Author: Spencer Applebaum & Shayon Sengupta, Multicoin Capital; compiled: Gold Financial

This is the fourth article in the chain market series.Application of controlled execution (ACE)Part two looks at the reverse choice in DeFi, and models to guard against it. Part three talks about how real world assets on different tracks will be chained up.

Note: In this paper, "Cryptoasses"This refers to assets such as BTC, ETH, SOL, HYPE and other primary chains.Real World Assets (RWAs) means assets originating outside the encrypted ecology, including stocks, bonds, bulk commodities, foreign exchange and other traditional financial assets.

The earliest assets in the blockchain were those such as BTC, ETH, SOL and now HYPE. As a result, the vast majority of the early DeFi infrastructure components were built for such assets. These products include: automarketer AMM (Uniswap), virtual automatic marketer vAM (Perpetual Protocol), mortgage warehouse stabilization currency product (Sky, predecessor of MakerDAO), synthetic asset (Synthetix), non-fixed floating interest rate lending pool (Commoon, Aave) and dYdX. We believe that these products have worked relatively smoothly because of high market volatility at the bottom, a dynamic speculative trade and an extremely large number of long-tailed coins, with no permission to participate. By way of retrospect, the following is a picture of the total value of the DeFi locker for the year:

Source: https://mikemcdonald.github.io/eth-defi/

However, asset structures and user groups are changing today. United States debt, equities, corporate credit, bulk commodities, foreign exchange and other real-world assets are on the chain. Such assets, which usually have lower volatility rates and narrower trading prices, possess fixed maturity dates and cash flows, are better-quality collateral, borrowers ' information can be traced, and a large number of institutional participants conduct transactions. As a result, another set of basic components became important: the central limited purchase order book CLOB, request for quotations RFQ, self-employed market vendors propAM, fixed interest rate lending, pool vaults, interest rate derivatives, buyback agreements, dark pools, portfolio bonds, options and periodic futures. We call it...DeFi 2.0 Original。

Many of these components have been in DeFi for many years. DeFi has often finished building these tools first, but the assets that fit them have not yet been chained up.

Background: Most of the discussions about RWA (including our previous articles) focused on asset monetization and moving assets onto block chains. But few people are looking at how these “traditional assets” will evolve when they go up the chain.

Building new, ground-level basic components will provide investors with significant downstream opportunities. Values are likely to be captured in a technology warehouse: from the base commons chain itself, to core basic components being developed now, to end-user orientation, customer relations front-end and order flow engines.

Review of DeFi 1.0

From a traditional financial point of view, early deFi capital in its original language was extremely inefficient. AMM was less efficient than the money available to professional traders; over-collateralized mortgages were costly leverage; floating interest rate borrowing was difficult to estimate the cost of funds while concentrating risk on a few pools.

The first challenge for newly issued encrypted coins is to gain liquidity, not optimize the transaction price. AMM’s core advantage is that anyone can quickly establish a trading market and complete initial price discovery.

In chain systems that do not require permits, anonymous borrowers have no balance sheets and no credit records. So the agreement can only rely on over-collateralization and cannot use standardized credit clearance -- the latter could have given them better borrowing conditions. In reality, this has limited impact. It is clear to all that most users of loan agreements do not borrow money for the operation of entities; It is to leverage high volatility of crypto assets, or not to sell currency or obtain funds on a temporary basis. For such users, floating interest rates are perfectly acceptable: even if the cost of financing rises by several hundred basis points, it does not rise or fall by 100 per cent in a month.

The logic of a permanent contract is the same. Encrypted assets have no maturity, no legal rights, no cash flow, and traders want to be able to increase their leverage for price increases or falls. Lose maturity, make synthetic derivatives, make product logic simpler, and match lower asset characteristics. Likewise, traders who do more than 2 times more leverage in the short term will not be subject to floating capital rates.

Core features of DeFi 2.0

DeFi 1.0 is not a simple, early version of traditional finance. It is designed for home-grown crypto assets and specific user groups. Assets change, and the base components change.

RWA has a number of characteristics that are distinct from the original encryption asset, and these are the core features of DeFi 2.0 (which some see as an advantage and which others consider to be shortboards):

1. Lower volatility and narrower trade prices

2. Long-term presence and predictable cash flows

3. The collateral is of higher quality and can be validated by the borrower

4. Entry of large market participants at the institutional level

5. Increased portfolio and risk exposure

1. Lower volatility and narrower trade prices

AMM is well suited for long-tail crypto assets to start up their liquidity cold. If you issue a new currency in shturl.c, or raise money through MetaDao, the first thing you do is run the trading market. But there are no such pains as dollar debt, apple stocks, euro versus dollar. They themselves have professional traders, deep mobility, low volatility and extremely narrow prices.

When you fire the MEME currency, traders usually don’t care about the slide points of several basis points. Even at the slide point 2%, the one-hour hereafter drop 30%, and the transaction costs are almost negligible. But in public debt, foreign exchange transactions, 10 basis points may be the full margin of the whole deal.

In this scenario, the central limit order book (CLOB), the request system (RFQ) and the self-employment AMM are more appropriate. Professional traders can refer to external performance, volatility, order flow, and their own risk limit priced inventory, rather than simply sharing liquidity along the AMM curve. Such components already exist in DeFi, where value is really high only when a small trade can determine the assets that are lost or lost.

These assets are also more easily attracted to marketers. First, there is already a large number of mature traders trading these items, and traditional markets can hedge and offset the risks. Second, high-quality liquid assets naturally create a demand for dispersed households and motivate marketers to provide liquidity. Third, the risk of jumping is much lower than that of MEME and high Beta crypto assets, which in an environment of slightly higher public-chain delays, can easily be pushed over by unilateral actions.

Low volatility also gives value to some derivatives. Projects such as Ribbon, Katana and Friktion introduced automated pre-positioning and sale of downside options many years ago, with small landings, but underlying assets were not adequate. (b) The reserve-to-up strategy is suitable for the annual increase of about 10 per cent in equities, generating additional gains for holding; It's a little awkward to put 50% of the currency that fluctuates on a single month like SOL: Holders may give up huge rises for modest gains (we understand markets will price independently, but historically encrypted options are far less liquid than stocks).

The demand for encryption options is low, and the underlying cause remains the asset itself. If a high-risk, high-value game deal is to be made, it is enough to open HYPE three times more than once. This Delta derivative for 1 is sufficient in terms of risk gain and trade stimulus, without any option – the right naturally has time to be charged, and there is a risk that the principal will be lost in its entirety.

As stocks, indices, large commodities, foreign exchange, and so on, the RWA uplinks, options markets are expected to burst. A well-liquidated option market can support an increase in readiness, a lead policy, downside protection, volatility trading, and structured revenue products. DeFi infrastructure, which we believe was built earlier, is itself not wrong, but it appeared too early, with no suitable bottom assets at that time.

Volatility also profoundly affects credit markets. If the collateral fluctuates by 10 per cent a day, the lender must set aside large security cushions. This is also why the early encrypted lending market generally maintains around 66 per cent of mortgage rates, with extremely harsh penalties for settlement. This explains why the encryption of DeFi is enough to borrow at floating interest rates. Alice used SOL to mortgage USDC to leverage, and the collateral fluctuated far beyond the cost of a single-day rate of interest from 7% to 10%, and she naturally wouldn't care about short-term interest rates.

2 Longer and predictable cash flows

The vast majority of crypto assets are permanent. BTC, ETH, SOL, HYPE do not have maturity dates, which shapes DeFi’s lending and derivatives markets. Aave, Compund mainly provides open-ended floating interest rate loans that are suitable for traders with uncertain lead times and lower financing costs than asset fluctuations.

As early as 2021, we wrote about the opportunity of DeFi’s fixed-interest market. Frankly, it was too soon to be able to do so, and the central cause remained asset attributes.

An enterprise borrows $100 million for acquisition or capital expenditure for a three-year period, and it has to make clear that interest is 5 million or 10 million per year. Similarly, asset managers buy 6% of the yield on bonds, finance 4%, lock in 2 points; once financing costs soar to 6%, the transaction loses its economic value directly.

In addition to this, there are structural inefficiencies in open-ended lending: depositors can withdraw their funds at any time, but borrowers want to take over the loan for a prolonged period. Additional liquidity buffers must be set aside for protocol controls to guarantee that depositors can draw down. This is why DeFi has a very conservative curve on the utilization of open-ended loan pool funds (to prevent them from being borrowed). Some of the deposit funds were left idle, resulting in a gap between the interest rate paid by borrowers and that of depositors on hand, with additional charges to be charged for agreements such as Aave, Kamino and others.

Fixed interest rates, fixed-term markets are one of the solutions. Depositors are no longer allowed to withdraw money at any time, and borrowers are allowed to lock down their maturity. Depositors’ funds can be invested more fully, and borrowers can set up precise financing costs. The cost is that liquidity will be divided according to different maturities: three months of loans and a year of loans belong to different markets – but this is how real price discovery across time horizons can be created, ultimately building yield curves.

Morpho Midnight is an example of this. It builds a fixed-term market, which generates interest rates through competitive bidding at a given maturity and allows depositors to transfer slots before maturity. If there are sufficient liquidity in the future for three months, six months, one year, and multi-year markets, we can access financial costs with different dimensions over time, thereby pricing loans, bonds, forwards, swaps, and all products associated with them.

Pendle, Exponent is another example: their potential market size (TAM) has expanded with the expansion of the asset base. Such products cut off the cost of and proceeds from interest-bearing assets, allowing users to trade fixed and floating earnings. The sources of tradable proceeds in the past chain were very limited: pledge earnings, interest rates on borrowing, sustainable capital rates and protocol credits. In fact, one of the most popular uses of revenue coins is to leverage credit incentives for DeFi projects.

When RWA arrives, the source of revenue expands to US debt interest rates, credit spreads, dividends, floating interest-rate loans and other contractual cash flows. Gains are stripped away from leveraging incentives for projects to a common principal, revenue-splitting tool, which is why we value these basic components.

The same logic applies to interest rate derivatives. Pendle’s Boros allows users to trade fixed / floating ends of the constant fund-for-life rates at specified maturity dates. Currently, the bottom mark is still encrypted primary interest rates; but once the hedge points are converted into dollar debt rates, enterprise financing costs or other real world benchmark rates, the value of this architecture will increase significantly.

Periodic futures, forward contracts are the same. Firms pay foreign exchange after six months of hedge, bulk commodity producers lock in forward payments, and bond managers do not need to renew contracts for long run risks.

Finally, the value of the Treasury will increase significantly as DeFi assets and strategies become rich. Early DeFi Treasury was mostly automatedly encrypted raw strategies: mobile mining, recycling leverage, marketing LP, swing-rate options. With access to RWA, the Treasury can package the United States debt ladder configuration, stock readiness for upswings, decentralized credit portfolios, base-side transactions, or a combination of fixed and floating earnings of all types. The components are not new in themselves, but the strategic space that can be carried within them will be greatly expanded.

3. Better-quality collateral, certified borrowers

Prerequisites for the birth of encrypted borrowing: The agreement is almost unknown to borrowers. It is difficult to enforce legal compliance directly with the Taig and Solana wallets without financial returns, credit scores, and smart contracts.

This model is good for anonymous, volatile collateral, but too inefficient for many RWAs. Short-term US debt is different from ETH: with lower volatility and sufficient external liquidity, lenders can assess market value with confidence.

RWA, together with the future progressively refined chain of identity and legal framework, can also make borrowers themselves fully truncable. The balance sheet, cash flow, management team, contracts and liabilities can be reviewed in the face of a real business or fund. As long as the identity of the borrower is verifiable and the collateral is legally enforceable, lenders need not rely entirely on the collateral ' s market value. We have also seen partial agreements that begin to bind chain repayments and chain credit files and discipline borrowers who default on the chain. Maple is already doing this: it's a letter to institutional borrowers that is exhausted rather than treating them as anonymous wallet addresses.

The early DeFi mortgage network was fundamentally flawed: most of the people willing to borrow were the ones who could not absorb money through traditional channels. Goldfinch, for example, lends credit to emerging market SMEs that are underqualified, geographically constrained, unable to access high-quality traditional credit and highly problematic in reverse selection. Once the United States regulatory framework is liberalized and entities are allowed to access unlicensed credit subject to compliance, we expect that the market will break out and that there will be an opportunity for global bulkers to obtain higher-quality lending assets with risk adjustment returns.

4. Entry of large market participants at the institutional level

RWA also changes the size of the transaction. The transparency of the blockchain tends to be advantageous in many cases, but it can cause trouble when dealing with large amounts. A $20,000 BTC buy is irrelevant for transparency; but when asset managers need to buy $100 million in stocks or bonds, the purchase order will be completely costly.

Traditional finance has taken decades to build tools that allow institutions to place large amounts of money on their books without revealing intentions: large-scale transactions, request for quotations, hidden orders, networking, dark pools. DeFi is also developing similar products. Renegade uses multiple security calculations (MPCs) and zero knowledge certification (ZKPs) to achieve privacy set-ups and chain settlements; Silhouette built a dark pool on Hyperliquid. Zama, in our portfolio, has adopted a modular approach to developing the basic components of universal encryption (FHE) for applications on the common public chain that directly increase trade confidentiality.

Here's the key to distinguishing:Hide Settlement Information and Hide transaction intentSome agencies can accept the transaction, but at the next stage of implementation, almost all will require confidentiality to avoid market runaways.

5. More dollar portfolio and risk exposure

We talked about the inefficiency of DeFi derivatives at the summit a few years ago. The core conclusion is that each agreement is an independent bond, and that DeFi's original broker has the opportunity to give one-size-fits-all letters, merge all users across the agreement, and reduce the requirement for a deposit.

This matter has increased further as asset classes have become more diverse, holding stock sizes have become more fragmented. A large dollar debt can hedge interest rate futures; Alice, with multiple SPYs and an empty BTC of equal size, deserves a more favourable margin.

Project 0 of our portfolio is building this system on Solana: to include multiple DeFi platform collaterals in the Unified Guarantee and Credit System. It currently optimizes the capital efficiency of encrypted markets; it increases exponentially when users can hedge interest rate futures with a US-debt convertible, stock-to-stock swaps, bulk-to-trade periodic futures, foreign exchange openings against forward contracts.

This is a typical example of RWA expanding the potential market size of its original DeFi component. When traders hold multiple encrypted positions, portfolio bonds are useful, but most crypto assets are shared with highly relevant Beta. When combinations incorporate truly independent sources of risk such as stocks, credit, interest rates, bulk commodities, foreign exchange, encryption, etc., they release their value completely.

We predict that future users will manage all class assets within a set of balance sheets, without the need for separate pre-positioning bonds on each platform; third-party lead brokers will aggregate and spread across user risk exposures.

Who's going to capture the value?

The most important thing: RWA will greatly widen DeFi's economic boundaries.

The most intuitive expansion of market size comes from the base asset mass. Encrypted assets account for a small proportion of global financial assets; RWAs are several orders of magnitude larger than stocks, sovereignty and corporate debt, large commodities, foreign exchange, etc. Even if a small portion of these assets and transactions go up chain, the opportunity pool of the DeFi agreement will be significantly expanded.

But there's an equally important layer: RWA, usually.Every dollar asset needs more financial infrastructure.。

A MEME currency may require only a spot market, a permanent market, and up to one additional lending pool (provided there is collateral value, someone is empty). And a dollar debt can be traded in cash, financed through repurchases, as collateral, sequestered collection portfolios, hedge futures or interest rate derivatives, and packaged into structured products.

So the opportunity is not just to become more asset-rich in the chain.The density of financial activity corresponding to unit assets will also increase significantly.. Values are distributed along the entire technology stack:

The bottom is the common L1 and L2 links.The more complex financial markets generate large-scale transactions: marketers update offers, drop orders, credit warehouse refinancing, options swaps, cross-platform transfers of collateral, and portfolio rebalancing. The future block chains will continuously update a significant amount of finance. If (we believe) the blockchain becomes the clearing and enforcement layer for such activities, one or two public chains can capture much larger, more sustainable space requirements than encryption speculation.

The top tier is the core financial language.Exchanges profit from the flow of transactions; Loan agreements are allocated credit spreads; (b) Interest rate markets generate long-term income from earnings transactions; The options, structured product agreements draw fees for the transfer of risks. Many agreements already exist, except that the bottom potential market size is magnified by RWA. Pendle does not have to be a mere pledge-proceeding, points-trading market; Boros does not have to be only a market for sustainable capital rates; An option agreement need not be limited to BTC, ETH Volatility. They can break the original borders and capture greater value.

There are also many potential values in the polymer layer.As more platforms and asset classes are chained, users do not want to manage finance, mortgages, and deal in a dozen agreements alone. This has given rise to DeFi's primary homebroker: read the full mix of users, determine where money should be spent, how much leverage is reasonable, and how best it can be ordered. This role is extremely valuable in traditional financial terms, and only becomes more important as markets become fragmented and commingled along the chains.

Finally, application and order stream.To master the application of end-users, it is ultimately decided where most transactions go: by which route orders are made, by which collateral storage platform, by which credit market they borrow, and by which product they give priority. We discussed in the issuer’s exchange that controlling order flows can lead to the best economic liquidity places.

This is why we think that RWA’s opportunity is not just simply to chain assets up. When assets go up, they generate a set of financial infrastructure needs: transactions, credit, derivatives, and the original language.

DeFi 2.0: Assets are in pursuit of the original language

DeFi has actually tried most of the original language that RWA needs: order book, request price RFQ, options, structured products, fixed-term lending, income stripping, interest rate derivatives, dark pools, portfolio bonds. The problem is: these tools were originally designed for crypto assets.

(c) Boros has introduced interest rate derivatives, but the bottom is a sustainable fund rate;

The definition of the core language of early DeFi: AMM, contract for perpetuity, indefinitely floating interest rate lending, vAM, over-collateral stabilization currency was born because they fit the characteristics of home-grown crypto assets. It is important that these products do not disappear. AMM continues to serve long-term assets; The contract of renewal remains the central tool for encryption speculation. Pooled over-collateralized floating lending is still suitable to leverage crypto assets with anonymous wallets. But the industry is going to RWA, and we need new basic components.

The first phase of RWA focuses on the chaining and monetization of assets. The next stage is to make these chained assets truly usable.

Whether in secondary-market investments or venture capital operations, we bet that DeFi 2.0 in its original language will generate a lot of investment opportunities worth layout. These bottom-of-the-counter modules will support the next generation of uplink assets – assets that many users around the world are eager to hold.

We're talking about how DeFi's original language evolves to carry RWA. The next topic on market structure is, we're going to look at why the RWA itself needs DeFi.