Recently, the cryptocurrency industry has been severely regulated by the US SEC, with top centralized exchanges being investigated and a large number of Proof of Stake (PoS) cryptocurrencies being classified as securities, causing a panic. However, at this time, certain primitive technologies and concepts are being re-examined, one being Proof of Work (PoW), and the other being Real World Assets (RWA). Cryptocurrencies based on PoW are classified as commodities, complying with existing regulatory rules; RWAs map physical assets from traditional markets onto the blockchain in token form, betting on future compliance narratives. Both old and new concepts have received a high level of market attention.
Reasons for the Early Failure of RWAs
Looking back, as early as the 2017 Ethereum ICO token issuance frenzy, many projects proposed RWAs (then known as asset tokenization). For example, the equity of real estate could be tokenized, and investors could purchase corresponding RWA tokens to receive investment dividends. These projects were popular among investors at the time, mainly because compared to purely virtual tokens with no practical applications, more people believed that cryptocurrencies tied to physical assets were more valuable or reassuring.
This is also one of the key factors why RWAs are able to garner market attention again, especially for new users entering the cryptocurrency industry recently. However, in reality, almost no RWA projects have achieved the expected success in the past. The main reasons for this are as follows:
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At that time, blockchain was a completely new concept. Cryptography and tokens were not yet trusted technologies among the general public, and the management parties of real assets lacked the motivation to put large-scale assets on the chain, resulting in widespread skepticism or a wait-and-see attitude.
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The blockchain infrastructure at that time was not mature. The exploration of decentralized application platforms was still ongoing, and even Ethereum, which currently has the second largest market capitalization, was constantly doubted about its prospects in the past. Therefore, RWA projects at that time almost needed to create a separate chain for each category of assets, increasing the difficulty of implementing RWAs.
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The centralized management of off-chain institutions. Before being put on the chain, RWAs needed off-chain institutions as guarantors, and the parties involved in the transactions had to rely on the credit endorsement of these institutions, which contradicted the pursuit of the crypto world.
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Difficulty in risk management. The maintenance of underlying assets, asset tokenization, distribution of profits, and other aspects all involve risk management. Once a default occurs, without any relevant RWA laws and regulations, the risk of asset loss is significant.
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Different asset attributes face different problems when put on the chain. Not all real assets can have increased liquidity by being put on the chain; instead, the cost of compliance and security maintenance caused by putting certain assets on the chain can far outweigh the benefits of liquidity.
Different RWA Assets
It was not until Ethereum proved itself as a decentralized application platform and the emergence of DeFi that the foundation for the current RWA narrative was laid. In particular, when MakerDAO, a leading DeFi project, turned to RWA, it attracted industry attention. MakerDAO’s approach is to buy a large amount of US Treasury bonds and use them as RWA on its chain.
US Treasury bonds belong to the category of debt assets and have significant advantages in terms of liquidity, standardization, scalability, and security compared to other traditional real-world assets. In addition to debt assets, other assets that are suitable for RWA currently include gold, real estate, loans, and equity assets. One type of asset that the RWA market has overlooked is energy-related assets.
The most famous energy-related RWA asset is the Petro, which was announced by Venezuela in December 2017 and is backed by the country’s oil reserves. Oil has significant advantages over other RWA assets, but it ultimately did not succeed. On the other hand, another type of RWA that proved to be successful through the proof-of-work (PoW) mechanism, where energy consumption is used as proof of reserve, is Bitcoin.
The Relationship Between RWA and PoW
How can PoW, the consensus mechanism of Bitcoin, become RWA?
In reality, behind PoW is real electricity energy assets, and the consumed electricity is issued on the chain in the form of tokens. The process of converting electricity into tokens is decentralized and market-based, and it is a direct process without any intermediaries. Furthermore, the asset maintenance and distribution are completely determined by code and mathematics. It can be said that Bitcoin is not only the world’s first decentralized electronic currency that prevents double spending, but also the first RWA that tokenizes energy on the chain.
From the perspective of RWA, what are the characteristics of energy PoW?
Energy has significant advantages over other traditional real-world assets in terms of liquidity, standardization, scalability, and security. Especially in terms of liquidity, asset standardization, and scalability, it has reached the extreme, as every person in the modern world relies on energy for their livelihood.
The process of tokenizing energy consumption as assets on the chain is PoW. It relies on machines to calculate computational power. Its characteristic is that it requires pre-designing the economic model of the chain before energy is tokenized. Just like the process of energy consumption being tokenized on the Bitcoin chain, the total supply of tokens is initially set at 21 million, and the energy consumption is dynamically adjusted every two weeks to regulate the difficulty of the mainnet’s total computational power. Additionally, the proof of energy consumption undergoes a halving cycle every four years.
The Ultimate Goal of RWA is PoW-based Tokens
As the most liquid and largest asset in the economic system, if we consider the PoW-based token as a Real-World Asset (RWA), then the token system becomes an optimal RWA system. By transferring PoW tokens, we are essentially transferring real-world assets, and you can exchange these assets for other assets available on the market. This PoW-based RWA product is a token that serves as a medium of exchange within the economy.
History and economics have shown us that monetary exchange is much more mature and efficient than barter exchange. Therefore, instead of putting real-world assets on the blockchain for exchange, when it is unavoidable for assets to be centrally managed, it is better to directly use token circulation and exchange to replace the on-chain circulation of real-world assets. So it can be said that the ultimate form of RWA is PoW-based tokens.
From the perspective of RWA, the energy consumption of the entire Bitcoin network is dynamically adjusted and limited. It is expected that by the year 2140, the energy consumption of Bitcoin mining will end, and at that time, the total value of Bitcoin will be based on the total energy consumed throughout its history. If technological advancements have been made by then and the cost of energy consumption is significantly reduced, and since Bitcoin will no longer be mined and has no marginal cost in the market, the overall value of Bitcoin will decrease without considering other factors. This will inevitably lead to a market repositioning of Bitcoin, which is likely to be defined purely as a collectible, just like the current market for collecting ancient coins.
Therefore, it is necessary to design the energy consumption of PoW in a comprehensive manner. For example, simply changing the limited quantity to unlimited can avoid the problem of the disappearance of marginal costs and the decrease in asset value due to the reduction in energy costs after energy proof ends. For example, Dogecoin, which consumes energy through PoW but has no supply limit, does not have this problem. From this perspective, it means that Dogecoin is more suitable for circulation as a token than Bitcoin from a sustainability perspective.
In addition to the design of the quantity of energy proof, there are other factors to consider such as the dynamic adjustment period of energy consumption, the divisibility of energy proof, privacy, fair distribution, liquidity, and supply regulation. Bitcoin and Dogecoin, apart from the difference in quantity, share the same problems as tokens: the lack of a supply regulation mechanism. This leads to a high volatility in the value of assets supported by energy.
So, what kind of design is optimal from the perspective of energy tokens? Answering this question will involve considering more factors, and the author will provide a detailed analysis in future articles.
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