Written by Ye Kai
The origin of RWA is not Web3.0, but Web2.5. The current RWA may only be regarded as a transitional form of Web2.1/2.2. Therefore, the early development of RWA is more like the tokenization of real-world financial assets (debt, stock, financial products, etc.), rather than the tokenization of real-world physical objects. These assets are somewhat different from physical objects. If we want to look at it from the perspective of real-world financial assets, we must consider the industry. There is a classic ADF framework for industrial analysis: Assets - Dealers - Finance. RWA, which focuses on industrial upgrading, will be integrated with real-world industrial assets and industrial transactions (on-chain certificates and Oracle mechanisms, etc.), and then tokenize financial products based on assets and transactions.
For example, RWA for green energy and RWA for crude oil, their financial products cannot avoid commodity trading of energy or crude oil, and their tokenization cannot avoid the realization of related exchange functions.
Industrial Transaction Finance
Due to the existence of the industry, the transaction scale of this asset can be expanded. If an ordinary real-world asset is placed in the context of an industry, its transaction scale and transaction method will also be very diversified, thus giving rise to diversified industrial trade finance (Trade Finance).
Industrial transactions may have different trading markets and methods, depending on the asset categories in the real world: on-site trading, electronic trading, over-the-counter trading, and block trading. The trading volume of an agricultural product such as ginger or garlic on the electronic trading platform may exceed 20 billion, and there will be a wealth of trading financial phenomena such as futures-spot arbitrage, market makers, virtual positions, and price manipulation.
Garlic Industry Electronic Disk
Take the garlic industry as an example. When Ye Kai was working on the Rural Revitalization Fund, he visited the Shandong Electronic Trading Market for garlic, a very common agricultural product. Garlic farmers plant garlic, and local pickers and dealers purchase garlic from scattered farmers and bring it to the wholesale market. After the wholesalers purchase it, it enters the "market" for concentration; some of the middlemen in the market are similar to "brokers" in the stock market, providing intermediary services for garlic speculation, helping speculators to collect, sell, and refrigerate and store garlic on their behalf. Large middlemen are often those dealers with thousands or tens of thousands of tons of cold storage; "big speculators" with tens of millions or hundreds of millions of funds buy or sell hundreds of tons of garlic through middlemen. These big speculators are basically from other places, including Fujian, Zhejiang, Guangdong, Hebei, Heilongjiang, etc.; garlic farmers and garlic dealers, as retail investors, follow the trend and speculate when the market is hot; at the same time, electronic garlic trading is also fueling the trend, helping to drive up or down prices.
The financial phenomenon of garlic trading is often: when speculators see an opportunity, they will purchase a large amount of garlic through middlemen. In this way, in addition to the wholesale volume and export volume of regular transactions in the market every day (normal consumption of the garlic industry and export to Japan and South Korea, etc.), investors will also buy lock-up warehouses in middlemen's cold storage, and sometimes provide leveraged financing. When the market is frenzy, industrial speculators directly speculate on the warehouse receipts of garlic in cold storage. For 1,000 tons of garlic warehouse receipts, the previous speculator may spend 60 million yuan to buy at 3 yuan per catty, and then sell it to the next speculator who continues to be bullish at 4 yuan per catty, totaling 80 million yuan. What is bought and sold are warehouse receipts, and garlic does not leave the cold storage at all. When demand is strong, electronic trading will help push garlic prices up all the way, and then when demand falls, the trading market will also be turbulent.
Cotton Industry Transactions
Louis Dreyfus, the D of the four major international grain traders ABCD, has been quietly laying out its plans for the entire agriculture, food and financial industries, among which its penetration into the cotton industry is centered around trading and finance.
In the early days, China's cotton industry was relatively closed and the market was difficult to grasp. Louis Dreyfus first recruited a group of elites from China's cotton industry with high salaries, especially senior executives from cotton and linen companies in some provinces and cities, and formed a senior team that not only understood the international market but also the Chinese market together with Louis Dreyfus' international talents. Then, through a perfect futures trading mechanism and strong financial strength (overseas funds and domestic bank funds), cross-market operations were carried out through the two cotton futures markets in New York and Zhengzhou, thereby influencing the domestic futures market prices. At the same time, imported cotton in the spot market and warehouse receipt cotton purchased and processed domestically were used to cooperate to influence the domestic spot market prices, and finally achieve dual benefits of arbitrage in the futures and spot markets. Finally, with the full opening of China's cotton market, Louis Dreyfus and many international cotton traders quickly intervened, and with strong capital, it quickly became the most influential industrial capital group in the cotton industry.
Bulk non-ferrous metals industry
Among bulk commodities, non-ferrous metals are very core assets. As the core of global non-ferrous metal trading, the London Metal Exchange has also laid the foundation for trading and finance in the non-ferrous metal industry. However, the complexity of procurement, smelting, fine processing, and trade in various production areas and manufacturing industries makes the non-ferrous metal industry even more complicated.
I won’t go into details about the nonferrous metals industry here, but instead share a diagram of the industrial upgrade framework that Ye Kai’s team provided to a Fortune 500 nonferrous metals group five years ago. This diagram will give you a general idea of the picture.
(Sketch of XX Industrial Forest Map)
There are many cases of industrial transactions. For example, there are many related exchanges in China for emerging assets such as carbon emissions, including the Shanghai and Wuhan carbon emissions exchanges for official carbon emission quotas, the Beijing Green Exchange, and several registered Oriental carbon emissions exchanges, as well as the Macau International Carbon Emissions Exchange. The scale of carbon emissions trading has not yet matured, but there are already so many exchanges. It is conceivable that the importance of industrial transactions and pricing power can be imagined. Then RWA around carbon emissions must be integrated or upgraded with relevant exchanges.
A relatively new thing recently is the hydrogen energy exchange. The hydrogen energy strategy is relatively recent. Transactions and finance related to hydrogen energy and industries, including hydrogen price index, green bonds for hydrogen energy infrastructure, supply chain finance for hydrogen production equipment, etc., are also a very large market.
RWA Exchange Alternative Design
There are two situations for replacement or upgrade design. One is that the newly established industrial exchange can draw on the ideas of blockchain and RWA for upgrade design. The other is that the RWA exchange with virtual asset resources can integrate industrial assets and financial tokenization of transactions to realize the industrial exchange.
Since industrial exchanges must support diversified trading methods, especially conventional spot trading in the industry, the alternative design of the RWA exchange needs to fully consider the needs of industrial trading and finance. The model of the industrial RWA exchange can be designed as: "spot trading + RWA trading + liquidity pool".
(ChatGPT raw picture)
The implementation of spot trading is not complicated. It mainly depends on the refinement of the core logic of the business and the receipt of the delivery note. The assets and transactions of the industry are not necessarily all physical goods, various logistics, transaction records, etc. must be on the chain. As long as the assets are numbered basic data based on the digital system and consensus algorithm of the industry, the relevant transaction flow is hashed and encrypted, and then the delivery note of NFT (non-homogeneous token) is generated on the chain. For spot trading, the delivery note/warehouse receipt is sufficient, and the trading system is equivalent to a centralized order book trading system.
The realization of RWA transactions involves multiple links of industrial transactions, from payment and settlement of transaction orders to accounts receivable, warehouse receipt pledge and supply chain finance, as well as financial products such as fixed income bonds, margin trading, accounts receivable ABS, etc., which will involve the design of industrial stablecoins, equity, franchise and tokenized products.
RWA will have diversified trading methods, based on the delivery note NFT pool, decentralized AMM, OTC bulk, and may also require some centralized order book functions.
For spot transactions, the delivery note NFT, when designed with NFT swaps in RWA transactions, becomes an option transaction. Some of the income RWA products may come from the spread or interest rate swap of the delivery note NFT.
Most of the liquidity pools for real-world assets are similar to Uniswap’s asset pools, but there are also some consumable assets whose liquidity pools have certain dissipative properties, so they require special design.
RWA transactions reserve arbitrage space and products for Makers and Brokers, so there will be spot (delivery note NFT) contracts, pledge leverage, and spot-futures arbitrage.
Since RWA transactions have asset liquidity pools, there will be industry capital pools, deposits and withdrawals, and payment settlements, but they are tokenized or stablecoins, just like the "industrial currency" designed by Ye Kai when he was engaged in supply chain finance nearly ten years ago, which is based on the share and split transfer of the credit and commercial bills of core enterprises within the industrial chain. In fact, you can understand this as a stablecoin, or as the tokenization of the credit line of industrial RWA transactions.
RWA transactions also involve contracts, which are equivalent to options on real-world assets. Of course, this is slightly different from options on cryptocurrencies, because this is backed by the redemption of physical assets, so at least it will not completely return to zero.
RWA transactions need to focus on industry
The core of blockchain is the credit-free model, while transactions and finance in traditional industries are basically based on credit. Industrial financing depends on big data such as corporate credit, ratings, and asset inventory transactions. These are all centralized, and are centralized around the core enterprises in the industrial chain. They are very unfriendly and exploitative to upstream and downstream small and micro enterprises.
RWA transactions focus on industries, which can gradually form a decentralized creditless model, form a consensus algorithm in diversified transactions, and the liquidity pool and capital pool will grow a decentralized asset pricing algorithm. In this process, because RWA is tokenized, it can further generate utility and governance tokens for industrial transactions, which can be used to incentivize counterparties and pledge rewards, etc., making it more inclusive and efficient. Similarly, because the industrial stablecoins or industrial tokens in RWA transactions, as the "industrial currency" circulating within the industrial chain, greatly improve capital turnover and reduce capital costs, and can moderately increase leverage.
RWA transactions can also not adopt the equity-based securitization design, but alternative investments. Because most of the real-world physical assets are alternative assets, the "spot trading NFT + RWA NFT + liquidity pool + liquidity fund" model can be used, which is equivalent to a physical electronic disk, taking the non-securities route, physical assets supporting and empowering the real industry, doing a good job of KYC and AML, and upgrading to "ATS RWA Exchange + Localized Broker + Industry Cluster Institutional Community +..."
Industries have agglomeration effects. For example, mining is in Canada, and most of the global mineral resource transactions, mining companies’ listings, etc. are on the TSX. Hydrogen energy is likely to be in Japan or Australia, because these two countries are national hydrogen strategies and are also the largest purchasers. In theory, if you are the largest purchaser, you have the conditions to dominate the trading platform and pricing power. If not, it means that you have not done well and have been passed by other industrial capital combined with industrial exchanges.
The upgrades that RWA Exchange brings to industry exchanges are very clear and necessary:
Improve efficiency
Reduce capital costs
Improve capital turnover
Improve transparency of trade assets, transaction flow, warehouse receipts, bills of lading and invoices
Trade credit monetization,
Diversified financing and reasonable leverage
Realize flexible industrial resource mismatch, small-amount inclusive funds can be split and circulated, and liquidity
What industrial transactions have room for growth?
Someone may ask: Which industries have room for upgrading?
For RWA exchanges, emerging industries may have more opportunities. After all, there are no mature exchanges and they are in the early stages of development. So the following industries can be paid more attention to:
AI Computing Power
Green Electricity
Hydrogen Energy
Certain financial products, agarwood, whiskey, ancient tea trees, etc.
We are working with leading institutions and platforms in the Web3.0 and RWA fields to actively build a series of RWA professional investment banking services to provide diversified crypto financing services for high-quality assets and entrepreneurs. We welcome people with lofty ideals to participate in the construction, or add WeChat YekaiMeta to join the RWA practice seminar group to participate in the discussion.
