“That’s Our Two Satoshis” - The Manifestation of Real World Assets (RWAs) in Crypto

Jeff Dorman, CFA
Jul 24, 2023
Thats Our 2 Satoshis Logo

What happened this week in the Crypto markets?

Screen Shot 2023-07-24 at 8.51.57 AM

Source: TradingView, CNBC, Bloomberg, Messari
An Example of Real-World Assets
Since we spend all of our time studying the digital assets industry, its evolution, and the investment opportunities that come with it, it is often difficult to decipher what has gone mainstream and what is still simply insider industry jargon. For example, at some point in the last two years DeFi, NFTs and stablecoins all went mainstream, but I’m not entirely sure when it happened.  For a long time, many industry outsiders thought all tokens were just “another Bitcoin” or cryptocurrency, or some nonsense “memecoin”, and then slowly the investing world began to realize that this wasn’t true - that there were in fact many categories of tokens with different purposes, structures and value propositions.  It certainly wasn’t obvious when we launched our Digital Assets Taxonomy in 2021, as our categorization was one of the first attempts to educate, but it seems obvious now in retrospect.
To that end, I’m not entirely sure where “Tokens backed by Real World Assets” falls in today’s lexicon.  Is this the 5th legit category of digital assets (after cryptocurrency, DeFi, NFTs, and Stablecoins), or is this just another buzzword that will soon fall off the map?  From an investing perspective, tokens backed by RWAs aren’t that interesting yet.  Most are securities, and therefore there is insufficient market liquidity, immature alternative trading systems, and lack of infrastructure available to trade these instruments in the same way that we’ve come to expect for other tokens that are not securities, or that reside in a regulatory gray area.  But if this category continues to grow, you’d assume the infrastructure will catch up quickly.
Let’s clarify a few things about tokens backed by RWAs?  For starters, it’s important to recognize that in many ways a digital asset on a blockchain is no different than an ETF – a wrapper that can house any asset inside of it. Much like ETFs started as S&P 500 Index tracking stocks and have ballooned to now represent everything from gold, to currencies, to bonds to real estate… tokens on a blockchain can represent just about any underlying instrument as well.  
Eventually, IF the ability to trade blockchain-based assets continues to grow and expand, more and more traditional “real-world assets” will be tokenized to take advantage of the unique characteristics of blockchain-based trading and proof of ownership.  
But RWAs have also snuck into the digital assets industry not as tokenized assets, but simply as cash investment substitutes.  When interest rates were 0%, no one cared to put their cash in low (no) yielding instruments.  But with short-dated Treasury yields now north of 5%, the game has changed.   Parking cash in a bank was no longer a viable option financially, and became even more egregious when banks themselves became unstable earlier this year.  Stablecoin issuers are now investing their cash into RWAs (Treasuries) to earn a yield.  Both USDC and USDT (Tether) have diversified their holdings away from commercial paper and other riskier assets into U.S. Treasuries.  And MakerDao (MKR), the entity behind the stablecoin DAI, has begun to back its stablecoin with U.S. Treasuries as well.  These aren’t “tokenized bonds” per se, but rather, blockchain-based companies investing in RWAs.  Either way, it’s clear that assets that were once confined to traditional finance are now seeping their way into the digital assets arena.
To illustrate the earnings impact, let’s dive deeper into MakerDAO.  Maker has always had a significant amount of dollar-based assets on its balance sheet, but only recently have they begun to invest in treasuries. This newfound interest income is a huge boon for the project.  In the last 3 months, Maker has been generating record revenues. By reducing USDC on its balance sheet and replacing it with yield-generating RWAs, Maker has managed to quadruple its earnings and the MKR token now trades at under 10x earnings.  
Source: Twitter
This shift into the “real world” has had a major impact on MakerDAO’s financials. Simply by integrating real-world, yield-bearing financial instruments into its business, Maker has launched itself into the top 10 most profitable blockchain-based entities. 
As we discussed last week, the main goal of most digital asset investors is to be able to invest in all asset classes in one place, instead of the fragmented and separate ways in which we must currently invest in blockchain assets and traditional financial instruments. 
“...I believe we all just want to invest in BTC, ETH, DeFi tokens, private startup equity, stablecoins, AAPL, TSLA, Gold, Oil, bonds, etc all in one place.  We don’t care about the Howey Test.  We don’t care what is a currency, commodity, security or other.  We don’t need more than 5-10 pages of a company or project’s description, cap structure, and financials. “
We’re not there yet, but it does feel like we’re getting closer to this reality.  It was only two years ago when our industry was excited because Tesla and other corporations were putting Bitcoin on their balance sheets.  Now, we as an industry are excited when blockchain-based companies are putting treasuries on their balance sheets.  Eventually, the lines will blur between tokenized pre-existing traditional assets, assets issued in tokenized form, and blockchain-native assets.  It remains to be seen whether a TradFi incumbent, or a Blockchain incumbent, will offer the “one-stop shop” experience, but it is definitely coming.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Michael Dershewitz - Chief Operating Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Robert Valdes-Rodriguez, CFA- Vice President, Research
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

Subscribe For the Latest Blockchain News & Analysis



Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.

Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.