Amid the RWA craze, will crypto become a new financial system or become a vassal of tradition?

Will Cryptocurrency Tokenize Traditional Finance, or Will Traditional Finance Traditionalize Cryptocurrency?

The financial industry has been experiencing a transformation in business models. Over the decades, we have witnessed the rise of alternative investments (such as private equity, venture capital, and especially private credit). Private credit has become one of the fastest-growing sectors in finance.

Mergers and acquisitions star Ken Moelis recently lamented the decline of M&A bankers. Today, alternative hybrid financing structures are more profitable than buying and selling companies.

For investors like us who focus on cryptocurrency, alternative financing can completely include on-chain structured products and tokenization elements of capital structures. However, it would be a great pity if this opportunity is ultimately seized by unemployed M&A bankers rather than profitable crypto project founders.

So far, the only products truly accepted by the traditional financial system are stablecoins and Bitcoin. DeFi has not truly taken off outside the crypto realm, and its performance remains highly tied to trading volume.

One future development direction is bottom-up, constructing a fully on-chain capital structure (debt, equity, and tokenized assets between the two). Traditional finance loves yield and structured products. Although many of us previously gained thousandfold returns from hyped concepts, the development of institutionalized on-chain finance will require us to adapt to new challenges.

We Once Dismissed This

For a long time, we have been uninterested in real-world assets (RWA). In the past, we viewed it as an outdated "reification" thinking—merely wrapping existing off-chain assets in a digital shell, still subject to traditional judicial systems fundamentally different from "code is law". But now, we are re-examining this seemingly unimaginative yet highly practical opportunity.

Limitations of On-Chain Private Credit

Tokenizing private credit on-chain essentially just opens new financing channels for borrowers. Platforms like Maple Finance have indeed pushed this process forward. However, once capital is impaired or defaults occur, lenders can only entirely rely on existing judicial systems (and platform teams like Maple) to recover funds. More troublingly, such debts are often issued in emerging or frontier markets with weak rule of law. Therefore, it is far from the perfect solution its proponents advocate.

Adverse Selection Dilemma

More worrying is the adverse selection problem. On-chain private credit targeting crypto retail investors often has questionable asset quality. Those opportunities with the best risk-adjusted returns will always be monopolized by giants like Apollo and Blackstone, never flowing into the blockchain market.

Unique Advantages of Native On-Chain Businesses

Fortunately, there are indeed some native on-chain businesses that are currently profitable and have not yet been touched by traditional institutions. These projects now need to innovate boldly in financing methods based on their on-chain revenue generation characteristics.

As for US Treasury tokenization? It's merely a seasoning for DeFi strategies or a shortcut for crypto native users to diversify assets while circumventing fiat entry/exit restrictions, with very limited substantive significance.

However, the key issue is: Can this model be open to unlicensed capital and promote competition? Payment companies are unlikely to give up their moats and allow external institutions to lend to their merchants. This may be the entrepreneurial opportunity for on-chain native crypto commerce and unlicensed capital solutions.

Differential Voting Rights

If a company's equity value is entirely derived from on-chain revenue (i.e., no other income sources), then tokenization of equity becomes inevitable. Initially, it may not adopt a standard equity form but can use a hybrid structure between debt and equity.

Recently, Backed.fi's launch of a tokenized Coinbase stock has attracted attention. The solution involves a Swiss custodian holding the underlying stock, allowing cash redemption for users who complete KYC. The token itself is an ERC-20 standard, enjoying the composability advantages of DeFi. However, this design only benefits secondary market participants, with Coinbase as the issuer gaining no substantial benefits—neither able to raise funds on-chain nor achieve innovative equity tool applications.

Although equity tokenization (and other assets) has recently become a hot concept, truly exciting cases have yet to emerge. We expect such innovations will be driven by platforms with extensive distribution channels that can benefit from blockchain settlement, such as Robinhood.

Another development direction for equity tokenization is to create on-chain giants that can obtain near-unlimited financing at extremely low costs through on-chain revenue, proving to traditional markets that half-baked solutions won't work—either fully tokenize all revenues to become a completely on-chain organization or continue to remain on Nasdaq.

Regardless, equity tokenization must deliver new functions or change equity risk characteristics: Can fully tokenized companies reduce capital costs due to real-time on-chain profit and loss statements? Can they trigger conditional equity issuance through on-chain oracles, changing current At-The-Market (ATM) mechanisms? Can employee equity incentives be unlocked based on on-chain milestones rather than time? Can companies collect all transaction fees from their own stock trading instead of surrendering them to brokers?

Conclusion

We always face two development paths: top-down and bottom-up. As investors, we always pursue the latter, but increasingly more things in the crypto field are being realized through the former.

Whether it's equity tokenization, credit instruments, or revenue-based structured products, the core issue remains consistent: Can new capital formation methods be opened? Can incremental functions be created for financial instruments? Can these innovations reduce companies' capital costs?

Just as traditional venture capital arbitrages between private and public markets (the trend is to maintain privatization rather than go public), we predict that the binary opposition between on-chain and off-chain capital will ultimately disappear—in the future, only superior financial solutions will exist. We might be wrong in our judgment; on-chain credit linked to revenue may not necessarily reduce capital costs (and might even be higher), but in any case, a true price discovery mechanism has not yet formed. To achieve this goal, we need to go through the maturation process of on-chain capital markets, require large-scale financing practices, and need new market participants to join.

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