Introduction
This article focuses on stablecoins backed by Real-World Assets (RWA) other than fiat currencies. Henceforth, the term RWA excludes fiat currencies.
Stablecoins, a unique subset of cryptocurrencies, aim to mitigate the volatility inherent in traditional cryptocurrencies like Bitcoin. They provide stability by pegging their value to an underlying asset, typically fiat currency (e.g. USD, EUR, SGD), commodities (e.g. gold), or cryptocurrencies (e.g. BTC, ETH). Fiat-backed stablecoins, like Tether (USDT) or USD Coin (USDC), rely on reserves of fiat currency to guarantee their value. However, the value of fiat currencies are susceptible to market sentiments and fluctuations as well, which can stem from inflation and changes in monetary policies.
Stablecoins backed by RWA offer a paradigm shift within the stablecoin ecosystem. Unlike fiat-backed counterparts, RWA-backed stablecoins derive stability from assets of tangible and inherent value, such as real estate, precious metals, or financial instruments like U.S. Treasury securities. This reliance on RWA establishes a robust foundation for stability, distinguishing RWA-backed stablecoins through their transparency and direct linkage between the digital and physical worlds.
Key Advantages
RWA-backed stablecoins mark a significant advancement in overcoming limitations observed in fiat-backed counterparts within the cryptocurrency domain.
Anchored to tangible assets like real estate or commodities, they offer unparalleled transparency and reliability, fostering trust among users and investors. With fiat-backed stablecoins, investors would have to trust that these stablecoin issuers have the cash that they claim even if they did provide proof of reserves. However, with RWA-backed stablecoins, investors would be able to check the value of such assets that are backing the stablecoins to verify that the stablecoin issuer has enough collateral when issuing RWA-backed stablecoins. Furthermore, RWA owners are separate from the stablecoin issuers and thus they will keep each other in check, ensuring that the RWA’s value is as claimed and stablecoin issuers do not commit fraud or money laundering.
Additionally, the inherent value of these assets establishes a more secure footing for RWA-backed stablecoins, reducing susceptibility to traditional currency volatility and providing resilience during economic uncertainty.
Beyond transparency and stability, RWA-backed stablecoins aim for regulatory compliance, widening accessibility to retail investors and regions with limited access to fiat-backed stablecoins.
By embracing a diversified asset base, they mitigate risks linked to dependency on a single asset or currency, promoting a more resilient ecosystem. Thus, RWA-backed stablecoins offer a promising path toward instilling confidence, trust, and resilience in the stablecoin domain, potentially shaping the future landscape of digital currencies.
Figure 1: Summary of key advantages of stablecoins backed by RWA
Examples
MatrixDock’s USDV
USDV, an example of an RWA-based stablecoin project, issues the Verified USD (USDV) stablecoin backed by STBT (MatrixDock’s Short-term Treasury Bill Token that is backed by U.S. treasury securities within 6 months maturity and reverse repos). In contrast to centralized stablecoin issuers like Circle and Tether, some are of the view that RWA-based stablecoins supported by on-chain assets offer enhanced transparency in their underlying assets, establishing a more stable credit foundation for the stablecoin.
Traditional stablecoin issuers typically receive dollars, mint equivalent stablecoins, and invest the dollars in U.S. Treasury bills or highly-rated bank bonds, generating revenue streams. Similar to other stablecoin issuers, USDV employs a comparable approach by directly sharing revenue from the underlying asset with ecosystem participants through smart contracts. This revenue-sharing strategy benefits minters, liquidity providers, and market makers, fostering the stablecoin ecosystem.
STBT holders, upon completing KYC verification, can become USDV minters by depositing STBT into the smart contract to mint new USDV. USDV utilizes a distinctive coloring design akin to Bitcoin’s UTXO mechanism, allowing on-chain identification of stablecoin minters. Earnings, dynamically adjusted based on the quantity of underlying asset STBT, are held within the contract. Among these earnings, 50% are allocated to stablecoin minters, while the remaining 50% benefit market operators and liquidity providers. These earnings serve as incentives for participants in the USDV market, supporting ecosystem development.
Ondo’s USDY
Ondo Finance recently introduced U.S. Dollar Yield Token (USDY), available on the Layer 2 network Mantle, enabling users to acquire USDY directly through decentralized exchanges (DEXs). USDY is issued by Ondo USDY LLC, a separate entity from Ondo Finance Inc., and is backed by short-term U.S. Treasury bills and bank demand deposits. It is registered under Regulation S, allowing sale to non-U.S. retail investors with specific limitations, including a 40 to 50 day lock-up period post-purchase.
The token contract for USDY includes unique whitelist and blacklist features. Users can KYC via Ondo’s website to join the whitelist and mint USDY. By joining the whitelist, users may implicitly agree to terms in a legal document stored on IPFS, referenced within the token contract.
USDY currently accrues interest over time. Additionally, Ondo Finance launched mUSD on the Mantle blockchain, which is a rebasing token pegged 1:1 to the U.S. dollar’s value. Users would not need to undergo KYC to access USDY or mUSD on Mantle, since there are no whitelist restrictions. Both USDY and mUSD automatically adjust token balances to represent accrued yield.
Conclusion
RWA-backed stablecoins are poised at the forefront of revolutionizing the stablecoin landscape, addressing critical concerns surrounding transparency, reliability, and regulatory compliance within the cryptocurrency domain.
Looking ahead, the popularity and increasing trendiness of RWA indicate a sustainable growth in its market size, setting the stage for promising prospects for stablecoins backed by RWA, and increasing the type of RWA assets that back such stablecoins. With exemplars like USDV and USDY showcasing innovative approaches to asset collateralization and distribution of benefits, stablecoins backed by RWA present a promising path forward in instilling trust, compliance, and resilience, potentially reshaping the future dynamics of digital currencies.
DigiFT is the first regulated exchange for on-chain RWA, approved as a Recognised Market Operator with a Capital Markets Services license by the Monetary Authority of Singapore. DigiFT allows asset owners to issue blockchain-based security tokens and investors can trade with continuous liquidity via an AMM.
Here at DigiFT, we are excited to see greater adoption of RWA and how the market grows. DigiFT remains dedicated to providing a cutting-edge platform that empowers users to trade tokenized RWA. Together, we can build a more transparent, secure, and resilient financial ecosystem that bridges the gap between the physical and digital worlds.
