Treasury debt market is $24tn. On top of that, the repo market (short-term funding with bonds as collateral, mainly US Treasury), is more than $3tn daily. Yes, the opportunity is huge. And that’s only a slice of the RWA opportunity.
While the rate environment pushes investors towards the safest instruments at attractive yields and could allow significant growth, we shouldn’t forget about private credit. Funding is easy for the government and big corporations. At the same time, it’s more and more difficult for real, salt-of-the-earth businesses to find financing. Aren’t we building decentralized finance to create an unbiased global financial system where everyone can participate, not just organizations whitelisted as investment-grade by the ratings agencies?
Creating a fairer financial system is a complex problem but we shouldn’t settle for disrupting the failures and blind spots of traditional finance only to end up with the same biases.
The Real-World Asset Summit by Centrifuge is a meaningful step in the right direction! But we are still early. The day the Centrifuge Real-World Asset Summit attendance surpasses the AGM of Berkshire Hathaway in Nebraska, we can probably be satisfied that we are on the right track to changing the world for the better.