Original title: "Design Analysis of a General Framework for RWA Products"

Original author: Ye Kai (WeChat/Twitter: YekaiMeta)

Many customers and project parties are concerned about how to design RWA products? Focusing on the core of RWA: "Controllable assets, trusted asset management", we designed a general framework for RWA trusted asset management products as a reference for the design of Hong Kong compliant RWA products, and it is also applicable to offshore's RWA tokenization design.

The general framework of the entire product is shown in the figure, which is divided into six links: asset pool, structuring, asset tokenization and mezzanine, tokenized assets, and management.

（Figure 1）  General framework of RWA products

Among them, the mezzanine structure is generally the SPV of Fund or Trust, which is the core of RWA trusted asset management. Whether it is the requirement for Hong Kong compliant RWA in the form of Fund, or the trusted SPV coded by smart contracts and protocols in offshore tokenization.

This mezzanine is O2O, offchain2onchain, which is both isolation and link. The significance of the mezzanine is to isolate assets. When the direct tokenization of physical assets cannot solve the problem that physical assets and virtual assets cannot be 100% mapped, the existence of the mezzanine is very meaningful. RWA is to financialize this mezzanine, while the direct tokenization of Web3.0 is to code and contract the mezzanine. The trustee of the mezzanine, under the supervision of licensees and industry norms, conducts asset management and operation through traditional means, and uses the credit and regulatory constraints of financial institutions to achieve asset O2O management.

The multiple core elements of this RWA product framework: basic asset pool, cash flow analysis, programmable SPV (cash flow, credit enhancement, custody), trusted asset manager, liquidity incentives, etc., form the design prototype of the RWA product.

Basic assets

The primary element of RWA is the underlying assets of the asset package. The underlying assets of RWA are no longer traditional physical assets such as real estate, but credible assets of digitalization and blockchain, or native assets further generated on the blockchain. These digital assets are the reconstruction of physical assets in the real world based on the atomic level, and can also be further combined. Physical assets in the real world need to go through infrastructure conditions such as asset due diligence and confirmation, data on the chain, and asset pooling before they can become the underlying assets on the chain and enter the RWA asset pool. Moreover, the underlying assets in these asset pools can or can produce continuous and stable cash flows.

Physical asset data on-chain and asset pooling require a series of asset protocols. Based on the RWA asset protocol on the chain, real-world physical assets are converted into various RWA underlying assets on the chain, which further become the underlying assets of digital financial scenarios on the chain such as asset tokenization, lending, insurance, and income products.

The underlying assets must have clear property rights, which is also one of the most basic prerequisites for asset evaluation. Whether it is "ownership" or "usufruct rights", as well as the further independent "operating rights", "lease rights", "mortgage rights", "income rights", and "disposal rights", they all need to have sufficient and legal authorization procedures. Secondly, the underlying assets must be transferable. Through the RWA asset trusted asset management, the initiator may need to transfer the underlying assets with clear ownership to the SPV in an open or secret manner. This link cannot have legal defects, so it is necessary to confirm whether there are restrictions such as third-party rights.

Cash Flow Analysis

The equity structure of RWA products is essentially the expected cash flow, and its structural design mainly comes from cash flow analysis. We need to conduct a detailed analysis of the business scenarios and transaction payments of the underlying assets, from the current transaction structure, income cycle, cash flow nodes, etc. of the underlying assets, including the level and efficiency cost of the transaction structure, the timeline split of the original income cycle, the process nodes and time nodes for generating cash flow, and the cash flow aggregation method.

The transaction structure of many physical assets in the real world is very complex and intermediary. The design of RWA products needs to optimize and disintermediate the transaction structure, or it can be a subversive design, such as user-side reverse transactions.

The income cycle will affect the income structure. For example, the income cycle of agricultural and animal husbandry is 6-9 months. First, advance funds, then raise, and finally sell them before cash comes back and settlement. To design a new income structure, can the income cycle be designed in advance, and can it be pre-sold or pre-collected? In addition, new cash flow nodes and cash flow collection methods should be further designed. The cash flow nodes should be placed in advance. In addition, token payment settlement, clearing and automatic collection can be designed in combination with RWA trusted asset management to realize on-chain cash flow.

Cash flow must have a certain degree of stability. The sales revenue of general commodities, land transfer revenue, mineral resource development revenue, etc. are not suitable as the underlying assets of RWA trusted asset management due to unstable cash flow. However, if the products sold are water, electricity, gas, heat or other types of daily necessities, the downstream user demand is strong and very stable, or a long-term supply contract has been signed, it can be used as a basic asset for securitization.

Secondly, cash flow must be predictable. RWA trusted asset management is essentially a discount on the future cash flow income of assets. Therefore, when conducting securitization operations, professional institutions need to predict the cash flow that can be generated by the underlying assets in the future to help investors establish reasonable expectations for future income, and through the trust channel, the cash flow assets that cannot be specified are converted into trust income rights that can be specified, so that the underlying assets meet the requirements of assetization.

Rights to income from underlying assets

The most common type of income rights is the leasehold interest in real estate. The owner of the real estate transfers the income from the leasehold of the real estate to the investor. When the income is divided, it can be divided into daily or weekly rental income corresponding to 1m2, which is simple, direct and clear. Leasehold income includes simple leasehold income, i.e. rent or annuity; it can also be designed as complex leasehold income, such as secondary leasehold interests, including a low-risk fixed income and a high-risk floating income, and future cash flows with different interest rates and priorities can be realized through asset tokenization. Complex leasehold interest design can allocate part of the leasehold interest (such as fixed income) to investors, while retaining or conditionally allocating part of the remaining asset interest (such as floating income) to other investors.

As mentioned above, based on the forecast of leasehold income, a mezzanine layer of the trust channel can be established to isolate the leasehold income from the value fluctuations of the underlying assets, and only the non-specific leasehold cash flow assets can be converted into specific trust leasehold income rights (a simple T-REITs).

Mezzanine and Programmable SPV

The biggest difference between the design pattern of RWA and asset securitization and REITs is that it makes full use of the technological innovation and smart contracts of blockchain to realize the programmable SPV of mezzanine, that is, a programmable special purpose entity based on blockchain.

Just like realizing a Defi's "mortgage-loan-liquidity income" financial business combination in a block, on the RWA tokenized value chain, the "asset + cash flow + income model + people" on-chain combination of real-world assets is realized through programmable SPV (Block + smart contract + consensus code), and the code "SPV" can realize intelligent credit enhancement (such as tiered grading, mortgage, insurance, etc.).

The mezzanine and priority subordinated of a Fund can basically be realized through one or a group of Ricardo-like contracts. The core design idea of programmable SPV is to realize the aggregation and reorganization of tokenized asset elements after RWA asset share through the block of blockchain, so as to replace the off-chain SPV and realize the real on-chain native tokenization structure. Another core of programmable SPV is composability. SPVs of different RWA assets can be combined to realize Lego Money.

Trusted Asset Manager

The design pattern of RWA asset tokenization needs to have an asset management core: the token asset manager, which is also the custody pool for RWA asset tokenization. It governs different RWA token assets, SPVs and distribution mechanisms, information disclosure, etc. through consensus algorithms, platform tokens, smart contracts, and programmable codes. In the future, DAO distributed autonomy may be gradually realized. It is just that in the early stage, it may still be necessary to entrust management and operation through managers (GPs) and custodians (Trust) in traditional finance; in the mature stage, trusted and codable management is realized.

The token asset manager is a one-stop custody of RWA token assets. The issuance, pricing, investment, trading, and liquidation of RWA assets are all handled in one manager and one combination protocol. It can also manage the composability of RWA assets, so as to achieve the synergy of basic assets and programmable development, achieve the consistency of risk control, and achieve combination synergy from different angles such as systems, assets, and protocols.

Liquidity Incentives

Unlike traditional asset securitization designs, RWA asset tokenization can make full use of the characteristics of tokenization to enhance liquidity, and promote more secondary market liquidity by providing new token incentives for investors to continue to invest or trade RWA asset tokens in the secondary market. This is a unique liquidity incentive that RWA asset tokenization can innovate based on blockchain and smart contracts.

Liquidity incentives, also similar to "liquidity mining" in Defi, are essentially a multi-level distribution. It does not affect the original RWA asset tokenization income, and further exchanges value for liquidity participation in the secondary market. Investors can continue to enjoy the original income dividends of real estate tokens, while obtaining new liquidity tokens, thus realizing multi-level distribution and liquidity value exchange.

The segmentation and grading of some underlying assets after shareholding will promote liquidity and increase price volatility, and the price difference caused by price volatility will lead to more liquidity, thus creating arbitrage space. For example, taking real estate as an example, since real estate RWA assets are no longer large assets with high fullness, but fragmented small assets, a complex liquidity market will be formed between investors, buyers, sellers and market makers. Long-term investors will consider stable and continuous income rather than price, while short-term investors will care about price difference and arbitrage, but the relatively stable income characteristics of real estate will gradually turn over short-term investors.

Of course, it needs to be used flexibly in actual RWA projects. At present, the cooperating securities exchanges generally start with project consultations to see how the main credit of the project party or issuer is from the perspective of issuing crypto bonds. What is the rate of return of the asset package? How is the cash flow? What are the guarantees or credit enhancement measures? First simply judge whether it is feasible. If it is OK, then further analyze it. An RWA product framework is only used for reference and guidance to better promote the orderly development of RWA!

#ARAW Always RWA Always Win! On the 16th and 17th of this month, the RWA keynote speech and roundtable forum at the main venue of the Shanghai Blockchain Festival and the RWA sub-venue, look forward to friends gathering in Shanghai to exchange ideas!

RWA gang R01Labs and RWA Investment Bank, based in Shenzhen and Hong Kong, have been established. Interested institutions and potential partners are welcome to participate in the construction; you are also welcome to add WeChat YekaiMeta to join the RWA practice seminar group to participate in specific RWA project and product discussions.

This article comes from a contribution and does not represent the views of BlockBeats.

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