Thread by @ChainLinkGod

1/ Tokenized Real-World Assets (RWAs) is how #DeFi will scale to a global level

A 🧵 covering my thoughts on the opportunities and challenges this present

2/ It is my belief that until RWAs are brought on-chain at scale

DeFi will continue to be highly reflexive and treated as a casino that mostly facilitates speculation of tokens

Tokens which have value from their ability to generate revenue from speculative activity

3/ This thesis is based upon my observations regarding how people use DeFi today and where the yield comes from

People think they know where the yield comes from (fees, interest, premiums, token subsidies)

But it really all just boils down to speculation on tokens

4/ Bringing RWAs on-chain offers a way to short circuit this inter-reflexive speculation loop

The speculation of crypto tokens will remain, but are no longer the main story

Rather these tokens are effectively hotswapped with RWAs (used collateral, liquidity, debt, etc)

5/ Think about it

If DeFi in its current state were to disappear tomorrow, how would society be affected?

Beyond some investors losing money and devs losing jobs, not much in the global economy would materially change

6/ It comes back to the question of ‘what is the point of the infrastructure we’re building?’

Are we aiming to create a more transparent, trust-minimized, and economically efficient society?

Or are we just creating economic experiments and meta-games for people to speculate on?

7/ You could point to the revenue of these blockchains and dApps as a source of real product-market-fit

But again, look into where that revenue is coming from

It’s mostly from people speculating on tokens with questionable value propositions

8/ During bear markets, when speculative activity dies down, these revenue streams start to dwindle

The same reason crypto went up so much (reflexive speculation) is the reason why it goes down so much

This doesn’t scale

9/ This is not sustainable and it doesn’t create real world value for people

DeFi needs a baselayer level of demand that is attached to things in the real world

RWAs created by businesses and governments are a step towards this reality

10/ And let’s be clear, this is already starting to happen

There was $180B worth of stablecoins at its peak in 2022

Stablecoins are tokenized dollars, which are a RWA created by the US government (technically the FED)

The demand for RWAs is clear here

11/ In fact, I would argue (and I have), that stablecoins are the product market fit of DeFi today

Programmable, composable, permissionless digital dollars that can be transacted and settled in a much more time and cost-efficient manner than TradFi

Superior dollars

https://twitter.com/chainlinkgod/status/1528760841448919045

12/ The natural next step is bringing other RWAs on-chain next

We’ve seen some forms of this with stablecoins for other fiat currencies and for commodities like gold

Mostly on Etheruem but will likely pick on other chains soon afterwards

13/ The next step beyond this is tokenizing other RWAs including government treasuries, corporate bond, equities, and securities

There is a proposal on the @MakerDAO forum to allow tokenized short term bond ETFs to be used as collateral to mint $DAI

forum.makerdao.com/t/mip-6-declar…

14/ Many push back against this thesis because on-chain RWAs are not trustless and therefore not fully aligned with our ecosystem’s ideals

I don’t think it’s that simple

Trust-minimization is a spectrum, and DeFi can bring significant benefits to all assets along the spectrum

15/

1. Greater levels of transparency into market risk and asset usage

2. Superior composability with other financial primitives

3. Better accessibility for the underbanked of the world

4. Increased revenue opportunities from a larger addressable market

16/ The elephant in the room for this thesis is: regulation

If the rules and regulations don’t allow for businesses to tokenize assets on a public blockchain, then they won’t

And if they do, then they will likely require a level of KYC/AML to comply

17/ It’s the identity problem in DeFi that regulators care about

Which I think can and will be addressed by privacy preserving identity protocols that use zero-knowledge proofs

Prove facts about yourself without actually revealing these facts on-chain for everyone to see

18/ But even with the regulatory and identity hurdles cleared

There will still be a subset of apps and users that want to stick to the crypto-only and push for the maximum level for trustlessness

So there will likely be a split with regulated and non-regulated DeFi

19/ The tokenized RWAs, along with the users, revenue, and institutional support they bring will be on regulated DeFi

The casino meta-games, economic experiments, and recursive speculative activity will be on non-regulated DeFi

20/ The non-regulated DeFi serves as an experiential sandbox to explore new ideas

It also serves as a backup for if society and traditional finance as we know it completely breaks down

Having viable alternatives are good

21/ If you look at the current DeFi landscape today, you can already see projects moving one way or another, even if just signaling

There will also be projects that will straddle both ecosystems, mostly consisting of core infrastructure

The moves are being made now

22/ Lastly, what I’m stating here is not what I want to happen

But it’s what needs to happen for DeFi to scale and is the most likely future state of the ecosystem

It’s how crypto and DeFi reaches the next billion users, providing products and services the masses actually want

23/ This isn’t the only hurdle we need to overcome

There are many more particularly when it comes to the User Experience (UX) and the onboarding process

But that’s another thread for an other time with a whole other can of worms

24/ As a summary, we need to focus less of our time on figuring out new ways to print tokens and fake yield

And start focusing more on how we can bring RWAs on-chain so we can offer the masses applications they would actually want to use

25/ Like for many topics, there is an informative blog post from @chainlink, published in 2020, that explores the concept of RWAs and the role of oracles

This is simply the path forward for DeFi
blog.chain.link/asset-tokeniza…

If you found this thread insightful, please like and retweet the first tweet in this thread 🙏

I’m interested in hearing other people’s perspective as this thesis as it’s a divisive topic

https://twitter.com/ChainLinkGod/status/1543323712325267456