PRIME: A framework for evaluating RWA projects
Last month, we released our initial report on real-world asset (RWA) tokens, addressing a comprehensive range of questions:
- What are RWAs and what are not?
- How do RWAs provide advantages over traditional financial systems?
- Which RWAs are onchain now and what’s on the horizon?
- What might the RWA market look like by 2030?
- What are the main challenges to global adoption?
- Which areas are ripe for investment?
If you’re new to RWAs, I recommend starting with that report. In this follow-up, we delve deeper into Question #6, offering concrete guidelines for evaluating RWA projects.
The RWA space isn’t like other crypto sectors. Things can get very complicated when linking crypto rails to offchain assets and their established regulatory frameworks. There are a lot of obstacles — both technical and regulatory — that must be overcome for value to flow in. A lot more than your typical blockchain project that operates “safely” within a crypto-native space on established crypto rails.
To see billions in value flow into various RWA tokens beyond stablecoins, these projects need to overcome a number of regulatory and technical obstacles currently limiting accessibility and utility of their tokens, much like fiat-backed stablecoins did since they were first issued a decade ago.
Given these challenges, it’s not surprising that, as of now, non-stablecoin RWA projects only account for about 3% of the total RWA sector. And that small market share is mostly capitalized by a small number of institutions and wealthy individuals.
How do we go beyond this?
After reviewing dozens of projects in this space, I see that many favorable conditions must converge to see these projects gain meaningful market share. And only a handful of these projects look well-positioned for growth in the next few years, primarily those focused on tokenizing securities, commodities, and asset-based finance. However, there are a few experimental projects tokenizing real estate and high-value collectibles that are also intriguing.
What sets these projects apart is that they offer some combination of Accessibility, Utility, and Safety. How these are achieved, and to what degree each matters, is project-specific. Some projects are performing better than others because of their affiliation with trusted world-class institutions (e.g., BlackRock’s BUIDL). Others look more promising than others because they are more retail accessible (e.g., Ondo’s USDY). Others stand out because tokenization infrastructure offers significant advantages over traditional infrastructure for certain purposes (e.g., Centrifuge Pools).
While accessibility, utility, and safety are consumer priorities in this space, there are specific properties that give rise to those qualities, which I refer to with the acronym PRIME:
- Permissionlessness: E.g., retail availability; global access
- Reliability: E.g., reliability of the issuing organization or protocol and the risk profile of the yield it generates
- Integrated utility: E.g., integration into crypto trading and DeFi; ease of onchain diversification by crypto-natives; real advantages to crypto rails over traditional systems
- Maintenance-minimization: E.g., low-cost and uncomplicated maintenance; digital representation and storage for offchain assets
- Easy UX: E.g., easy of redemption; easy of yield; ease of transfer
Note that these are not mutually exclusive (e.g., reliability may be associated with permissions). And, the contribution of each property to an RWA project’s potential depends on the asset category and target consumer. As a rule of thumb, the more properties a project meets, the better its prospects. A weighted average score across these properties can serve as a heuristic for evaluating different RWA projects.
Now, let’s delve into each property and examine examples of projects that meet (or fail to meet) each property:
Permissionlessness
Right now, most non-stablecoin RWAs are generally highly permissioned, requiring KYC/AML compliance, large ticket sizes, accreditations, or geographical restrictions, and they can only be transferred on proprietary platforms and only among other pre-approved investors. In effect, they are typically accessible and used only by institutions and wealthy individuals, and often confined to specific groups and regions — not to mention, this is a subset of the subset of an already small circle of crypto-adopters. That’s a small addressable market.
In contrast, look at stablecoins. Anyone can buy and trade them on permissionless secondary markets, anywhere. That’s a huge addressable market.
Retail availability
To get some perspective on the importance of retail contribution in RWAs, let’s take a historical look at estimated retail ownership of the top stablecoin supplies as a proxy:
Take notice here that the rise of retail ownership — especially pronounced for USDT — coincided with the massive rise of stablecoin supply around mid-2019 through 2021. It was around that time when retail flocked to CEXs to buy stablecoins and trade them for various other tokens.
Now, retail owns about 50% of both USDT and USDC. In other words, if we exclude retail, as defined here, their supplies would be cut in half.
While retail accessibility is an easier problem to solve where the US SEC does not have direct oversight (e.g., currencies, commodities), there are projects squarely in the securities space finding workarounds that allow for greater retail accessibility, and the benefits are becoming evident.
Case study: Ondo Finance’s OUSG vs. USDY
Ondo Finance’s two core products, OUSG and USDY, are a good case study for demonstrating the importance of less-permissioned access to retail, as they hold issuer constant while the products differ on retail accessibility.
OUSG targets institutions and wealthy individuals while USDY is their retail-friendly alternative. They are now both available in accumulating and rebasing versions. Although KYC/AML compliance is required to mint both OUSG and USDY (note: also true for USDC while USDT is solely issued by Tether), one major difference is that USDY can be traded permissionlessly on DEXs like Orca on Solana (like USDC and USDT).
Of the top-5 products tokenizing US securities, USDY is the only one that offers live trading pairs on popular DEXs, making it the most retail-friendly major player in this space. Among this list, it’s also available on the most blockchains including Ethereum, Solana, Sui, and Aptos.
Despite USDY launching half a year after OUSG, it’s picked up a lot of momentum this year and has already flipped OUSG in supply. Together, Ondo Finance’s assets under management (AUM) is over $500 billion, making it the #1 tokenized treasury protocol in terms of market share, and #2 in the entire non-stablecoin RWA space (after Tether’s xAUT).
Just three months ago, USDY supply was in the order of $3.5 million while OUSG was about $105 million, or 30x greater. Now, USDY supply is nearly two orders of magnitude larger than then, while OUSG supply has roughly doubled.
At this rate, we could see USDY overtake Franklin Templeton’s BENJI this year. BENJI was one of the first tokenized treasury products and, until recently, the category leader. It has seen relatively little growth over the past year, and is now at a supply of $357 million.
While there are obviously many factors at play, I think one of the main drivers behind USDY’s momentum is its less-permissioned access to retail. USDY is currently the only tokenized treasury that can be minted, deployed on major DEXs and CEXs (currently offered on Bybit), and bought and traded by retail for other tokens. Meaning, it is starting to share some of the major demand drivers of stablecoins.
Global access
The US is the largest cryptocurrency market in the world. A study by Chainalysis estimated that nearly a quarter of all cryptocurrency value received could be accounted for by North America.
If we look at the sheer number of transactions of USDT and USDC, around 45–50% happens during Western market hours.
Similarly, Arcane Research found that as much as 43% of Bitcoin volume occurred during US market hours.
The point is that strictly banning the majority of Americans from trading an RWA token means excluding a massive share of potential volumes and transactions. But, that is the state of non-stablecoin RWA tokens today.
So, when evaluating non-stablecoin RWA projects and estimating their future volumes or usability, it’s crucial to consider the state of restrictions imposed by US securities regulations on the largest crypto market in the world. The extent to which US market activity will be cut off will be directly related to the nature of the underlying asset and how it is being used.
Reliability
Another major consideration is the reliability of the issuer. Currently, RWA tokens are issued in a predominantly centralized way by institutions. This is because there is no established way to conduct identity verification and compliance checks in a decentralized manner (though some early projects are working on this, see E Money).
If the issuing institution has a strong reputation, buyers will have more trust in its tokenization process and the risk profile of its token and its source of yield.
Perhaps the best example of this is BlackRock’s BUIDL.
BlackRock partnered with Securitize to launch their first tokenized asset fund BUIDL on the Ethereum blockchain in March 2024.Within just six weeks, BUIDL captured nearly a third of the $1.3 billion tokenized treasury market, with $380 million in tokenized treasuries, taking the top spot from Franklin Templeton’s BENJI. BUIDL now boasts $462 million in assets under management (AUM), while BENJI holds $357 million AUM.
Keep in mind that BENJI is still the second largest tokenized treasury product in terms of AUM, meaning that two of the biggest tokenized treasury products are fully centralized, issued by two of the largest asset managers in the world.
I think the main reason for this is simple: Customers trust these institutions, their tokenization process, and their regulatory compliance. The “reliability effect” is particularly pronounced for BUIDL because BlackRock is the largest asset manager in the world, with over $10 trillion in AUM.
Integrated utility
Returning to Ondo’s USDY, it stands out for its integration into crypto and DeFi. Among the top-5 tokenized treasury products, USDY is live on the most chains, it can be traded on major DEXs and CEXs on those chains, and it even has a live governance token. That gives USDY three major utilities that other cryptocurrencies don’t have combined:
- Crypto trading: Crypto is still a fairly isolated world where arguably the main utility is trading tokens to try to sell higher or earn yield. Stablecoins also derive a great deal of their utility and demand due to the numerous trading pairs denominated against them and the liquidity available. While USDY is far from this pervasiveness, I see it gradually permeating into more exchanges and DeFi.
- Yield: Another major activity in crypto is seeking out yield opportunities. Unlike stablecoins, tokenized treasuries like USDY offer this.
- Onchain diversification: RWAs like USDY offer an onchain diversification strategy for crypto-natives. In the crypto market, assets tend to be highly volatile and highly correlated. Now, without offboarding crypto rails, crypto-natives have the option to diversify into non-yield-bearing stables or yield-bearing USDY.
On top of that, the use of a governance token makes Ondo a more crypto-native product, appealing to crypto users who care about decentralization and community.
The utility of crypto-trading plus yield on a token pegged to the dollar should not be understated. If it sounds familiar, you may be thinking of Ethena’s USDe, which has skyrocketed in supply to over $3 billion just four months after its public launch, surpassing Solana’s total stablecoin supply, and exemplifying just how much demand there is for a stablecoin (or stablecoin-like product) with yield.
USDY vs. BENJI
BENJI is also somewhat retail friendly due to its minimum $20 investment. However, there are a number of major limitations that could explain why it is not growing as rapidly as USDY:
- Can buy it only on its proprietary mobile app
- Available only to US persons
- Can only be transferred in the mobile app
- No trading pairs denominated in BENJI
- Only available on Stellar and Polygon
In short, while BENJI is also yield-bearing, it lacks in terms of integrated utility.
Experimental RWA categories starting to demonstrate integrated utility:
- Asset-based finance: Centrifuge pool tranche tokens vs. costly and slow traditional asset-backed finance
- US real estate: Villaso’s USH token vs. US real estate REITs/ETFs
- Gold: Paxos PAXG and Tether’s XAUt tokens vs. gold ETFs/certificates
Maintenance-minimization
Ease of storage and low-cost maintenance of the represented offchain asset is important for RWA usability and feasibility. The nature of the asset significantly impacts the complexity and cost associated with its maintenance. For example, tokenizing physical goods like watches or fine wine requires substantial resources for storage and preservation (e.g., climate controlled environments, large vaults, expensive security measures, and insurance). These factors contribute to high maintenance costs, which are a concern to the business model for these projects.
In contrast, US treasuries or home equity investments (HEIs) or other digital offchain assets are generally easier and less costly to maintain. US treasuries, being government securities, are inherently low-maintenance. They are stored electronically in existing secure systems that require minimal physical space or physical securities compared to large physical assets. The reliability and established infrastructure of these systems helps reduce maintenance costs.
Similarly, HEIs involve digital ownership records, which simplifies management and reduces the risk of document loss or damage.
Projects that effectively minimize maintenance challenges not only reduce operational costs but also enhance the overall efficiency, scalability, and security of their offerings.
Easy UX
Crypto has a UX problem. It is still too hard and technical to attract mainstream usage. Hence, the ongoing push for chain abstraction and account abstraction. Ease is the #1 rule used by behavioral scientists to get people to do something you want them to do, and has been proven effective in a variety of contexts in business, policy design, and intervention design. I believe it’s equally important for the mass adoption of RWA tokens. Here are some primary examples:
Ease of redemption
It’s important to remember that while RWA tokens may be fractionalized and liquid, their underlying asset may not be. This discrepancy can pose significant challenges to maintaining market stability and investor confidence. No one in their right mind would put significant investment into an RWA token that cannot be easily redeemed.
Take for example the depegging of Tangible’s “Real USD” (USDR). The immediate trigger for the depegging was a spike in redemption requests for DAI, which depleted USDR’s liquid reserves. This left USDR unable to meet further redemption demands, causing its value to drop from peg sharply.
The fundamental issue was illiquid collateral combined. USDR was backed by tokenized real estate, with special purpose vehicles (SPVs) actually managing and maintaining the physical properties. It While USDR was liquid, its collateral was highly illiquid — not to mention, high-maintenance.
The inability to quickly liquidate these real estate assets to meet redemption demand led to a crisis of confidence among investors, triggering a bank run and exacerbating the depegging — not so dissimilar to what happened with Terra’s UST.
In contrast, compare the current market leaders: USD, US treasuries, and gold. These all present more liquid alternatives. Currencies, especially major ones like USD, are highly liquid and can be exchanged or traded in vast amounts globally. US treasuries, as government-backed securities, have a deeply liquid and active market with large daily trading volumes. Similarly, gold is one of the most liquid investments available. It can be quickly and easily converted to cash due to its universal demand and established infrastructure.
Ease of yield
Earning yield on RWAs should be as easy as possible. For example, rebasing yield-bearing RWA tokens like Ondo’s USDY and Mountain Protocol’s USDM are prime examples where the token auto-rebases while keeping pegged at $1. This means that all accrued interest is automatically distributed in the form of additional tokens all valued at a fixed $1 instead of requiring manual redemption for yield or using accumulated value where there’s an added layer of mental and operational complexities of adjusting for non-USD pegged value.
Ease of transfer
Going back to the USDY vs. BENJI example, there is a huge difference in the UX of an RWA token that is permissionlessly transferable across multiple chains (USDY on Ethereum, Solana, Sui, and Aptos) versus a token with strict transfer restrictions (BENJI only transferable between approved parties on its mobile app). Just imagine if stablecoins couldn’t move about freely within and across multiple blockchains — we’d hardly see any usage like we do today.
The PRIME scale
Now that we have explored the parameters of the PRIME scale, let’s see how it can be practically applied to evaluate RWA projects.
How to use it
1. DYOR
- The most important step is to first do research into the project to get a sense of how important each component in the PRIME scale is for that specific project.
2. Assign weights
- Based on your findings, assign a percentage weight to each property.
- The total of all weights should add up to 100%.
3. Assign ratings
- Based on your findings, assign a rating to each property on the scale.
- Ratings range from 1 (Very Low) to 5 (Very High).
- Mark the rating for each property in the respective column along with notes to keep track of your rationale.
4. Calculate the weighted score
- Multiply the rating for each property by its assigned weight to get the weighted score.
- Sum the weighted scores to calculate the overall score for the project (out of a maximum score of 5).
Learn more about Inception Capital at our website
Subscribe to our Medium Publication
Follow us on X @_inceptioncap
Disclaimer: This post is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice, or investment recommendations. This post reflects the current opinions of the authors and does not necessarily reflect the opinions of Inception Capital, its affiliates, or individuals associated with Inception Capital. The opinions reflected herein are subject to change without being updated.
