The RWA Thesis: Seeing through the Smoke & Mirrors
Special thanks to Nick from Fortunafi and the MANTRA team for feedback and review.
Introduction
Crypto has long been dominated by speculation and volatility, with traders often chasing the next big narrative or memecoin in hopes of quick profits. However, this speculative environment, while profitable for a few, has led to widespread losses for the majority, exposing the need for a more sustainable and value-driven approach. As the market matures, the emergence of RWAs is paving the way for a new era in DeFi. Unlike traditional DeFi markets that rely heavily on speculative inflows, RWA protocols offer real, tangible value by integrating real-world assets with blockchain, creating positive-sum systems that generate consistent returns throughout market cycles.
This shift is further supported by the growing demand for regulatory clarity, which is essential for the widespread adoption and success of RWAs. With protocols like Ondo, MANTRA, Fortunafi, and more leading the charge, the crypto industry is beginning to realize the potential of RWAs to not only stabilize the market but also to unlock new avenues for value generation. These protocols are setting new standards by combining regulatory compliance with innovative financial products, offering users secure, compliant, and profitable investment opportunities that cater to a broader range of participants.
The House Always Wins
In our Protail Thesis, we highlighted how crypto is a speculative paradise for those who identify narratives early and time the market effectively. These traders excel in an environment where trading attention itself becomes a profitable strategy, identifying and exploiting trends before they become widely recognized.
Public perception often suggests that the only way to make significant profits in crypto is to gamble more than one is willing to lose and chase the next new shiny ticker. This high-risk, high-reward mentality fuels the appeal of speculative trading, where timing and luck play crucial roles. However, trading attention is a high-risk game, and every win is another person’s loss. While protail traders often reap significant profits, the majority of people frequently incur substantial losses.
Today, profiting from memecoins, often seen as the quickest way to make money in crypto, is becoming increasingly difficult. As shown in the data below, less than 2% of tokens launched on Pump.fun successfully graduate to Raydium, which means that the vast majority of traders are losing money even before these tokens launch on a DEX.
The issue isn’t with memecoins themselves, but with the crypto casino we live in, which requires massive inflows to counterbalance systematic outflows from rug pulls, platform fees, and MEV. In fact, according to local protail trader based16z, trading bots and launchpads have built a multi-billion dollar industry around Solana memecoins, which clearly highlights the magnitude of capital being sucked out of the system over time.
The Push for Regulatory Clarity
This constant need for new money doesn’t necessarily mean the memecoin meta is dying; it simply highlights its reliance on continuous speculation and reveals how reflexive crypto really is. What’s interesting is that we don’t believe crypto’s reliance on speculation is simply a product of market dynamics, but also a result of regulatory constraints that have stifled innovation. It seems way less risky to create a memecoin with zero utility compared to building something real. As the market continues to be driven by speculation rather than intrinsic value, it becomes clear that for crypto to provide actual utility, regulatory clarity is essential.
The politicization of crypto demonstrates how much the hope for regulatory clarity has captured mindshare. With over $603 million in open bets on Polymarket regarding the winner of the 2024 presidential election, we are now clearly in an era where the distinction between a “pro-crypto” President and an “anti-crypto” President is crucial, despite blockchain’s origins as a neutral technology that grants individual sovereignty beyond political influence.
The politicization of crypto is also apparent in the sheer capital inflows and outflows of the so-called “official” Trump tokens:
- On June 17, 2024, TrumpCoin ($DJT) soared past $320M FDV after Martin Shkreli claimed that he had created the token alongside Barron Trump, promoting it as the official Trump memecoin. The token quickly dropped in value as Barron did not come forward to corroborate Shkreli’s claims. DJT now trades at a mere $5.68M FDV, plummeting by over 98% from ATH after one wallet sold $2 million worth of DJT in one transaction.
- On August 8, 2024, CT was abuzz with rumors of a new official Trump token as Restore the Republic ($RTR) broke $156 million FDV within 4 hours after launch. Almost all liquidity quickly evaporated once Donald Trump Jr. claimed that RTR is not an official Trump project.
Regardless of the outcome of the presidential election, the U.S. stands at a pivotal moment for crypto regulations. While the current lack of regulation has created challenges for businesses, it also presents a clean slate to shape future policies that are favorable toward crypto. RWA protocols and tokenized securities, which bridge traditional finance and blockchain, are especially well-positioned to thrive in this environment. In the next coming years, RWAs could serve as a refreshing alternative for those who are tired of speculating on vaporware.
Unlocking Utility with RWAs
Stablecoins: The Ultimate Onboarding Tool
The immense potential of the RWA market is clearly evidenced by the strong traction stablecoins have achieved. While the crypto community is all about making outsized returns as quickly as possible by aping into volatile assets, stablecoins are still the most widely used asset. A couple data points reveals just how crucial stablecoins really are:
- Market Dominance in Crypto Trading: Stablecoins account for over 80% of the daily volume of the crypto market, while over 75% of DeFi transactions are conducted using stablecoins.
- Institutional Adoption: Institutional investors hold around 30% of the total stablecoin supply, indicating significant institutional interest and trust in these digital assets.
- Global Remittances: Stablecoins facilitate around one third of all global remittances.
- Regulatory Compliance: As of July 2024, 80% of all stablecoins adhere to some form of regulatory regime.
Tether’s remarkable growth is also a strong indicator of the size of the stablecoin market. In the first half of 2024 alone, Tether generated over $5.2 billion in profits, with its exposure to U.S. Treasuries surpassing that of major nations like Germany, the UAE, and Australia. If Tether were a country, it would rank as the 18th largest holder of U.S. debt, underscoring the scale of demand for stable, yield-bearing digital assets.
Stablecoins, with their widespread adoption and significant market presence, will serve as the most effective gateway for onboarding users onto RWAs. Despite their current market capitalization of $164 billion, stablecoins are still only scratching the surface of their potential, especially when considering the $90 trillion total addressable market based on the global money supply. Furthermore, the annual volume of crypto is still at magnitudes lower than Fedwire, ACH, and Visa — there is clearly a lot more room to grow.
The vast opportunities ahead can be unlocked through innovation within RWAs, which can enhance the utility of stablecoins by building a myriad of products around them. As regulatory clarity improves, RWAs will thrive, further expanding the utility and market reach of stablecoins, driving them closer to their full potential.
Lessons Learned from Last Cycle
RWAs are not new in crypto. Centrifuge was one of the first protocols to integrate real-world asset pools with MakerDAO in mid-2021, and later that year they launched their RWA Market by leveraging Aave for liquidity. By October 2022, BlockTower Credit brought $220 million in collateralized lending on-chain through Centrifuge, with MakerDAO providing $150 million in senior capital. Other protocols like Maple Finance, Goldfinch, and TrueFi also emerged during this time, enabling various forms of lending and yield-bearing products using credit pools.
The issue with the RWA protocols from the last cycle, however, was that they took the wrong approach to regulatory compliance, which limited their ability to scale and integrate more broadly within DeFi. Maple Finance, for instance, relied heavily on centralized elements, which exposed users to undue credit risk. Credit pool managers had the power to arbitrarily extend loans and grow excessively large loan books, leading to poor credit management and substantial losses, such as the $54 million of sour debt Maple Finance faced following the FTX fallout. These defaults directly impacted end users, highlighting the risks of crypto lending without proper collateral.
Similarly, Centrifuge struggled to offer competitive yields due to a limited pool of enterprise borrowers and the conservative nature of the collateral (i.e. invoices and accounts receivable) that these borrowers provided. Although Centrifuge introduced structured products with varying risk levels — DROP tokens (senior tranche) offering lower-risk, fixed interest rates around 3.98%, and TIN tokens (junior tranche) offering higher, floating rates up to 18.92% — the higher risk associated with TIN tokens and the low returns from DROP tokens made these investments less attractive compared to other DeFi opportunities.
The Next Wave of RWA Protocols
For RWA protocols to find true PMF, they have to leverage DeFi’s full potential while still adhering to proper regulations. Several teams have already begun to spearhead these efforts, and we’re particularly excited about the following protocols:
Ondo Finance
Ondo Finance offers two compliant, yield-bearing products:
- USDY is backed by short-term U.S. Treasuries and bank demand deposits. Unlike typical stablecoins, USDY generates yield. It can be used as collateral to borrow stablecoins, and if the interest paid for borrowing is lower than the yield earned from USDY, users can generate a profit.
- OUSG provides liquid exposure to short-term U.S. Treasuries and supports mints and redemptions 24/7.
We have been bullish on Ondo because the team’s approach is grounded in regulatory compliance. USDY is offered under a “Regulation S” exemption from the SEC, which means it is available only to non-U.S. individuals or entities, while OUSG is restricted to qualified purchasers. This compliance ensures that Ondo operates within a legal framework, reducing the risk of regulatory challenges that have plagued other RWA protocols.
We also like Ondo because its products are composable with the broader DeFi ecosystem. For instance, on Flux Finance, users can use OUSG to borrow stablecoins, then loop it by using those stablecoins to mint more OUSG, thereby compounding their yield. USDY also launched an integration with Aptos, allowing users to leverage USDY within Aptos’ various DeFi applications.
Ondo has demonstrated steady growth in TVL since its launch, now boasting over $550 million in TVL. Despite their limitations to certain investor types both products have seen significant adoption, with over 5 million and 4.5 million mints, respectively.
MANTRA
MANTRA is an L1 designed for tokenizing RWAs. The MANTRA Token Service allows businesses to structure digital asset offerings that are fully compliant with various regulatory frameworks across different jurisdictions. The MTS is also permissioned, ensuring that only approved entities can create, manage, or transfer tokens on the platform.
The MANTRA team has been able to maintain full regulatory compliance (MANTRA is in the final stages of obtaining a Virtual Asset Regulatory Authority license in Dubai) while delivering real value to the markets it tokenizes, all while offering users compelling yield opportunities:
- In June, MANTRA launched a USDY vault with Ondo Finance, where users who deposit USDC earn rewards from both MANTRA and Ondo, in addition to stable yield from USDY.
- In July, MANTRA announced a project with MAG Dubai to tokenize $500 million worth of luxury real estate, offering an 8% APY in stablecoins and OM tokens.
- In August, MANTRA announced its venture into the aviation industry by partnering with Novus Aviation Capital to tokenize aviation assets, including commercial jet aircraft.
Fortunafi
Fortunafi has developed a suite of yield-bearing products and enabled securities on-chain. Central to its offering is the Reservoir protocol, which features the rUSD stablecoin. Reservoir improves upon previous stablecoins by supporting multi-collateral, backing rUSD with both crypto assets and RWAs. rUSD will also provide passive yield to holders.
In addition, Fortunafi has introduced the Tokenized Asset Protocol, enabling 24/7 on-chain trading of real-world financial instruments. These include:
- Tokenized U.S. Treasuries ($fBILL / $ifBILL): Provides exposure to (i) direct purchases of U.S. Treasury Bills that have a remaining maturity under 12 months or (ii) investments in ETFs that invest in short-term U.S. Treasury Bills, including BIL, SGOV, and SHV.
- Spot Coinbase ($fCOIN / $ifCOIN): Provides liquid exposure to Coinbase ($COIN) shares.
- Spot Robinhood ($fHOOD / $ifHOOD): Offers liquid exposure to Robinhood ($HOOD) shares.
- Equity Index ($fSPQQQ / $ifSPQQQ): A 50–50 mix of liquid exposure to Nasdaq ($QQQ) and S&P 500 ($SPY) ETFs.
- Hilbert V1 Fund (fHV1 / ifHV1): Provides exposure to an institutional quantitative crypto market-neutral strategy with zero correlation to BTC.
The main reason that we are excited about Fortunafi is that it’s able to offer a unique blend of stability, compliance, and actual utility. By providing tokenized securities and a robust stablecoin protocol, Fortunafi is enabling users to benefit from real-world yields while maintaining the flexibility of DeFi. As Fortunafi matures and captures more market share, users can continue to diversify and hedge their crypto portfolios with traditional financial instruments.
Conclusion
The evolution of RWA protocols marks a significant shift in crypto, offering a more sustainable and value-driven approach compared to the often purely speculative and zero-sum dynamics of this market. Unlike the cyclical and reflexive nature of low float/high FDV governance tokens and cabal-driven memecoins, RWAs and their related protocols inherently tend to be positive-sum, generating real revenue through real-world assets. This growth isn’t dependent on constant inflows or the Ponzi-like structures that have plagued other areas of crypto. Instead, RWAs benefit from underlying value growth, ensuring that even in bear markets, assets like stablecoins can continue to grow and offer returns.
Protocols like Ondo, MANTRA, and Fortunafi exemplify this shift, each addressing the shortcomings of their predecessors by integrating regulatory compliance, real utility, and innovative financial products. As the crypto market continues to mature and regulatory clarity improves, RWAs can continue to provide robust, secure, and compliant investment opportunities. In doing so, crypto can move beyond pure speculation to offer tangible, positive-sum benefits that contribute to a more sustainable future for our industry.
