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The Macroeconomic Potential of RWAs

The Macroeconomic Potential of RWAs

Sibylline are becoming increasingly aware of the possibilities surrounding tokenising Real World Assets (RWAs). First instance tokenisation of RWAs such as building NFT’s into assets for exclusivity and stratified access is one possibility. However, those holding large amounts of RWAs not currently on the market can afford to be much more ambitious. This article focuses on the requirements necessary to build a completely parallel financial system, with a token backed by a physical asset a la a stablecoin, the possibilities emerging therefrom, and the economic theories which might lend insight.

Scaling Stablecoins

Stablecoins are easy enough to understand in and of themselves. Just as one currency may be pegged to another, stablecoins are cryptographic tokens which have a value pegged to an underlying asset or series thereof. Some are simply pegged to traditional currencies like the dollar, allowing a 1-1 exchange ratio for the consumer. Note that institutions may not treat them as 1-1 equivalent due to differences in confidence, storage, regulations, risk appetite, and so on, but deviations will be small. Additional complexity can be added - some stablecoins could be pegged to stock indices, commodity values or a basket combination thereof. The Stablecoin thereafter has value both as a medium of exchange and a store of the confidence in the value it is pegged against.

This allows those who mint stablecoins, presuming that they also hold the underlying asset, an unparalleled opportunity to develop their own influence and propagate their designs into the future. The first challenge will be ensuring that the stablecoin is fungible in terms of some other currency, or that it has purchasing power in real things. This can be in terms of other currencies like the dollar, or goods and services, in the way Bitcoin and Ethereum increasingly are increasingly accepted as payment directly to merchants. Ideally, the minters, or consortium thereof, would aim for both simultaneously, and pursue whichever avenue posts the most returns more aggressively in-line with their broader strategy.

Financial Potential

This does not mean that the underlying asset is now off the table for further deployment. Certainly, one could use a certain amount of underlying commodities to produce cash equivalents, physical representations of the token in question. That commodity could be combined with other, more abundant supplements if it is particularly rare and/or difficult to physically manipulate - a composite coin of say 95% scrap metal, 5% value metal can still function as a Real World Token (RWT) for a stablecoin based on the value metal, just the same as one purely composed of the value metal, because it is a token, rather than a lump commodity.

If a value metal were to have other applications, one could therefore collect money on it twice. Creating a stablecoin pegged to its value is the best of both worlds in that it is a store of value like gold and Bitcoin, but also uses more sophisticated methods, and has immediate real world appeal. What remains of the value metal deposit not deployed in real world tokens could then be used in any other applications, and sold to those who would so use it. It goes without saying that, if the minters of this stablecoin, were to control a large fraction of the global supply of the value metal, integrating themselves into the supply networks using that value metal would afford them volumes of soft power and prestige, alongside that already gained from creating such a desirable currency.

However, if the minters were to try and pursue both these options, exactly what to peg the stablecoin to becomes a more complex decision. If a significant fraction of their total supply of value metal is being sold elsewhere, pegging to the global supply of the value metal in question becomes less stable, as the buyers cannot be controlled once they purchase, and may fail in their own enterprise, deviate from contract, or produce other unexpected results. All these things would presumably influence the supply value, unless sales of the underlying value metal are so wide that any one actor no longer matters on the demand side. Whilst this might be the case in retail and wide use metals, I cannot envision this easily being the case with the Rare Earth Metals which will likely be used for stables in this way. It may instead make sense to peg the value of the stablecoin to an entity which holds:

  • The initial ecosystem and blockchain on which the stablecoin is to be minted and deployed.
  • The deposits of the valued metal in question.
  • Contractual interest from those looking to acquire that valued metal.

This is a less subtle approach which would require some degree of interaction with conventional financial architecture, though likely on the supply side. This may in turn compromise anonymity to some degree, if this is important. However, note the specific word, ‘hold’. There is no requirement for the entity in question to actually own the assets in question, or derive any final beneficial expectation at law. The only requirements, should the minters wish to pursue this route, are that:

  • The entity is an effective confluence node for all these derivations of value to intersect.
  • Those holding positions in the entity have some way to derive benefit to their satisfaction from the entity (resulting trusts, debt and licensed intellectual property are all routes by which this could be straightforwardly architected).
  • That this architecture is not so effective that hostile intentions arise from those in Centralised Finance (CeFi) and elsewhere whose business model and interests are disrupted, at least, outside tolerance or ability to ameliorate those intentions.

Enlightening Economics

One underrated point of Hayek’s economic vision was a system of competing private currencies, sometimes complementing, and sometimes set against, Von Mises’ bet on gold, now going digital. Cryptocurrencies as currently formulated go part of the way towards fulfilling both these visions. Schumpeter further noted that radical breakthroughs will be followed by smaller clusters; the first mover on this technology would be perfectly poised to make such a breakthrough which would go down in history.

The first breakthrough such a project could achieve is the reconciliation of Wieser and Von Mises. Wieser predicted that currencies would degrade, and separate from their subject matters - Von Mises subsequently insisted that money managers would not strike in the interests of the citizenry and that ‘gold must be the currency of everyone’, so that they always had access to real value which they could lever and depend on. Bitcoin is a store of value analogous to gold. But it will never achieve currency adoption and status on its current architecture. A Stablecoin could achieve this, whilst maintaining the ability to store value like gold and Bitcoin.

The second is advancing the view of money as a comparative tool put across by Schumpeter, far ahead of his time. Schumpeter uniquely appreciated that money is still important where no transaction takes place, because it allows for an easy comparison of the value of goods, and for individual agents to calibrate their future behaviour accordingly. There must be a common unit of account for trade to take place, because meaningful comparison implies a standard to be measured against. All this is true at one point in time; when iterating forward into the future, it is best for this standard to be as stable as possible. This is where stables come in. Government monetary and fiscal policy, whether they like it or not, manipulates the value of the standards of comparison their citizens use nonstop. People’s individual tendencies to spend or save are exacerbated by inflationary events and decisions beyond their control. National fiat currencies may be widely used, and preferable to barter, but they are also sub-optimal standards for measurement. Stablecoins, proof from direct government engineering and separate from political incentives to debase the currency for the next big spending project could provide a far better standard to measure goods against as a general ledger.

The final question remains one inside the space - why use stables over a currency confined to a platform, and why are they preferable inside the Web3 space to other cryptos? Whilst larger firms may have the power to profitably issue their own currency and accept only it as legal tender to better set up price discrimination in their favour, smaller firms will have to use common units of account. Even then, it doesn’t automatically follow that larger firms will choose to issue their own currencies, as it may dissuade customers who can easily go to a competitor. Either way, once we’ve accepted that there must be a common unit of transaction, stablecoins should be easily engineerable for low gas fees, based on the ability to specialise them for exchange, excluding development tools for other purposes.

This way, they could be the reconciliation between Schumpeter and Hayek; Hayek famously argued for private currencies to compete in the same way cryptocurrencies do now, but Schumpeter worried that winner takes all dynamics would lead to a net loss for consumers on account of exactly the price discrimination previously mentioned. With stablecoins, the remainder of the crypto ecosystem is free to compete to build the most efficient currency possible, but, with a separately indexed price and value, consumers do not stand to lose from being individually price gouged based on their position, buying habits and demands.

Conclusion

We feel that the intersection between RWA and Stablecoins is one of the most underrated points in the modern crypto ecosystem. Sentiment is currently elsewhere, chiefly focused on CBDC’s, with most commentariat attention migrating to AI for the last few months. There is, in this distraction, a chance for a consortium to be first to market on an entirely new class of currency and take not just market share, but huge volumes of soft power by storm.

This would be best done by creating a stablecoin ultimately pegged against, if not a valuable underlying asset, an entity in a position to corner the supply of that asset and monetise its supply. Two for the price of one. This will achieve a tripartite offensive: first into Web3 by creating a universal currency and store of value, which also has an intuitive appeal current cryptos lack. Next, into whatever markets the underlying asset fuels, building the entity and its holders huge soft power, alongside a real-world ecosystem to deploy the assets their stable is backed against. Finally, the intersection between that supply and Web3 will, correctly managed, produce a fusion of underlying assets and alternative enterprise, woven under a financial umbrella, which could ground the expansion of that stablecoin into ground normally occupied by CeFi. When it does so, it will not be as capital vulnerable as Bitcoin or Ethereum, in financial or social terms, because of the huge volume of underlying assets and depending processes.

An unprecedented opportunity awaits. Qui audet adipiscitur.