[RWA] Things I don't like about Real-World Assets

[e18r]

^{General Disclaimer: the following views are my own and do not necessarily reflect or represent the views or opinions of the Maker Foundation or any of its directors, executives, employees or contractors.}

1. Their name

The term “real-world assets” carries a heavy assumption about what blockchain is.

We’ve all been there; acquaintances from outside crypto condescendingly asking us about these “funny internet coins” we like, wondering whether we’re gonna finally grow up and get a real job. That’s not surprising for anyone in the space anymore.

What is surprising, though, is that now we ourselves are using a term such as “real-world assets”, which reflects that same condescending attitude. If these assets are from the real world, then by implication blockchain would be the fairy-tale world, right? Let’s not buy into this narrative.

2. They’re not part of Maker’s original intent

While expressing my views around, I’ve heard the argument that RWAs are part of Maker’s original whitepaper. No, they’re not. Take a look for yourself here and here.

3. Their role in maintaining the peg

RWAs were first introduced as a way to lower the price of DAI, since at the time DAI was running significantly above peg. Although we still have this problem, please note that this is a good problem to have.

It may not look like it now, but being below peg not only is a worse problem, but in some cases an insolvable one. As with any other asset, the price of DAI ultimately relies on the trust of its users. If that trust were to disappear, the demand for DAI would soon follow, as well as its price. People trust DAI because it doesn’t engage in the unreliable practices of the traditional financial system.

So while I agree that RWAs can help lower the price of DAI, I wonder if they could also help raise it.

4. The idea of breaking out of the blockchain

I recently watched Greg Di Prisco’s interview on RealVision. It’s a very good interview; Greg has a compelling way of explaining how Maker works, and also brings up interesting insights about the role of collateral in an economy. I agree with everything he says, except for the following:

This is kind of a huge moment for us; it’s when we break out of the blockchain ecosystem. Up until now, you’ve only been able to borrow against digital assets, and this was very much a proof of concept. If Maker’s ever going to serve millions of people around the world by offering them a decentralized stablecoin, it needs the credit that backs that decentralized stablecoin to be there in demand.

If you listen to the entire interview, the above statements contradict much of the rest he says. If blockchain is something we need to break out of, then why bother creating a blockchain-based system in the first place? If borrowing against on-chain assets is just a proof of concept, why not stick with traditional banks?

5. The desire to grow faster

Take a look at the growth of MCD’s market cap since its inception in november 2019. It went from zero to 2 billion in a year. Does it look like it needs to grow faster?

I don’t think so. On the contrary, I’d prefer it to grow slower.

An important argument for RWAs is that they will allow Maker to scale beyond the blockchain ecosystem. However, growing too fast is risky.

Concluding remarks

We all want Maker to change the world. I understand it can be frustrating that blockchain tech isn’t having an impact in the “real world” yet. Developing countries such as my own Colombia could benefit immensely from all the advantages of decentralization.

However, things take time. If Maker isn’t able to reach everyday people, it’s simply because crypto adoption takes time. It’s not our fault. People have a hard time changing their attitudes towards something as sensitive as money. But even if it takes a century, it doesn’t matter: we’re building something greater than ourselves.

Instead of breaking out of the blockchain into the real world, we need the real world to break out of their centralized institutions into blockchain. When that happens, blockchain is going to be the real world and it will be serving billions of users.

[mrabino1]

@e18r

What is surprising, though, is that now we ourselves are using a term such as “real-world assets”, which reflects that same condescending attitude.

Pretty sure no one had any nefarious intentions with the phrase (maybe assets in the physical world would have been more descriptive… for now and purposes of this article, let’s just use non-blockchain assets).

In general, my view is that a blockchain is its own ecosystem (digital or not). The external credit markets have evolved for FAR longer and represent significantly more credit demand that within the ethereum blockchain (orders and orders of magnitude).

SO the question that comes is … what is our objective? If growing the DAI ecosystem is important, we must continue to add collateral faster than DAI users want to draw it. Importantly, that collateral needs to be as uncorrelated as possible. We have already been adding collateral at rapid pace and in many cases have had misfires of would-be collateral that didn’t work out. Ultimately, the community adopted centralized stablecoins (in bulk) to be a temp bridge for collateral. We still have hundreds of millions of dollars of stablecoin exposure, today.

Without sounding like I am crapping on crypto, from my lens much of the crypto market is correlated. Thus how do we construct a portfolio that is uncorrelated when all crypto is correlated? the answer is to use collateral from the non-blockchain world. The entire genesis to do follows the desire to both change the non-blockchain world AND benefit the blockchain world in the same go.

@e18r

If Maker isn’t able to reach everyday people, it’s simply because crypto adoption takes time. It’s not our fault. People have a hard time changing their attitudes towards something as sensitive as money. But even if it takes a century, it doesn’t matter: we’re building something greater than ourselves.

Not only does adoption take time, infrastructure takes time. DAI’s penetration to markets (all of them) today is hindered with transactions fees. Same with USDC. This is a wonderful paradoxical problem, a collective victim of ETH’s success. This is not Maker’s “fault” nor the assets in the non-blockchain world. The question is what can we do about it.

From my seat, continuing with centralized issuers that have a massive % of overall portfolio is just not an option. I wish the non-blockchain world would or could just issue tokens. Until then, we (governance) are continually being backed into a corner to meet the insatiable demand for DAI. To meet that, governance has come up with new creative methods to extract / unlock new innovative credit demand from the market (Uniswap LPs are a perfect example).

Even then, the credit demand within the blockchain is just not enough. We are not marching to 10Bn (that is inevitable). We are marching to 1Tn (or more).

The real issue I want to convey is that Maker has effectively embarked on a one-way path of wanting to become a synthetic credit backed USD on a global macro level. WHEN (not if) we are successful as being a method-of-exhcnage, we will be hit with such demand that absent the PSM, the peg would break upward and basically destroy the project. In this context, the speed of the growth is from end-users wanting to hold / use DAI. Governance is not in the driver’s seat, per se (we are just controlling some levers).

The only way to scale DAI * AND * not have centralization of issuers is via non-blockchain assets. Without sounding alarmist, much of the future of the entire project relies on Maker onboarding non-blockchain assets to address collateral scaling issues. The collateral onboarding must outpace DAI demand.

[ElProgreso]

@e18r

Developing countries such as my own Colombia could benefit immensely from all the advantages of decentralization.

I guess I would interpret this as you saying here that if the local mercado needs to borrow against their property they should not have access to DAI (not yet) and the sastrero and diseñador de moda should go to Bancolombia S.A and pray to God they get approved for a loan? I get it. It’s too early for that. Tho it Would be nice to provide the less-disadvantage a different outlet via DeFi.

@e18r

I don’t think so. On the contrary, I’d prefer it to grow slower.

I think we are beyond the growing slow phase–but I don’t think RWA will outperform DeFi–not until we get more regulation, and the Price Oracle issue does have a lot of questions.

Personally I feel like the Maker Community is being left behind when it comes to innovation. But if we want to continue to just provide DAI to degens and whales then lets see how far that takes us… but I get your drift. We shall see.

[prose11]

I guess one thing worth noting about the importance of this asset class is its non-correlated nature to our current collaterals. In order for us to continue to grow we need collaterals that aren’t correlated, otherwise we reach a certain point where it doesn’t make sense from a risk standpoint to issue more DAI.

I think we must be intentional about our growth in the space, but a Maker with more diversified collaterals is always going to be better than the alterative IMO. Otherwise we’ll be left constantly increasing the Surplus Buffer or charging above market rates to try to turn vault owners away. There are many different assets that could be collateralized in the future and while we have a great system in place for onboarding Crypto tokens, if we don’t allocate resources to looking for other avenues of collateral our growth will always be capped.

[iammeeoh]

I agree with what others said above: it is important to diversify our collateral to avoid strong correlations.

If tomorrow BTC and ETH were to drop by 80%, we’d probably go back to 300m DAI, due to the huge amount of liquidations, and that would not be cool.

Also, I view USDC as our first real-world asset. It has been beneficial for us to embark it, it has stabilised the peg and allowed many more people to use reliably DAI.

In an ideal world, the tokenisation process would have already been done at scale by some companies, and we’d just need to embark their tokens, just as for USDC. This has not happened, yet, and we are tying to bootstrap this process directly within MakerDAO. We’ll see how it goes but it is definitely worth trying.

[mrabino1]

@iammeeoh

I view USDC as our first real-world asset.

I tend to agree. Primary difference however is that it doesnt have any credit demand unto itself. We need non-blockchain assets that have credit demand and a ~liquid market.

[williamr]

@e18r

If these assets are from the real world, then by implication blockchain would be the fairy-tale world, right?

I agree with most of the points raised by others, regarding nomenclature and paths for growth for the DAI Credit System. Maybe “non-blockchain” or “non-crypto native” are appropriate ways of calling it. At the moment, the first steps in the experiment are simply called “real-world-finance”, not carrying any bad intentioned semantic on it.

As @mrabino1 mentioned, what this is aiming at really are the existing debt markets. This starts by being the financier of the financier. So indirectly, financing portfolios in “non-crypto” native markets such as property. While this is not putting financing lines directly to the pocket of the SME that cannot find appropriate finance in the banking world (that would be inefficient at our current stage of the project), it is a step into having DAI circulating “close enough” to the non-crypto native world.

Crypto evolves fast. And it is possible that blockchain projects find a way to actually build the rails for companies to finance their non-blockchain operations with DAI in the future. In a way, this what is happening with big companies replacing treasury and “cash equivalents” for BTC (e.g. Tesla, MicroStrategy etc) is a move into that direction. This will eventually allow them to use those assets to finance operations via credit markets. But this is still a very minor part of the debt market. Until then, what RWA is proposing is to fill a definitely needed gap that is competitive and aligned with a Credit System. After all, a Credit System is not discriminatory of whether the debt is eventually utilised only for crypto-native assets, is it?

[SebVentures]

To add on top of what was already said, Rune was speaking about real-world assets a long time ago.

Governance decided to go into RWA in June last year

@e18r

People trust DAI because it doesn’t engage in the unreliable practices of the traditional financial system.

Well, people in DeFi also trust USDT which engages in shady practices no bank would even imagine. And what is USDC if not a “traditional financial system” offspring (but more obscure)?

[MakerMan]

@e18r

I don’t think so. On the contrary, I’d prefer it to grow slower.

My personal view is this growth represents something of an early phase which tends to be parabolic or exponential if you will. But if you look back at why there is high demand it was entirely due to farming and/or LP returns. I think this will peeter out ‘at some point’. There were many better ways to address this demand.

One thing I don’t think anyone has pointed out is whether actual deposited tokens have gone up. I remember distinctly ETH being like 1.5-2M and we are only at 2.5M. While Maker has new asset classes I think the maybe 50% has been due to new asset classes added, the other 50% is due to price growth. Price declines 50% and all hell is going to break loose. Of that I am 100% certain. Many people think the network and these systems will be able to handle this. Time will tell.

As to terminology (yes I am a fan of George Carlin) I pretty much agree. You could do a Carlin like Baseball Football skit based on crypto-RWA terminology.

What people are coming to realize:

1. Blockchain is permissionless (if you pay attention)
2. Markets never close.

@mrabino1

Thus how do we construct a portfolio that is uncorrelated when all crypto is correlated?

As time goes on I see even greater market correlations across vast arrays of asset classes. There are a few uncorrelated or better anti-correlated assets (the things you really need in a balance portfolio) and unfortunately these are FAR and FEW inbetween. Markets go down, do you really want to be in bonds? Especially when Central Banks are going to print their way out of every problem here on out?
There is a point where everything is going to become correlated, and no amount of insurance will cover a wipe out disaster which is precisely where everyone goes begging to governments for bailouts.

Insurance companies are notorious for paying dividends when times are good to shareholders, and then holding their hands out to ‘the people’ when the get hosed by some larger disaster. Perhaps it makes more sense to bank those dividends against the bad times. Oh but heck then no-one would want to own the things (certainly not for the lofty valuations these things have).

@mrabino1

Not only does adoption take time, infrastructure takes time. DAI’s penetration to markets (all of them) today is hindered with transactions fees.

Fees are not the problem. Friction and ease of access IS. Put simply it isn’t that people just have to risk loss of funds, and pay high fees, but they also have to figure out how to get from A to B which sometimes has like 25 or more steps - all of them with significant fees, and/or research - leaps of faith.

I have felt that the most important thing to change with respect to crypto is a kind of wallet that basically has functions - deposit funds A into contract B - take care of all the BS in between. It is like being able to sit down and turn the key in a car and go, and a pilot that has to go through a 30-60min checklist just to taxi down the runway. Friction/ease of use straight up is the biggest problem in this space, next security of funds and/or result advertising. APY, APR, ROI, I have been tracking returns on a number of different LPs and many of them are all over the place on how the define the above terms making sorting what is the best return, much less the safest place almost impossible to determine.

Now lets heap on network fees and access. There are points where changes in protocols due to network fees changing basically takes away access for players. Raise hands if you were trading dydx when fees went from 1gwei to 100gwei the first time and got locked into contracts that you couldn’t exit because fees pretty much didn’t just eat the profits but also the principles on contracts. Or that lot size restrictions killed you ability to trade.

These are all real issues that are still unresolved in this space. There are still many real issues to be solved but that has never stopped us before. What it does do it put people early in these spaces at hazard, and is one of the many reasons returns are so crazy high. If RWA money could seek the returns in these spaces they would kill returns so fast it would make everyone’s heads spin.

Friction is one of the many things that keeps the returns and opportunities in these spaces so high/hot.

One thing I do see. Is that without the rest of the financial space having representation on one or more blockchains we will not see the growth that would take us to 1T or 1000T of TLV in the entire space which is where we seem to be headed. The real issue is going to be legislation and old world trying to force the new crypto into the old financial models and this is where I see the real pain appearing in this space.

[g_dip]

Hi @e18r , first of all thanks for posting this. In my opinion it’s the kind of discourse this post has generated that demonstrates the power of Maker governance. To address your points:

1/ I am certainly guilty of perpetuating the use of this phrase. I agree that it’s not ideal in the sense that it doesn’t accurately capture what we’re talking about, but I don’t think it’s condescending. It’s one of those things that was coined a long time ago and now it’s become the way that we all understand what each other are talking about. It’s also easy for a person not involved with the blockchain community to intuitively understand. But to be clear, when I use the term “real world asset” I am referring to assets where the “consensus mechanism” is not on a blockchain, but in existing judicial systems. Is that any more “real” than when consensus is formed on the blockchain? Of course not. Is it something people who have never heard of proof of work or proof of stake can more easily understand? Yes.

2/ I don’t agree that just because something isn’t in the whitepaper, it wasn’t part of the original intent. The purpose of the MakerDAO system is to keep Dai stable - from the earliest days of the community the need for more diversified collateral was discussed and known. I personally witnessed several conversations relating to using the protocol for Trade Finance before Sai was even live. Does this constitute intent? I think so. But I also don’t think an originalist interpretation of the whitepaper is very useful in a constantly evolving ecosystem.

3/ RWAs were first introduced approximately 11 months ago when USDC was added to the protocol. I totally agree that it’s a good problem to have, but it’s a problem nonetheless. If we want Dai to serve billions of people, we need to be prepared for the eventuality of demand outstripping supply. I don’t agree that Dai being below the peg is necessarily worse or unsolvable. In my opinion, the DSR is Dai’s most valuable feature and it would be great if it could actually be used.

4/ When I went on RealVision I had to speak to a very broad audience that understands traditional finance, not blockchains. I don’t think there was anything I could have said which accurately described the nuance of the topic, so I did the best that I could. I am sorry I didn’t do a better job with that. But please, let me explain my comments:

A blockchain-based asset (what I was referring to as a digital asset) is one where objectivity of ownership (and any potential dispute) is handled via a consensus mechanism. Most, if not all, non-blockchain assets are completely incompatible with this framework. For instance, even if I tokenize the deed to my house, the government will always retain the ability to determine the rightful owner of the house and to regulate the agreements pertaining to the asset. It may one day consider the blockchain as an indication of the truth, but it will likely never give up its power to be the ultimate arbiter. The same applies for invoices, mortgages, intellectual property, bonds, etc. Let’s call this the “legacy system” for simplicity. By their very nature these assets can’t just defer consensus to the blockchain. If we are to wait for agencies, regulators and courts to cede their powers to the blockchain, I fear we’ll be waiting the rest of our lives.

So why do I call current blockchain-based assets a proof of concept? I say this because their value proposition (perhaps with the exception of Bitcoin) is entirely based on the speculation that they will one day make a meaningful impact on the economy, and therefore by definition the legacy system. Bitcoin may be the perfect store of value, but the economy can only go so far with a store of value - it needs buildings, infrastructure and businesses to grow. I often ask myself this - why is ether valuable? The easy answer is “because it powers decentralized applications”. But if those decentralized applications don’t actually gain market share in the economy (i.e. interact with the legacy system) the value of ether remains purely speculative. By definition the only way for these applications to “break out,” as I like to phrase it, is to find a way to achieve this interaction without sacrificing their major advantages. So why use a blockchain? Because there are many things that DeFi has to offer that the current system does not. I think that’s a subject for a different reply, as it will get quite long, but I believe the presence of entities like 6s Capital and Centrifuge in our ecosystem is evidence enough that Maker has something compelling to offer legacy originators. For what it’s worth, I think that one day the distinction between “on-chain assets” and “off-chain assets” won’t even exist.

5/ Short of penalizing Dai holders, Maker needs to grow to keep up with Dai demand. I don’t know how we could grow less quickly without punishing the savers that depend on Dai. My counterpoint to this would be, in the context of us not being able to “control” the growth of Dai, would you rather take on more USDC or have custom RWA solutions that are built by dedicated community members?

To conclude, I think that when you say “Instead of breaking out of the blockchain into the real world, we need the real world to break out of their centralized institutions into blockchain”, it is really the same vision of RWA as has been put forward by the community. We simply can’t avoid judicial “consensus mechanisms” if we want Dai to serve billions of people - but I believe we can deliver a permissionless stablecoin to billions of people without compromising the integrity, diversification and quality of the collateral portfolio.

[williamr]

Awesome explanation, Greg. One last point I would like to add to 4 and 5 here. While it would be great if all businesses that need to finance operations in non-crypto world had btc (or any of its ERC-20 variants) to utilise as collateral, it is simply not the reality right now. We couldn’t simply ask companies that manage trade finance or mortgage broking operations to hold an equivalent amount of btc in their balance sheets so that they can just start interacting with Maker. After all, managing crypto assets is not their core business activity (as it isn’t the activity of 99.9% of companies out there). However, a number of sectors and businesses out there still require credit lines that power their own growth in the non-blockchain world. And a very large number of them simply cannot gain access to financing, despite some with strong balance sheets. DAI as a credit system can certainly assist solving some of those discrepancies in the “legacy world” (and believe me, there are tons!), while at the same time solving other core protocol issues discussed above (e.g. correlation, supply, asset market risk etc). @e18r thanks for bringing up the discussion.

[maarten]

For DAI to accomplish its mission of being the unbiased global currency of reference, I don’t think we can be too dogmatic about blockchain-based and non-blockchain based collateral. These are rapidly converging and commingling concepts anyhow.

It is the access to financing what we make universal and unbiased.

[Philinje]

Amazing comments here, glad I took the time to come back to this post and see the state of the discussion. This kind of community governance is one thing the legacy world could learn from DeFi, and it doesn’t involve financial engineering.

It’s great that @e18r took the time to voice this argument in such a reasonable and cogent way. Certainly others in the community must be thinking similar things, and to a large extent I agree with the points made. I also agree with most of the comments and the balanced perspective that results. To me, the core difference between DeFi and the legacy world is the nature of consensus - delegated to government in the legacy world, and self-government and technological (one could say more fair) consensus in DeFi.

As a member of the RWF team, I am not partial to the legacy world. The reason any of us is here in this community is because of the creaking, inefficient and often unjust mechanisms of the legacy world. Nevertheless, that is the world in which we raise families and eat. The only point that seems to be under-served above is that the appeal of crypto is only growing and in fact the early adopters (beyond the people building crypto projects) are knocking on the door. They are trying to break in. The choice for us is not whether to “break out” or not, but whether or not to answer the door.

I talked this week with a property management fund with grade A assets and a huge portfolio. They don’t need loans nor do they provide loans. They simply want to leverage their assets to own crypto, just like any crypto user. Will a property portfolio fit in a Maker vault? Well, they could sell a few properties and buy BTC or ETH. But like BTC/ETH hodlers, they don’t want to deal with the consequences of selling their core assets. And isn’t that a fundamental part of the appeal of Maker’s solution?

We are in the golden seat of looking at the vast legacy world and deciding whether we can craft some mechanisms to help that world, or not. Maybe we have limited resources, limited expertise in some areas, and limited history. But the choice is ours. Maker is a leader in this burgeoning industry. The demand from “out there” will only grow. We can design the interaction to benefit us with stability, volume, revenue - on our terms (within some constraints). And let’s not forget those knocking will go elsewhere if we don’t answer the door.