Is there too much hype? RWA isn't so easy to do

RWA (Real World Asset) is undoubtedly one of the hottest concepts in the crypto industry right now.

As a pioneer representative, Maker has opened up the yield window for U.S. bonds and eaten the dividends of the era of the high-interest cycle, which in turn amplified the market demand for DAI, and finally pushed up its market value when the market went down. Since then, projects such as Canto and Frax Finance have also achieved some success through similar strategies, with the former doubling its currency price within a month, and the latter just launching sFRAX with V3 to grow at an impressive rate.

So, is the RWA concept really so “simple and easy to use” that it always improves project fundamentals steadily and quickly? Two recent lessons from the market tell us that it may not be that simple.

Goldfinch Bad Debt Incident

One is Goldfinch’s bad debt incident.

Goldfinch is positioned as a decentralized lending protocol. Since 2021, Goldfinch has closed three rounds of funding totaling $37 million ($1 million, $11 million, $25 million), the last two of which were led by a16z.

Unlike traditional lending protocols such as Aave and Compound, Goldfinch primarily serves real-world commercial credit needs, and its general operating model can be divided into three layers.

As an investor, users can inject funds (usually USDC) into different thematic liquidity pools managed by different “borrowers”, and then earn interest income (the income comes from real business profits, which is generally higher than the normal level of DeFi);

“Borrowers” are generally professional financial institutions from all over the world, which can allocate funds in the liquidity pools under management to real-world “businesses” that have needs based on their business experience;

After receiving the funds, the “enterprise” will invest in the development of its own business, and a part of the proceeds will be used to repay the loan interest to the “user” on a regular basis.

Throughout the process, Goldfinch will review the qualifications of the “borrower” and bind the details of all the terms of the loan to “guarantee” (somewhat ironically) the safety of the funds.

However, the unexpected happened. On October 7, Goldfinch disclosed through a governance forum that there was an unexpected situation in the liquidity pool managed by “borrower” Stratos, which has a total size of $20 million and an estimated loss of up to $7 million.

Stratos is a financial institution with more than 10 years of experience in the credit business, and is one of Goldfinch’s investors, so it seems to be quite “reliable” from the perspective of qualifications, but it is clear that Goldfinch still underestimates the risks.

According to the disclosure, Stratos allocated $5 million of the $20 million to a U.S. real estate leasing company called REZI and another $2 million to a company called POKT (the business is unknown, and Goldfinch said he doesn’t know what the money was used for…). ), both companies have ceased to pay interest, so Goldfinch has written down the two deposits as 0.

In fact, this isn’t the first time Goldfinch has had bad debts. In August of this year, Goldfinch disclosed that the $5 million it lent to Tugenden, an African motorcycle rental company, may not be able to recover the principal because Tugenden concealed the flow of funds between its internal subsidiaries and blindly expanded its business, resulting in large losses.

The spate of bad debts has taken a serious toll on the confidence of the Goldfinch community, with many community members questioning the protocol’s transparency and ability to review at the bottom of the disclosure page on the Stratos incident.

USDR de-anchoring event

On October 11th, the real estate industry (EMMM, this wave belongs to the double kill… USDR, the stablecoin that supports it, is starting to see a significant de-pegging, and the discount has not eased so far, trading at just $0.515. Based on its 45 million circulating size, the total loss of holders is close to $22 million.

USDR is developed by Tangible on the Polygon chain and can be minted by staking DAI and Tangible native token TNGBL, which has a 1:1 staking ratio and TNGBL is limited to no more than 10% due to risk considerations.

The emphasis on “physical real estate support” is due to the fact that Tangible will use the vast majority (50% - 80%) of the collateral assets to invest in physical property in the UK (minting the corresponding ERC-721 certificate after purchase) and provide additional income to USDR holders through housing rentals, thereby increasing the demand for USDR and thus connecting the huge real estate market to the crypto world.

Taking into account the potential redemption needs of users, Tangible will also reserve a certain amount of DAI and TNGBL in the collateral assets, with the reserved size of DAI ranging from 10% to 50% and the reserved size of TNGBL being 10%.

However, Tangible is clearly underestimating the magnitude of redemption demand in the event of a run. In the early morning of October 11, 11.87 million DAI was still reserved in the USDR treasury, but within 24 hours, users redeemed tens of millions of USDR and exchanged it for DAI, TNGBL and other more liquid assets for selling, which also led to the price of TNGBL halved, indirectly linked to the shrinkage of this part of the collateral assets, further aggravating the de-anchoring situation.

After the incident, Tangible has announced a three-step disposal plan:

First, it is emphasized that USDR still has an 84% collateral ratio;

The second is to tokenize the property they own (if there is no demand, they will consider liquidating the property directly);

**The third is to redeem USDR in the form of “stablecoin + real estate token + locked TNGBL”. **

According to overseas KOL Wismerhill’s estimates, USDR holders are expected to be returned:

$0.052 worth of stablecoins;

$0.78 worth of real estate tokens;

$0.168 worth of locked TNGBL.

All in all, the payout may be able to give the holder a “blood return”, but USDR is destined to be a thing of the past, and this attempt at RWA, which focuses on real estate, ultimately ended in failure.

Lessons learned

From the success of protocols such as Maker, as well as the failures of Goldfinch and USDR, we may be able to draw the following lessons.

The first is the selection of off-chain asset classes. Taking into account factors such as risk rating, pricing clarity, and liquidity conditions, U.S. bonds remain the only fully validated asset class today, and the relative disadvantages of non-standard assets such as real estate and corporate loans can bring additional friction to the entire business process, which in turn hinders its large-scale adoption.

The second is the liquidity unbundling of off-chain assets and on-chain tokens. Analyst Tom Wan said that Tangible could have minted the on-chain credentials representing real estate in the form of ERC-20, but chose to use the relatively “solidified” ERC-721 form, which made the agreement empty of the collateral after the DAI reserve was depleted, but the agreement could not continue to redeem the secured property. Real estate is illiquid, but Tangible could have improved the situation on-chain with additional design.

The third is the review and supervision of off-chain assets. Goldfinch’s two consecutive bad debt incidents have exposed its inability to manage the true execution status of the off-chain, even if it activated a special review role within the protocol, and chose a relatively credible own investor in the management of “borrowers”, but in the end it still failed to avoid the abuse of funds.

Fourth, the collection of off-chain bad debts. The borderless nature of crypto gives on-chain protocols the freedom to conduct business regardless of geography (except for regulatory factors), but when problems arise, it also means that it is difficult for protocols to carry out bad debt collection in specific areas, especially in those regions where laws and regulations are not yet sound, and the practical difficulty will only be infinitely magnified. Taking Goldfinch’s earliest bad debt incident as an example, can you imagine a couple of New York white-collar workers running to Uganda to ask for money from those who rent motorcycles…

All in all, RWA has brought imagination to the incremental market for Crypto, but as of now, it seems that only the “brainless stud” U.S. bond path can work. However, the attractiveness of US Treasuries is closely related to macro monetary policy, and if yields start to fall as the former turns around, there will be a question mark over whether the road will remain smooth.

At that point, expectations around RWAs may shift to other asset classes, which will require practitioners to face the challenges and forge new paths.