Host: Colin Mint Ventures Researcher

Guest: Mr. Mindao, Founder of dForce

Recording Date: 2023.7.10

Hello everyone, welcome to WEB 3 Mint To Be initiated by Mint Ventures. Here, we have been consistently asking questions and deeply contemplating to clarify facts, explore reality, and seek consensus in the WEB 3 world. I'm Colin, a researcher at Mint Ventures. Today, we have invited Mr. Mindao to have a discussion on the current hot topic in the cryptocurrency community - RWA. We will delve into it from the perspectives of compliance, specific sub-sectors, and future prospects.

Disclaimer: The views expressed in this podcast do not represent the opinions of the respective institutions of the guests, and the mentioned projects do not constitute any investment advice.

The Difference Between RWA and STO Narratives

Colin: The first question is, we can see that the narrative around the RWA market has been gaining more attention in the market recently. What do you think is the reason why the market is paying attention to the RWA market narrative at this particular time, and how is the current narrative on RWA different from the narrative on STO in the past few years?

Teacher Mindao: It's been over a year since the last bull market turned bearish. We know that in the past, the main source of income for the entire Defi or crypto was mainly from trading, leverage, and new token issuance. After the DeFi Summer, from the second half of 2020 to the peak of 2021, there was a boom in governance tokens issuance. At that time, the returns were very high, with DeFi reaching up to 20%, 100%, and even over 1000% for dog-themed mining. The US Treasury bonds didn't enter an interest rate hike cycle at the time and had close to 0% returns, causing everyone to not pay much attention to asset categories other than crypto. However, after the crypto market entered a bear market and the US dollar entered an interest rate hike cycle, the situation changed. If Defi has a risk-free interest rate, such as the trading APY in Curve's pool or the lending-type APY in Compound, it can be objectively considered relatively close to a risk-free interest rate. The current yield is around 0.5 basis points, which is less than 1 basis point, and I'm referring to non-subsidized returns. On the other hand, US Treasury bonds have already reached 5.5 basis points and may continue for quite some time. This kind of inversion has led to many funds staying in Defi rather than moving back to the USD world to buy government bonds. This is because Defi involves various contract risks, asset risks, counterparty risks, etc., which adds multiple layers of risk compared to government bonds. The narrative of RWA is different from before because it is real and tangible. In addition to the inversion we just mentioned, RWA assets, especially US Treasury bonds and tokenized assets, have increased from basically 0 last year to about $1.5 billion now. MakerDao has also converted a large amount of stablecoin reserves into US Treasury bonds. In the previous cycle, STOs, around 2017 and 2018, when the concept of DeFi was not yet present, the overall market was relatively empty and focused more on equity-related narratives, such as issuing company stocks or equity-based assets, without much involvement in bond-related matters. But today, when talking about RWA, it focuses more on US Treasury bonds or fixed income assets. So, I think these are two different eras, two different cycles, with significant differences in the narratives and backgrounds.

Colin: I think there is one more point, which is that many investors or users now hold a large amount of assets such as USDT and USDC, which are U-based assets, and their investment demand is for low-risk financial management. But around 2017, 2018, many projects at that time were invested in BTC or Ethereum, so the user structure has also undergone significant changes.

Teacher Mingdao: This is especially true. In fact, the changes in the overall market structure are quite significant. I remember at the beginning of 2020, stablecoins were about $1 billion, and during the peak of the DeFi Summer, it reached nearly $200 billion, growing very rapidly, with a very steep curve. But at that time, there were no stablecoins on the chain, everyone was playing with native tokens. From the previous bull market to the current bear market, although the issuance amount of stablecoins has declined, the on-chain issuance amount is still around $130 billion, of which stablecoins used for interest bearing purposes are estimated to be less than 10%. So this is a huge market, which means that there is nearly $120 billion in stablecoins on the chain doing nothing, basically earning no returns. There is definitely a strong demand for income from these funds. We can imagine that if this part of the funds can obtain the yield of government bonds, based on an interest rate of four to five percent, it would be about $5-6 billion. This money is being earned by Circle's USDC and Tether's Teather, they can earn about $4-5 billion in profit every year. This is why RWA is so hot, because everyone sees a particularly strong demand that is not related to the cycles of the token market, but rather the demand for risk-free income from US government bonds. Including the recent significant pressure on the interest rates of the US dollar and the RMB, it is also because many RMB holders have converted to the US dollar within the limit of $50,000 and deposited it in US dollar fixed accounts. Therefore, the People's Bank of China has intervened in commercial banks and a few state-owned banks, stopping or restricting the maximum yield. This reflects that in the traditional world, there is a very strong demand for the US dollar and US government bonds. In the context of the token market, there is currently about $100 billion with no returns, which is very attractive to asset issuers of US government bonds. At the same time, this is also very good for the token market because we are always worried about the outflow of funds from the token market, but with the interest market, it's like having returns in Yu'e Bao, and funds will not leave the chain. I think this is also a reason why RWA, especially tokens primarily based on US government bonds, have gained so much attention in recent months.

Colin: Yes, from some data we can see that the previous growth of US dollar stablecoins, especially fiat stablecoins, was mostly driven by traditional financial people arbitraging the crypto market. But now both sides have formed a relatively large interest rate inversion, so naturally some people will also want to arbitrage on that side. If we can bring the income from the US dollar onto the chain, these people may not be so inclined to leave this market, and the liquidity pressure on the entire market will not be so great.

Teacher Mindao: Yes, I think this is a very interesting phenomenon. When we talk about the RWA issue, in the cryptocurrency community, including many crypto natives, they believe it is a betrayal of the revolution. I think this has nothing to do with betraying the revolution. The reason is simple, if this over $100 billion USD does not have any return, it will run away and let traditional financial banks make money. Keeping the funds in the cryptocurrency community, making the income more democratic and distributed on the chain, is a very good and very crypto thing. The majority of non-Americans who hold US dollars in the world cannot enjoy the returns of the US dollar and US bonds, but they bear the pressure of USD inflation, which is very unfair. If US bonds can be tokenized and democratized, for example, bringing the yield to the crypto chain through DeFi, or bringing TOKENs of T-Bills to the chain, then non-Americans holding US dollars can also have the opportunity to gain income while bearing the pressure of USD inflation. This kind of fairness is very important.

Colin: Yes, in the past few years, the benchmark interest rate of the US dollar was around 0.25%, or even very close to 0. Now it is 5.5. If you still don't give it to me, the opportunity cost for users is too high.

Teacher Mindao: Yes. And an important point is that US dollar stablecoins can actually be regarded as a huge RWA (Risk-Weighted Asset). Now bringing US bonds into it, these two are already complete twin brothers, effectively moving the assets and income priced in US dollars onto the chain. This is a significant milestone for the technological infrastructure of crypto. And this will drive a large number of applications in traditional finance, such as realizing composability for fixed-income products on the chain. The source of fixed income may not be related to the cycle of the crypto community itself. Such products can be combined on the chain. Achieving this, I think, is expanding the application ecosystem of crypto.

Key Factors for the Success of the US Bonds RWA Project

Colin: Earlier, you mentioned that the current core of RWA storytelling is US Treasury bonds. What do you think are the key factors for the success of RWA projects related to US Treasury bonds?

Mr. Mindao: We have observed several fast-moving projects in the market, including Ondo Finance, Matrixdock in Asia, and Open Eden, which are primarily focused on US Treasury bonds. I believe there are several key points to consider. Firstly, compliance is crucial. It is important to ensure that the structure can effectively isolate bankruptcy risks. Many so-called compliance CeFi projects have failed in the past year, leading to a negative perception of CeFi. Even large groups like DCG have faced insolvency issues. Another important factor is the competition faced by the asset issuer in terms of RWA government bond issuance. They are in competition with DeFi projects. Although they have a cooperative relationship, these asset issuers also hope that we accept their assets as collateral or underlying reserves. However, I believe there is still a certain level of competition with DeFi projects. For example, MakerDao has not partnered with these platforms. They mainly tokenize RWA assets using their own trust and legal structures. However, these tokens do not circulate in the market; they are purely off-chain. The stablecoin is converted to USD, and then Treasury bonds are purchased, generating returns through a chain and trust mechanism, which can be reflected at the level of Dai holders. Therefore, MakerDao has not collaborated with the current partners in the market. MakerDao can now be considered the largest holder of RWA assets and also has a certain level of competition with DeFi projects. For DeFi projects, the key is how to distribute returns through tokenization. The current issuers of RWA assets face several issues. Firstly, all asset issuers must undergo KYC, whether for trading or purchasing T-Bills. This requirement is similar to the structure of stablecoin issuance. Everyone knows that for USDC and USDT, if you want to participate in their minting and redemption, you must undergo KYC. This is a basic requirement. However, this requirement is not necessary for secondary circulation. RWA assets are even more stringent. Even at the level of secondary circulation, a whitelist system must be used. For example, Matrixdock's T-Bill tokens are pooled on Curve and matched with stablecoins. If you want to buy or sell them, you must have a whitelisted account to trade in the Curve pool. From this perspective, I believe it will greatly limit the issuance scale of T-Bill tokens. However, for DeFi projects, it does not necessarily pose a problem. In fact,There are many ways to solve this problem. For example, Ondo Finance has created Flux Finance, which uses a pool model to collateralize Ondo's T-Bill tokens. This can be done by a market maker or the project itself, without involving individual users. With the collateral, they can borrow stablecoins from Flux Finance and exchange them for US dollars, which can then be used to buy government bonds, creating a cycle. This way, the returns from T-Bill can indirectly benefit the depositors of stablecoins through lending protocols. The advantage of this approach is that stablecoin depositors do not need to go through KYC procedures, as they are not holding or purchasing any T-Bill tokens. They simply lend money to the market maker for buying or leveraging. I think this is a clever structure. Another example is MakerDao, which also does not directly involve Dai holders with T-Bill tokens. MakerDao uses a separate trust to hold the tokens and maps the returns through monetary policy. It even provides more isolation than Ondo, as there is no direct relationship between them. It does not mean that if I earn money on one side, I have to distribute it 100% to Dai holders. For example, let's say I earn 5 points on T-Bill, then I can adjust my monetary policy to 3.5 points and keep the difference. However, there is no direct transaction relationship between the two, they are independent monetary policies. This is another clever aspect in my opinion. Regarding your previous question about how RWA project participants can capture a larger market, it is difficult to say. As I mentioned earlier, if a DeFi project becomes very large, it may bypass the issuers and set up its own structure. Or it might become a powerful distribution channel for the issuers. In this case, the issuers of the so-called KYC government bonds may find themselves in a weaker position.

Colin: You mentioned two very key factors in your previous response. One is KYC, and the other is its architecture. Let's talk about KYC first. Currently, there is an architecture in the market where you set up your own wallet, and users need to upload their passport and other information when using the wallet. It will mint an SBT, which is equivalent to a KYC token, and through this architecture, it achieves a relatively low threshold KYC solution. From the perspective of market practitioners, do you think such a solution will be widely promoted in the future?

Teacher Mindao: Yes, I mentioned this on Twitter before, and some KOLs also mentioned the RWA (Real World Asset) thing. In fact, buying US Treasury bonds is not that simple. Even if Americans buy them directly, it's not easy, let alone non-Americans. It requires various KYC and account opening procedures, and the threshold is very high. If there are a hundred people, maybe only one or two can cross this threshold. Just now, it was mentioned that if we use SBT identity tokens or do KYC on the blockchain, or do KYC through exchanges for distribution, I think this threshold will also filter out many people. It's a bit like using an Interactive Broker (IB) US stock account. Now they also provide interest services with 4.5% on USD. But we can imagine that opening an IB account is not easy, and the fact that there is no overseas USD account has already limited 99.9% of people. I think as long as you have done KYC, whether it's on-chain or on an exchange, it may not be a difficult problem for existing cryptocurrency users. I think as long as you have been in the cryptocurrency circle for a year or two, you will have gone through KYC accounts of various sizes on exchanges. So for this group of people, the difficulty may not be great. However, if we really consider users outside the cryptocurrency circle, KYC itself is a very difficult problem. For example, taking passports as an example, most Chinese people do not have passports, so how to authenticate this group of people is quite challenging.

Colin: I think this is a compromise solution, which may be relatively easy to implement in some developed countries because they have a wider passport penetration rate and identity information. But once it involves developing countries, there may be difficulties.

Teacher Min: But I think it has an advantage in facilitating distribution between CeFi and centralized exchanges. Just like Binance, it can promote fully compliant national debt products to users who meet KYC qualifications. Although it is currently in a sensitive position and cannot be done, theoretically it is feasible. The most interesting or revolutionary aspect, in my opinion, is not that centralized exchanges provide a service for KYC-verified individuals to trade. I don't think that's the key point. The key point is that after such a long time, we have experienced a significant mind storm, that is, the tokenization of the US dollar. The US dollar has been heavily tokenized and is already in use, but the native interest of the US dollar has not been tokenized, which is a flaw. A currency cannot be a true currency if it does not have its own interest. Therefore, I believe the most important consideration brought by RWA is how to tokenize the interest of the US dollar. When these two are combined, it means that we are truly tokenizing the currency of the US dollar on the chain, which is significant. Of course, this is a natural extension for the US dollar. Imagine if you hold US dollars, and stablecoins have excellent liquidity beyond cash and bank deposits, bringing greater liquidity premiums. If interest, capital costs, and opportunity costs can also be compensated on the chain, then what reason is there to deposit money in a bank? I think there isn't any. Currently, including JPMorgan, there is approximately over $20 trillion in deposits with zero interest used to buy national debt. But for many ordinary people, the threshold is too high. I mentioned earlier that the threshold for buying national debt is also high. Especially for those who hold US dollar assets but are not Americans, many overseas individuals hold US dollar assets. How can you buy national debt? This itself is a high threshold. But if we tokenize US government bonds on the chain, then people holding stablecoins can directly access the returns of US bonds. For the crypto circle, this not only retains $130 billion in funds but also attracts more M1 funds from traditional financial markets. This scale is larger and the significance is greater. In the past few cycles, we have always been worried that these funds will leave the crypto circle, and we always want to retain these funds. In fact, US bonds are the best way to retain US dollar funds. As long as the funds stay on the chain, they will have the opportunity to use various DeFi products and have the opportunity to enjoy various crypto services. This will create a virtuous cycle for the entire ecosystem. If there are US government bonds on the chain, I think these people will stay, which is much better than the past few cycles.

Colin: Many people leave because the market turns bearish, and they may choose higher-yield investments in the traditional world to capture the interest rate differential. These people may not have the motivation to leave anymore because they can already obtain more benefits here.

Teacher Min Dao: Right. I believe RWA US Treasury Bonds are just the first step. Besides Treasury Bonds, there are other types of bonds. Bonds have fixed income, which is crucial for the currency market. If we can put most attractive high-quality bonds from the traditional financial market onto the chain, it would be the most organic growth for the cryptocurrency market in terms of fund retention and new application development. It would not rely on the cyclical demand of the cryptocurrency market. This means a paradigm shift.

Colin: Yes, it could lead to a movement of deposits from traditional finance to the crypto market.

Teacher Min Dao: Right, at least for these people, the reasons for not converting funds from stablecoins to USD deposits in banks would decrease. Some people I've come into contact with would cash out into stablecoins, but not many would be willing to deposit them in banks. If we have US Treasury Bond returns on the chain, these people are more likely to stay on the chain because there are more composability and opportunities on the chain compared to being in banks.

Colin: True. You just mentioned another approach that doesn't require KYC, which can be seen as creating an intermediate layer to map the returns. Currently, there are similar practices in the market where users lend their funds to an institution, and the institution acts as an intermediary for the next operation, isolating the KYC process. Compared to the architecture of users directly holding (US Treasury Bonds), do you prefer the approach without KYC?

Teacher Min: I think the key is to look at the legal structure of the underlying assets when holding US Treasury bonds. This includes Dai, which has the stablecoin USDC. We need to pay attention to the USDC's USD custody method. When it comes to government bonds, I believe the issues are essentially the same as stablecoins. The underlying risks and compliance risks of the centralized issuers of stablecoins, whether they go through KYC or non-KYC paths, will ultimately reflect on the blockchain, which is the aggregated underlying risk. Therefore, if we can issue T-Bill assets in a compliant manner like USDC, the non-KYC version can be seen as an experimental solution for DeFi. The current KYC and non-KYC can be understood as the relationship between the front store and the back factory. The factory refers to KYC, which forms T-Bill assets and issues the assets, and this requires going through KYC. Without KYC, it is difficult to ensure compliance, asset inflows and outflows, and liquidity. Therefore, the factory needs to be completed by a centralized and compliant institution. In the stablecoin context, Circle is responsible for the KYC of all minting and burning users, as well as the compliance of its own structure. I personally think that for the front store, it would be more reasonable to adopt a permissionless approach of DeFi without KYC. Here I mention two different approaches, one is through a lending pool, and the other is similar to MakerDao's currency policy mapping approach. In addition to these, some people have adopted the Rebase Token approach, such as using stETH as a Rebase Token. But I think Rebase Token may be closely linked to the underlying T-Bill returns, with certain compliance risks. So in my opinion, the ideal situation is for each party to have their own responsibilities, the front store and the back factory. In centralized institutions, several strong institutions may excel in the issuance of T-Bill assets, while others distribute US Treasury bond interest through DeFi projects in the front end.

Colin: This may impose relatively high regulatory requirements on the intermediary semi-centralized institutions. (Semi-centralized institutions) I mean, DeFi has formed a liquidity pool, where everyone lends money to an institution without KYC, and the institution carries out subsequent operations, that is, the front store and back factory model.

Teacher Min Dao: I think that for on-chain protocols, putting stablecoins into pools and allowing users to borrow against collateral still constitutes a lending relationship at its core. However, different jurisdictions may have different views on this matter. If this project were to take place in the United States, for example, it might be seen as an attempt to penetrate US Treasury assets, and therefore, whether the borrowing interest reflects the stablecoin being a security token raises questions. But I believe that there are many things that can be done on-chain, and many interesting structures can be implemented. The advantages of such structures lie in their upgradability and programmability. For example, in the early days of MakerDao, there were legal disputes involving Gemini and DCG, which could have led to bankruptcy risks, so they were removed and completely replaced. Even USDC Depeg later reduced its share. I think it is precisely because everything on-chain is programmable that decentralized stablecoin projects have tremendous advantages. If a certain scheme poses too much legal or compliance risk, it can be gradually removed.

How to view MakerDao's configuration of US Treasury bonds and the possibility of triggering regulatory seizures

Colin: You just mentioned the very important project MakerDao. What is your view on MakerDao's configuration of government bond-like assets? Is the possibility of regulatory seizures high? What situations could trigger such seizure actions?

Teacher MinDao: I believe MakerDao's RWA architecture has had a history of at least 5 years. Previously, their RWA strategy did not focus on US Treasury Bonds, but rather on solar energy and real estate. The earliest projects were real estate projects and solar power plants. Due to Rune being an environmentalist himself, he especially wanted to transform MakerDao into a green fund and prioritize solar energy as MakerDao's core asset allocation. However, this proposal was met with some disdain in the community. There are also many practical issues. If you have ever been involved in infrastructure investment projects, you would know that the biggest challenge for assets like solar power plants is scalability. It is difficult to achieve large-scale operation because these assets face a lot of operational and counterparty risks. If you open a solar power plant in China, you will face regulatory risks in the Chinese market. In the past 10 years, China's solar energy regulatory policies have undergone significant changes, with subsidy policies and various loan policies constantly being adjusted. Therefore, these risks are not suitable for a scalable asset. MakerDao has gone through many misconceptions. They previously collaborated with Centrifuge and invested a large amount of assets in real estate and solar power plants. However, these assets did not reach a large scale, mostly only tens of millions of dollars, as the community found that such asset investments could not be scaled and were prone to default loan issues. With the rise in US Treasury bond interest rates, MakerDao gradually realized that US Treasury bonds are a good asset. Its RWA strategy is also based on this historical continuation, rather than a sudden decision to invest in government bonds. Now, I believe that for MakerDao or other stablecoin projects, government bonds have several key advantages. First, when creating a stablecoin, you can see it as a USD-denominated debt, and Dai itself is a debt. The highest quality USD-denominated debt is US Treasury bonds. If you don't believe in US Treasury bonds, then I don't think there is any debt in the world that you can trust. This is the most basic principle. If you don't believe in US Treasury bonds, why would you trust the debt of a solar power plant? Why would you trust the debt of a real estate company? Not to mention others. Therefore, when many people discuss RWA, I feel they are missing a point. They would say to do crypto and not go back to traditional finance. But my point is, first of all, if you are creating a decentralized USD stablecoin, you cannot ignore assets like US Treasury bonds. Logically speaking, this cannot be overlooked. Because US Treasury bonds themselves are the most important risk-free interest source among all USD assets. If you are creating other stablecoins like ETH or BTC, then there is nothing to say. If you are creating a USD stablecoin and not allocating risk-free income like US Treasury bonds, it is logically inconsistent. One of the important reasons why MakerDao later made a significant allocation to US Treasury bonds wasBecause of this, MakerDao later had a large number of minting through stablecoins in the Primary Stablecoin Module (PSM), of which nearly 70% were USDC. If you are a stablecoin project holder with USDC, you have the same risk but without the corresponding returns. The depegging issue of USDC is a big warning for MakerDao. In reality, the risk is not from the US dollar or the Federal Reserve, but from Circle. However, Circle does not provide a risk premium. Therefore, MakerDao converted all USDC to US Treasury bonds. In terms of regulatory risk, it is the same to bear. For example, if the regulatory agency seizes the US Treasury bonds in the MakerDao trust, it is the same risk as seizing the underlying US dollars and cash of USDC. But for MakerDao, the advantage of the former is the potential return. With returns, it is naturally willing to take on corresponding risks. In fact, I believe that if MakerDao itself establishes a trust to hold US Treasury bond assets, it would have one less layer of operational risk compared to the indirect approach through Circle. Because Circle itself as a company has operational risk, and we do not know if it is engaged in other activities. But if it only sets up a trust to hold US Treasury bonds, then personally, I think this risk is relatively smaller. Why are regulators scrutinizing Circle and Binance? Because they are not only custodians of assets, but also engage in trading, complex issues of derivatives, lending, and anti-money laundering. Companies like Circle and Binance with proprietary trading make people worry about whether they have proprietary trading departments and act as counterparties to their clients. Circle will also be suspected, including Tether's issuance of USDT and even holding commercial bills of Chinese property developers. In reality, if you hold USDT or USDC, the risk you bear as a decentralized project holder is greater. It would be better to set up a trust institution and hold US Treasury bonds cleanly. So the several questions you mentioned earlier, in reality, if they don't do it this way, they will face the same risks, or even greater risks. I think that now MakerDao uses a trust to establish bankruptcy isolation, just helping MakerDao, this DAO, to hold US Treasury bond assets, without retail investors or other user interactions. From this perspective, I personally think the regulatory risk is relatively smaller.

Colin: And they can achieve something that is currently not possible with either USDT or USDC, which is to disclose asset information every day. But Tether and USDC cannot actually provide such disclosure.

Teacher Min: Yes, to be honest, I think there is another point that maybe everyone doesn't understand. If MakerDao has $4 billion in USDC, and it has converted $3.5 billion of it into US Treasury bonds, to some extent, it has actually improved the credit of Dai. This practice is actually shorting USDC, in theory, benefiting Dai when USDC is not anchored. Suppose I have exchanged all USDC for US Treasury bonds, and USDC has gone bankrupt, it would be beneficial to me. So, for stablecoin projects like this, by taking reserves to buy government bonds, to some extent, it is a shorting behavior against USDT and USDC, or hedging their own risks. Let's assume that MakerDao is eventually able to convert most of its on-chain USD reserves to only a few hundred million dollars, enough to meet the on-chain conversion and liquidity needs, with the majority being in US Treasury bonds. In that case, the risk for them might be lower than USDC and USDT. That's my opinion. What's very interesting is that in this way, the decentralized stablecoin transaction becomes directly connected to the Federal Reserve, without the need for intermediaries. In the past, people thought that fiat-backed stablecoins were more stable and less risky than decentralized stablecoins. However, if we manage to turn the majority of reserves into US Treasury bonds, it could be the other way around, where decentralized stablecoins might be even more stable and lower risk than centralized stablecoins and fiat-backed stablecoins.

Colin: Just now you mentioned that stablecoins like Circle and Tether actually have two additional layers of risk, the operational risk of the stablecoin itself and the counterparty risk of asset allocation, but these risks are not priced into the assets internally.

Teacher Min: Yes, in addition to the issues mentioned above, there are also high operational risks such as managing the tokens on the contract side and managing the minting and burning of tokens across chains. Furthermore, for USDC and USDT, the regulatory risks they face are not limited to a single country but rather global. For example, MakerDao's trust could be established in the United States or in an offshore company, and regulatory risks would only exist in a few countries. However, the regulatory risks for USDC and USDT cover as many as 20 governments worldwide. The Chinese government also has the ability to freeze assets as long as it knows which bank the account is opened in China. The Chinese government can completely carry out this operation through Hong Kong. The reason why Circle and Tether did not open accounts in Hong Kong is because they could potentially be frozen by regulatory measures from other countries. The stablecoin operators have a very large number of users, involving various types of users, unlike MakerDao's Dai protocol, which isolates users through the contract layer and treats assets as DAO, without involving various types of users. USDC and USDT face tens of thousands or even millions of retail users, corporate users, hackers, and various other types of users, which significantly increases the regulatory risk involved.

Colin: So, do you think that after the addition of US Treasury Bills (RWA) to the blockchain, the stablecoin market may also undergo significant changes in its landscape? Is that a correct understanding?

Teacher Min: In the past, decentralized stablecoins faced a problem. For example, if we look at the DeFi summer period, the entire decentralized stablecoin field, including various token models and Ponzi models, underwent changes that led to various speculative and speculative behaviors. I believe that US Treasury Bills can provide very strong empowerment for decentralized stablecoins. What is this concept of empowerment? In the past, I believed that decentralized stablecoins would have a hard time competing with fiat-backed stablecoins because I thought fiat-backed stablecoins had a strong advantage in terms of deposit and withdrawal platforms. Furthermore, they had compliance advantages. And if there was significant friction in terms of slippage, decentralized stablecoins would have a hard time comparing to fiat-backed stablecoins. However, now I think that if US Treasury Bills' interest is introduced into DeFi decentralized stablecoins, decentralized stablecoins, compared to centralized stablecoins, may have even greater appeal. Whether in terms of profitability or programmability, they can adjust the risk composition of underlying assets more flexibly. Additionally, they have a very important aspect, which is that they remove issuance risks to some extent. So now it seems that decentralized stablecoins have the potential to overtake in a curve.

Colin: In other words, using US Treasury bonds as the underlying asset for RWA, issuing a new decentralized stablecoin based on US Treasury bonds, and then integrating it with the architecture of Dao and external legal frameworks. This approach would significantly reduce both the asset risk and operational risk compared to Circle.

Mr. Mindao: Yes, I think it would reduce them significantly. Furthermore, another important point is that both Circle and USDT face competition not only from stablecoin issuers but also from future national digital currencies. So, the competitive landscape is unclear, and they rely heavily on the establishment of a large amount of infrastructure, which involves significant cost. DeFi projects have actually borrowed a lot from the traditional fiat stablecoin deposit and withdrawal channels. But I also believe that in the future, projects like MakerDao, which already have their own government bond holding accounts, have opened up another deposit and withdrawal channel, which can be used to exchange for US dollars. Of course, this may not be applicable to retail investors; it can be used for transactions with institutions, forming a deposit and withdrawal channel within the Dao itself and bypassing the so-called fiat stablecoin channel.

Colin: It seems that the next major development in this field will be the change in the landscape of decentralized stablecoins.

Mr. Mindao: Yes, one topic we have often discussed in the past is "real yield." I believe real yield refers to RWA, which is the most genuine form of yield, isn't it? The concept of real yield that I mentioned refers to yield that doesn't require subsidy and can infinitely expand in scale. DeFi currently faces a problem where many yields cannot achieve scale expansion. For example, if you have tens of millions of dollars with a yield of 10%, when you have billions of dollars, the yield may drop to zero. But US Treasury bonds don't have this problem because they have their own uniqueness and essential distinctions from other assets and corporate bonds. They have a risk-free interest rate, a capacity that can be accommodated, and predictability of interest rates, which differ significantly from other government bonds and corporate bonds.

Promising RWA Project Assets and Corresponding Risks

Colin: Apart from RWA assets like US Treasury bonds, what other types of RWA assets do you consider promising? Are there any new risks associated with the assets you favor compared to US Treasury bonds?

Mr. Mindao: My personal view on RWA is that its implementation and application order will be sorted according to the degree of standardization. The highly standardized and homogeneous ones will be the first to be implemented, which is also part of standardization. For example, why is the stablecoin backed by the US dollar the largest RWA and able to be implemented first? Because the US dollar is highly standardized and homogeneous. Whether it's your dollar or my dollar, they are exactly the same, with the same functions and can be interchangeably used without any difference. Secondly, the stablecoin backed by the US dollar can be centrally managed, requiring only one bank or issuer for issuance and management. It is also highly standardized. Apart from stablecoins backed by the US dollar, to some extent, T-Bills also have these characteristics. But compared to stablecoins backed by the US dollar, one bad feature is that T-Bills are more like securities in terms of regulation. Stablecoins backed by the US dollar are not seen as securities by many people, but as currencies. However, for US Treasury bonds, most people now consider them as debt. In addition to US Treasury bonds, in my opinion, the next easier assets to introduce might be bonds, referred to as fixed income products. The risks and returns of fixed income products are relatively standardized, and bonds with different ratings have relatively standardized pricing markets. Equity, on the other hand, is different. The value of equity varies from person to person, and there are different valuation models. It does not have the high level of consensus like bonds. That's why I think the next step for RWA might be other bonds, such as Tier 1 capital securities issued by banks, like HSBC, which cannot be called quasi-sovereign bonds, but can at least be considered as better liabilities, especially for systematically important banks in the United States, which will have a certain distance from US Treasury bond yields. In addition to these, there may be bonds issued by other financial institutions, followed by gradually introducing bonds issued by listed companies or enterprises. Another category is stocks, which may be a bit awkward because the threshold for stock trading in traditional financial channels is not high. For those who really want to buy stocks, they can always find a way to do so, and for those who are not interested, stocks are not their assets. Therefore, I think assets similar to stocks may not be implemented as quickly as bonds in terms of application. There have been many tokenizations of stocks in the past, including DeFi ones like Mirror, which uses synthetic assets to represent stocks such as Tesla or Apple, but the demand for trading was not particularly high. FTX has also issued some tokenized stocks before, which had high compliance risks, but the demand may not be as big as imagined. As for real estate assets, I think they are more similar to fixed income products, but real estate is an NFT, each place is different, and the risks in each country are different. We have previously discussed in a space chat that to convert real estate assets into RWA, it may be necessary to first transform real estate into traditional financial products like REITs that are standardized, and then tokenize them to become a better RWA asset. However, I think real estate assets may be applied faster than stocks because real estate has a huge scale and rental income, making it more comparable tobsp;Fix income or so-called fix income products, even though they have equity attributes. I think these types of RWA assets are relatively good assets. Another type is the supply chain receivables that we talked about a lot in the previous cycle, and we also mentioned the tokenization of the supply chain. In fact, the tokenization of the supply chain is a category of fixed-income assets. It packages and grades different assets, with each package corresponding to a different fixed-income pricing. Therefore, to some extent, it can be considered a fixed-income asset. So, I think bond assets may be easier to apply than equity assets. According to the risk in the standardization level and capital structure, I think we should start from low risk and gradually develop towards high risk, such as equity and stocks, in this order. Moreover, fixed-income assets have already reached a very large scale, with fixed-income and real estate already amounting to trillions of dollars. If tokenization is to be realized, these two parts are already large enough.

Can RWA promote the development of the DeFi niche?

Colin: Looking back at the development of this year, if we compare RWA and LSD, there are some similarities between the two, that is, both hope to introduce new underlying assets to DeFi. In the LSD track, we see that the emergence of LSD has brought attention to previously marginalized tracks, such as yield tokenization. From your perspective, if US Treasury bonds RWA can become a widely available underlying asset on the chain, could it also promote the explosion of certain small-scale DeFi tracks?

Teacher Mindao: This is inevitable. LSD and the national debt of the US dollar have very important similarities. We can think of the national debt of the US dollar as the LSD of the US dollar, which is staked US dollar. They are the same at the root, both of them are about how to bring the risk-free rate of different assets onto the chain. For example, the largest LSD of ETH can actually be regarded as the risk-free rate of the cryptocurrency circle, with Ethereum as the benchmark, because many DeFi tokens are actually based on Ethereum, including various LP pools in Uniswap and Curve, which are paired with Ethereum. Although Bitcoin has played a so-called mainstream role in the base currency exchange, in terms of actual application, Ethereum is more like a native currency. Its stacking yield can be understood as the risk-free rate of the native currency. In the traditional financial field, most assets are priced on top of the risk-free rate. For example, the pricing of corporate bonds, banks, and real estate is based on the risk-free rate, which is then transformed into various other bond assets, and then the stock value of different industry companies is calculated based on the funding cost of different bonds. Therefore, the risk-free rate is the bottom-level basis for pricing various types of assets. Now many LP tokens have started to use the LSD of ETH to replace the native ETH. At the same time, various products such as layered and senior-junior products like Pendle have also emerged. Similarly, if the risk-free rate of the US dollar is introduced into the chain, various products may also be derived. Recently, we have considered using sDai stablecoin instead of traditional stablecoins like USDT, USDC, and USX. By using sDai, we can obtain the returns of US bond RWAs and high liquidity without any subsidies. Therefore, using sDai as a pair has great advantages. In the future, we may consider replacing all of them with sDai or similar assets that have T-Bill-like returns, and even have our own token similar to sDai, which has underlying returns and can be used by others. Therefore, we can regard it as the liquidity replacement of the entire DeFi infrastructure, gradually replacing non-yielding assets with yielding assets. I believe that this change will be significant, similar to the attention paid to interest rate hikes in the traditional financial field, because interest rate hikes or cuts of the US dollar will affect the pricing of other fixed income and equity assets, including all assets priced based on the US dollar as the benchmark. Similarly, if the interest rate of the US dollar is introduced onto the chain, the transmission of US dollar interest rate hikes will be faster on the chain, because it will be strengthened by various combinations of DeFi and pass on the US dollar interest rate more effectively. This is why the USFor your input,here's the translated HTML content: Meta is a very good thing for the chain, just like LSD is a very good thing for Ethereum. It can not only form its own use on the chain, but also act as restaking, turning itself into a mercenary to provide security for other chains, thus expanding the application scenarios.

Output: Yuan is a very good thing for the blockchain, just like LSD is a very good thing for Ethereum. It not only serves its purpose on the chain, but can also act as restaking, turning itself into a hired soldier to provide security for other chains, thereby expanding the application scenarios.

Colin: At the beginning of this year, I had a similar view as yours. I believe that the yield of LSD actually represents the risk-free rate of Ethereum. Based on this yield, Ethereum-based bond markets may gradually emerge. Looking at markets like Pendle this year, we can see the growth trend of its TVL. Therefore, I am optimistic about RWA of US bonds because with its emergence, there may be explosive growth in the new DeFi track based on the US dollar.

Teacher Mingdao: Yes. Going back to what I said earlier, an interesting thing is that the ultimate beneficiaries of RWA applications may not necessarily be the RWA asset issuers, but rather DeFi protocols like MakerDao or us. Due to the composability relationship, DeFi-related parties become the final beneficiaries who seize the revolution's fruits.

Comparison between RWA and LSD

Colin: The next question I want to ask you is, compared to LSD, what the market is currently focused on are first-tier asset issuers like Lido, Rocket pool, and Frax. In the RWA track, will these types of issuers exist but have low captureable value? Can it be understood this way?

Teacher Mingdao: RWA, there is a question related to the issuer of US Treasury bonds. Going back to what we talked about earlier, there is a KYC requirement that makes it difficult for the issuer to establish network effects. In contrast, we mentioned earlier how Lido's LSD was successful in building network effects because Lido's LSD can be directly circulated, just like ERC20 tokens can be traded in the market. Its network effects are established through circulation. However, for RWA issuers, circulation is achieved through DeFi projects. For example, Dai distributes your interest to Dai holders, and USX distributes your interest to USX holders. These interests become the dowry of these distribution parties. This is what I think differentiates RWA issuers from projects like Lido. Because Lido is essentially a DeFi project that further tokenizes native on-chain profits and directly enters a completely non-permissioned circulation process. I think many people may compare these two, but I believe there are significant differences between them. You can understand it this way: the issuer of T-Bills is now somewhat similar to the node operators of Lido. The node operators in the LSD race eat bones and no one gets to eat meat. Node operation is hard work, dealing with various security and design issues, and after earning hard money, they have to give half of the 10% of the returns to the protocol party, and the benefits of network effects are also obtained by the protocol party. So, what I understand is that the issuer of RWA T-Bills is more like a node operator from the perspective of staking.

Colin: Yes, I understand better when you put it that way. Nodes also communicate off-chain and require equipment maintenance and other various requirements.

Teacher Mingdao: Yes, the nodes themselves also have admission requirements and compliance requirements.

How to view regulatory intervention

Colin: We just discussed many issues, including new risks in the RWA network and the concerns of users. The next question is, in the past two years, we have seen the introduction of more users. Starting this year, the RWA narrative has become increasingly popular, and we hope to introduce more assets. As a practitioner, how do you view the issue of regulatory intervention?

Min Dao, Teacher: I believe that regulatory intervention is necessary whenever you engage in financial products. However, what's interesting about the appeal of RWA is that it breaks away from the previous sources of income in the cryptocurrency community. Previously, the main source of income came from trading, whether it's futures trading, spot trading, speculation, or token issuance. You'll find that these income methods all face high regulatory risks, such as leveraging 100x or 1000x. The attraction of RWA, on the other hand, lies in its detachment from those income sources in the cryptocurrency community. This intrigues me. You can think of RWA as being very non-crypto, but the benefit is that its logic is very easily understood by regulatory agencies. When you issue a T-Bill token, its malicious or rug-pulling logic is not as straightforward as issuing a regular token. From a regulatory perspective, this logic is very clear. There's another crucial point, especially for U.S. regulations. The SEC may be more inclined towards politicization, but from the standpoint of the Federal Reserve and the U.S. government, if they want to solidify the reserve currency status of the U.S. dollar, they should promote the tokenization of government bonds. For example, a wild institution like Tether has likely entered the top ten in terms of holdings of government bonds, and it could potentially make it into the top tier at the national level, which is quite remarkable. This would be very helpful for achieving dollarization or promoting the U.S. dollar. I believe we shouldn't prevent such things from happening. Of course, different departments in the U.S. have many conflicting interests. So, relatively speaking, the logic of RWA is easier to meet regulatory requirements. You can immediately see what it aims to achieve. Issuing tokens or NFTs is more direct and easier to deceive or speculate. However, government bonds, as underlying assets, still have something tangible. For regulatory agencies, intervening in RWA is easier. Of course, the regulatory bodies that intervene may be limited to core institutions like those in the U.S. It may not involve regulatory agencies from all countries around the world. Another point is that, in terms of the crowd involved in asset delivery, it won't involve as many retail investors as token issuance or futures trading. In fact, looking at the regulatory actions in recent years, the negative perception of cryptocurrencies is partly due to investor protection. Indeed, the cryptocurrency market has caused significant damage, with each explosion affecting hundreds of thousands of users. Platforms like FTX have hundreds of thousands or even millions of users, while an ICO project may have a few thousand users. From a regulatory perspective, you'll find that the main issue is investor protection. However, I personally believe that retail investors won't generally have access to RWA assets, at least not at the asset level. In theory, I don't think it would cause much harm to retail investors. Instead, it's a simpler problem for regulation.

Regions More Likely to See RWA Narrative Implementation

Colin: I can feel that you, Teacher Mingdao, are relatively more accepting of regulatory intervention. Based on the new regulatory direction and strategies that we see today, which regions do you think are likely to see the implementation of this narrative of RWA? And based on your understanding, what specific policies in these regions are likely to be more friendly towards on-chain assets and users?

Teacher Mingdao: Currently, it seems that these new issuers of US bonds are mostly in the Asian region, with several in Singapore and Hong Kong. Most of them are operating with teams in Hong Kong or Singapore, but in reality they may use structures such as BVI or the Cayman Islands. On the other hand, the United States may pay more attention to regulatory risks. I think in this area, there is a high probability that it will follow a path similar to the early development of Tether, starting with offshore operations. However, I believe that there will also be institutions operating onshore in the US, like Circle. I haven't seen the structure of Ondo Finance, but I remember that their team is mainly based in the US, so they may be more cautious. I recently heard that Compound's Robert also launched Superstate, because he used to work in the US Treasury Department. We had communication with him when we were doing DeFi, and he may not be in the federal Treasury Department, but he has worked at the state level Treasury Department in the US, so he should have a good understanding of regulation. I believe that their team's operations are also likely to be in the US. Therefore, I think Asian countries may have some advantages in terms of policies, and the regulatory risks may not be as high as in the US. But I think the US market should not be ignored. Many traditional financial institutions in the US are also gradually entering the space, and their approach may be different from that of RWA asset projects emerging from the crypto space. Therefore, I believe that the US is also an indispensable market, and the path of the mainstream may have some new attempts in the US. Recently, we have seen projects starting from Singapore and Hong Kong. Additionally, a very important point in the Asian region is the high demand for the US dollar, and there is a very high demand for offshore US dollars in Southeast Asia and Northeast Asia. So I think it's highly likely that these few places will not be absent.

Colin: So, can we understand it this way, that if we want to do US bond RWA projects, we should focus on the teams in Hong Kong and Singapore. If they have projects that can adapt to the local market marketing strategies, it will be easier to achieve project growth.

Teacher Mingdao: Yes. However, from the perspective of retail investors, most of these projects do not issue coins. So, to capture the value of this opportunity, you need to find some proxies, not necessarily the project itself, because they may not issue coins. So, how to capture the value of this opportunity? As I mentioned before, I think the composability of RWA's income will gradually spread to the entire DeFi protocol. So in this regard, I personally think it is good for the issuers of decentralized stablecoins. In addition to Dai, we see many stablecoins also considering how to introduce RWA. In addition to LUSD's integration with crypto native, there are also recent discussions about Frax opening a so-called main account with the Federal Reserve to directly hold US T-Bills. I think that's not so easy, but you can see that they are also starting to consider how to introduce it. Another simple reason is that if there is already a decentralized stablecoin on the chain that has integrated the yield of RWA's T-Bill, many stablecoin issuers just need to integrate it. For example, we can have dual integration, in addition to DAI, we can also directly purchase T-Bills as another strategy. Actually, both can be done. This is the flexibility of DeFi. For example, I can integrate DAI, although the income may be slightly lower, it doesn't matter, because what matters is whether it can be launched quickly and attract liquidity and trading volume. If not enough, I can further allocate things related to the underlying T-Bill. In my opinion, composability is a very important part of DeFi. After another year, T-Bill assets of US bonds may begin to penetrate various levels, although it is not necessary to directly hold T-Bills. It can be done through holding Dai and sDai, and it has already penetrated the income of T-Bills held by DAI itself. This is an interesting aspect of DeFi's composability. Its way of spreading is not to wait for each DeFi project to directly access assets like T-Bills, but to penetrate the income layer by layer through various combinations.

Colin: The current narrative is also Web 3, right? If interest-bearing assets based on U or fiat currencies can flow smoothly, I think it will greatly promote the promotion of Web 3.

Mr. Mindao: Yes, in the past year or so, funds in the currency circle have been flowing outwards. How can we achieve fund inflow? I believe this is a very important measure, at least to stop the continued outflow of funds.

Colin: Currently, we can see that more and more projects in both the already issued coins and the primary market are getting involved in the U.S. bond and RWA tracks. Additionally, there are other projects that may involve other types of debts. In the next six months, we may witness rapid growth in the entire track.

Mr. Mindao: Yes, the channel is very important in this regard. That's why on-chain projects of DeFi or centralized exchanges have become the dominant players.

Colin: Today, we discussed U.S. bonds, RWA, the development direction of underlying assets, business structure, and the potential impact on DeFi. We even provided suggestions for investors in the future layout of primary and secondary markets. That's all for today. Thank you very much, Mr. Mindao.