Can a Real World Asset Be CROPS Aligned?

Transcript

[music] [music] Hello everyone. Uh, welcome to my talk. Uh, my name is Eric Marty Haynes. Uh, I'm tokenization tech lead at Nethermind. And today I'm going to try to answer the question, can real world assets be crops aligned? So I want to start with some context. Um right now today a lot of real world assets are actually real world receipts.

So basically you have a token on chain but the source of truth lives offchain. And this basically means that you don't really own the asset that you think you own. And Ethereum as we know it has a soul, right? How can we give real world assets a soul? So, first let's take a look at the anatomy of an RWA, like what it's made of. And really, it has an onchain part and an off-chain part, but we should think about it as one whole system that has different components, but they both form the the entire system, right? And on the onchain side, we have things that most of you are probably already

familiar with like uh the the smart contract uh the admin keys where they can trigger specific functions. Um we also have oracles that transmit that information uh on chain basically from the real world and all this is happening on a blockchain, right? Like a settlement chain where where all this is happening and engineers are the ones like responsible for for let's say setting all this up and and and running it. And then on the off-chain side, uh we have an issuer and an SPV, uh a special purpose vehicle. It's it's the way a lot of real world assets are set up. And this is basically like the issuer of the asset. Uh we also have a transfer agent usually which is responsible of figuring out like who

owns what. Um we also have a custodian that is responsible for for holding the the asset. And then finally all this is is running let's say like on a legal system of whatever jurisdiction this asset belongs to and all these things are managed like by lawyers and uh legislators and so we should try to take a look at like which record wins right if there's a misalignment between this offchain and this onchain part what happens and nowadays really what often happens is that the off-chain part is the source of truth and it's actually what matters at the end of the day and So th this means that RWAS can fail us in in in ways that are as follows related to to to crops, right? So crops

are these principles of like censorship resistance, open source, privacy and security. And there's certain ways that these can fail, right? So for example, if your issuer turns on you and decides to freeze you or blacklists you then you know you you lose censorship resistance. You don't have this anymore. related to open source. Like if the mechanisms of uh this asset are unknown, then you don't really know what you're owning. Both on the onchain side, if there's like any logic that you don't know how it works, or even on the offchain side, like if you have any legal terms, right, that you don't know exactly like what you're owning. And um privacy related, you can have your information just be out there public or or maybe it's easy to figure out certain things about you.

And then finally related to security apart from the usual like security issues we think about we can have just the issuer vanishing right like if you can't redeem if you can't get the underlying asset out then it doesn't matter really if you have a token at the end of the day and so based on all these um I want to go through a rubric uh to basically explore how we can score real world assets based on these crops principles. And so basically as you see here uh we have a a scorec card that has the the four categories right again like censorship resistance, open source, privacy and security. And uh each have four levels, right? From none to high

with low and medium in between. And um yeah, how how else these are being scored? Well, basically both sides of the asset are checked. So we're checking both the the onchain side and the offchain side. And whichever one of them, let's say, uh, reaches the lowest score is going to impact the other one, right? So, it's kind of lowering the result to like the the most common denominator, let's say. Um, and then if a specific asset is available on multiple chains, we're just going to pick one chain because it makes things simpler. We're going to pick Ethereum if possible. And um any properties that we're not able to determine because they're not publicly available or or or yeah not easy to find, then we're just

going to assume the worst possible level because we just don't know what qualities they have and so we can't trust it exactly. And so um we're going to look at how this rubric scores the different categories. So we have censorship resistance. So having no censorship resistance basically means that the the issuer or the admin's like they can do whatever they want basically, right? There's no control. Having a low level means there's some rules on what they can do, but they're more like guidelines. They're not strictly enforced. So they're telling you kind of how they're going to behave, but you just kind of have to trust them. medium means that they can still have some control over you or censor you, but it's very strictly bounded on what they can and can't do and under which conditions

and it's all like pretty transparent. And then a level high would be basically they can't censor you at all and you know no one but yourself can choose what to do with the asset. Um for open source none would basically be it's closed source. We don't know anything about this. Low is there might be like some information available but not too much. Uh medium basically means that we have a bunch of information like the the smart contracts are public. They're verified. The main legal terms also but there might be some details or some systems that we can't really look into and don't know 100% how they work. And then finally high is everything is in the open onchain and offchain. We know absolutely how everything works and it's all like transparent.

Um for privacy none is we have no privacy, right? it's all public. Uh low would be having like pseudo anonymous, right? Like we we don't know who exactly owns something, but we can see like what's going on and we can infer stuff from that. Medium would be like a high level of privacy uh in an outwards facing level, but still like an issuer, an admin or someone can kind of peek in and break that privacy. And then under under like specific conditions and then high would be like no one but yourself can can can see what's going on.

And uh finally for security none would be like a single admin key can do everything right. Um and and there's no like mechanism in place on the offchain side if something happens. Low would be like there's some controls but there's still maybe not like time locks or or uh enough like protections in place. Let's say uh medium would be something that's uh more advanced and there's like fallbacks and mechanisms in place to deal with any like issue that might arise. And uh high basically means that there's no counterparty and you can basically uh have have full control of the security of the asset yourself, let's say. And um I want to give an example with Ether because even though it's not a real world asset, I think it

gives a good idea of what we're dealing with here. And so Ether would score high on all categories except privacy where it would score score low currently because it doesn't really have like native privacy. though this is being worked on and hopefully in the next few years we can expect to to score it much higher in this category and um yeah now let's take a look at some real world assets and here I just want to mention this is just my assessment using this rubric you might take a look at the rubric and score an asset differently so I just want everyone to keep that in mind um but we're we're picking different categories and we're basically picking the top five assets by TVL per category and then uh scoring them based on the rubric I just showed and um here

you can see the example for the top five uh tokenized treasury funds by TVL and as you can see like they're mostly scoring like quite low I would say especially when it comes to like censorship resistance also on the security side and I also want to mention the the colors so red basically means something is limited by offchain factors like the legal system and the purple means it's limited by technology or like onchain factors um again this is a bit of a general generalization, but I think looking at the top five assets, we can get an idea of like how this asset class looks more or less nowadays. And here we have an example of the top asset if you just want to see a bit like the reasons why it was scored uh how it was. I'm going to go through this a bit quick,

but feel free to like watch the recording and and read through it or ask me any questions later. Um for tokenized stocks, it's similar. Basically, we maybe see they have slightly higher source uh scores and open source in in this category. Here we have an example of the the top asset here. Um we can take a look at stable coins. Stable coins in general are are doing better like they do a lot better in in open source. And we even have one rare example of of having uh something in censorship resistance that isn't a score of low I would say.

Again here we have another example of why uh the top asset was scored this way. Uh tokenized commodities. Um, so these are like slightly worse security-wise. Um, and if you notice on the security side, um, they're they're limited more by the onchain or or technology factors in this case, but they still have like a decent compared to other assets like open open score, uh, open source scoring, sorry. Um, again, here we have an example of of one of them. And the tokenized real estate overall is the category that has like the the lowest ranking scores. So, you can notice it has quite low like open- source scores and and and low security scores as well. And you know, I haven't

really mentioned privacy here because everything is kind of scoring the same as Ethereum and um censorship resistance. Basically, most assets are scoring like none. Um and again, here's here's an example. And so, let's talk about some insights, right? And like 20 out of the 25 assets that we've looked at uh on the security side, they're failing or they're limited uh because of like admin keys or basically additional controls that could be put in place. Uh it doesn't mean that these assets aren't aren't secure necessarily, but it just means that there could be a lot more like mechanisms in place and safeguards uh for for things not to go wrong, let's say. [snorts] And um >> on on the and you know this is like an on thing, right? And on the censorship

resistance side, we see that 240 of these 25 assets are basically >> five to >> oh sorry um are receiving a score that is quite low and and for reasons that kind of really only the law can can can like make them score higher, right? And um here we have also just some examples of uh by category like of some insight. So like treasuries like even big players are keeping like the fund terms private. For stocks like transfer agents have to approve every holder. Uh stable coins like I mentioned they're doing quite good overall. Uh for for commodities like gold in this case like vault custody agreements often aren't public.

And for real estate most assets aren't showing like contracts or or the offering documents. And so uh this table basically shows like the top asset in each category of the ones we looked at. And you can see that some score medium in open source, but none of them are really like scoring medium like let's say where where it matters the most, especially compared to Ethereum. And so I want to talk about like what the barriers are here, right? And so we have tech hurdles and um here we have some things that can can allow us to kind of just like leap forward, right?

And on security like I mentioned like just having some things like publishing who holds like privilege roles or or using multi-IGs instead of single keys having upgrades under time locks with exit windows uh rate limiting uh token minting um removing force transfers and burns or at least making it so that um there there's a time lock associated with them and also providing indep independent proof of reserves like these are all things that can improve security and the catch is kind of like from the assets we looked at this is present in at least one of them, right? It's just like we don't have assets that are really like combining all of these or or at least many assets that are doing that. And then on the privacy side, you know, you can do shielded balances,

stealth addresses, you can do like ZK credentials. And these are all things that hopefully as Ethereum improves on, these assets can kind of just follow Ethereum's path. And so I want to talk now also about the legal walls, right? And um basically technology in this case can get us from scores of none to scores of low. But if we want to reach scores of medium or high for these real world assets, we kind of need uh different regulation or regulation to improve uh because otherwise it's not possible for us to just get uh past this wall. And right now the law seems to be moving a bit the opposite way. So for example uh with the US Genius Act or the Hong Kong stable coins ordinance, freeze and seizure mandates are are becoming like

mandatory for stable coins, right? And governments basically don't want this is just one example, right? But like governments don't want to relinquish control in the current system and they have good reasons to, right? Like there's sanctions enforcement, anti-money laundering, terrorist financing, uh recovering stolen funds, enforcing court judgments, tax collection. Like these are all valid reasons and and they're the reasons why governments like are hesitant to to like give up this control. And so I think here we have to be realistic that at least in the current landscape it doesn't seem like this is going to change anytime soon. And so medium seems like the realistic ceiling for things like censorship resistance.

And personally I think this limitation doesn't mean uh crops values aru related to tokenized assets. It just means we have to reframe a bit our expectations around going from something like censorship resistance to arbitrariness resistance. Not not the idea that you'll never get uh stopped or censored maybe, but the idea that it can only happen under very specific conditions with like very specific rules that you know ahead of time. And so based on all this, let's design like what can be the most crops real world asset, right? What would this look like? And so we our target is going to be as follows. Uh we're going to try to design a short-term government bond uh that has units that live natively on

Ethereum where the tokens are the legal record. Uh they're going to stay private only the information only is available to their holders. Um they're going to keep paying out even if the issuer of the asset disappears and they can be frozen but only by a public expiring court order. And uh how we're going to do this is interesting because we don't just need the tech side. Like I said, like regulation plays a big role here, right? And so we're we're going to just do like a hypothetical experiment where we're going to take uh regulations uh from different jurisdictions that are kind of positive and we're going to remix them and kind of assume that in the future uh it could happen that we have one jurisdiction that that includes all of these. And then we're just kind

of going to push these regulations to their logical end. But still keeping in mind that governments aren't just going to uh let go of control like we saw previously and they they still want to retain that. And so we're going to have a legal framework and here you can see a bit like the the laws or rulings that these are based on and kind of what they're pushed to but the building blocks we need is are we basically need the token to be the security. Um we need uh that holders are the only ones that can move the token. We need digital units that are considered property. Uh we need assets that can survive the issuer if anything happens. Uh we need redemptions that can't just be refused at will for no reason. Um we need freezes to follow like lawful court

orders. Uh we need courts that can sign digitally in order to do this on chain. Uh we need neutral rails. We need things like blockchains and Ethereum to be considered like neutral infrastructure. Uh we need ZK compliance and ZK credentials to be accepted. Um we need shielded balances to be considered not completely anonymous if there's ways like uh to reveal this data and uh we need open access also to these assets. Uh we need public terms. We we need all the terms to be made like open source and public and openly available. And then finally we need onchain markets. So that's on the legal side. Um from the technical side what we need is basically a settlement and register. And this is uh what we have on chain. Um we have an

intervention module that allows any interventions to happen under a very strict uh scope. We have a walkway switch in case something happens like with the manager or the issuer. We have reserves and nav being published on chain. Uh we have native privacy uh for the holders and eligibility determined by like zk credentials that are private but this can be revealed uh if if the user wants to. And then finally we have uh like subscription and redemption allowed to these authorized participants. And again, here's just a bit more detail of like each component and how it works.

Um, I'm not going to go through it again, but yeah, you you you can take a quick look. And here again, these are the the other components in the diagram. And and and so here we have the asset of the future, right? And this is like how it would score, right? So it would score medium in every category except for open source where it would score high. And and this is quite good in my opinion especially when we compare it to what we have today. So for censorship resistance basically like freezes can happen but the the scope is very limited. It requires a court order and there's also like appeals that can happen. For open source basically all the terms are public all the technology all the legal side like everything's public and

whatever isn't public is at least like proved somehow maybe with uh zk proofs or or some attestations on chain of some kind. Uh for privacy, basically everything's completely private to the holder themselves. Um government or court can can peek in and take a look at certain aspects, but again only under very strict like rules or court order or something like this uh that is very like limited in scope. And um finally for security like any single event is is pretty much survivable both on the onchain side like we have a lot of uh protections like multi, times locks, exit windows, all these sorts of things.

But then on the offchain side too, like we have a bankruptcy protections. There's a secondary manager ready to step in and issue redemptions in case anything happens to the primary one and and this sort of thing. And so I want to ask like how would this look like to a user, right? Like if I'm a user holding and using this asset, what would it look like right in theory? And um it would mean like on boarding only has to happen once and then I can reuse my credential. It means a buying is just a standard wallet transaction. If the issuer disappears, I can just get my underlying asset out. Um, cashing out is easy. It's just like a one day thing. Uh, holding and transferring assets as private.

There is selective sharing for taxes or auditing if I want to share. Uh, whenever there's tokens that are like frozen, it's done in a transparent way and people know what's going on and why and the scope of it. And then also there's like a recovery path for for for lost keys. And beyond treasuries, we can look at other categories also. Obviously the regulations change and and some of the implications are a bit different. For stocks it's similar. For stable coins it's similar. For commodities and real estate basically they would have a bit of a lower security and censorship resistance basically because the physical element remains a risk. And now I want to just take a look at the honest answer which is like can a real world asset be crops aligned. Well yes but as long as the state allows right like real world assets can survive the issuer but

they can't defy the state. And I think this basically means we should try to aim to go from re real world receipts to real world rights. And yeah, that's all. Thank you very much. >> Okay. Thank you very much, Eric. That was really interesting. Nice to know that people are working on this at a very sort of deep technical level. Uh we've had a few questions come in from the audience and there's still time to contribute and curate the questions by scanning the QR code, but we've got one to jump straight into. It's sort of flipping things around a little bit asking what are the risks to ETH as an asset from being intermixed with these low crops tokens. What do you think?

>> I mean that's a tough question to answer I would say. Um I think obviously Ethereum has um crops properties that we're all like happy with. Obviously, we want to like push them further, but as long as it remains kind of intertwined with these uh assets like current stable coins or even like tokenized funds or these sort of things that have other properties, it kind of creates like a a two-tier system, right? Where like if I'm holding ETH, I can do things like maybe in a in an easier way and I don't have to worry as much about these things, but then all these other assets are kind of like locked to me and I can't access them. And if I can, I kind of have to give up a lot of these things, either like my privacy or I have to give up the the fact that like I'm

the only one in control of this asset. And I think uh that's a bit of the risk, let's say, if if ETH uh stays intertwined with these assets that people lose track a bit of like the properties of each asset because we kind of just see them side by side and we assume like they work in a similar way because they're both like a token on a blockchain, right? But that's not necessarily the case. >> Okay. Uh, so the next question, so with with the amount of hacks happening, wouldn't it be better to be able to freeze funds faster than having a fully courts signed order? There's also another question. So court orders for freezes are slow, but hacks are fast.

How do you reconcile this? So this this is obviously a trade-off, right? And I mean, I'm not sure exactly what the right answer is here, but there's other ways you can do this, right? You could allow for immediate freezes, but let's say like with a cool down where you can freeze anyone, but um unless and and the asset remains frozen for let's say like a week or a day or however long. And uh unless then there's a court order associated to it that's provided within that time frame, the asset gets automatically unlocked, right? And I think that would be a good compromise.

Like as a user, I know if somehow I get accidentally targeted because there's a hack happening and there's confusion at the beginning, I know at least if if if no one can prove that I had anything to do with it, my asset will be released and I'm not like within a certain amount of time and I'm not going to get stuck dealing with the legal system that like accused me wrongly or like something like this. >> Okay, so a couple of minutes more. So a few more questions to go through. So uh question is who's working on crops aligned rwas? Who are the key players to watch if people want to sort of follow along? Who are the movers and shakers in this space?

>> So right now to be honest um it seems like there's not too much going on. It seems like the the real world asset space is is a lot more focused on uh let's say growing the space and like the the efficiency of it compared like to the traditional banking system and and this sort of thing. And there's not too much focus on let's say like the the additional values that this can bring apart from just like interoperability or these things which are quite useful as well right I would try to look more on the on the legal side because on the technical side we're we're doing good I would say compared to the legal side and we have different jurisdictions that are doing a bit different I would say and I think Switzerland is like one example of a jurisdiction that's like advancing quite well I would say in this regard

like in Switzerland you can have a company issue like shares of their company like stocks on chain where the the token itself is the legal share right and that's like just one step but I think these sorts of regulations are are what kind of push forward uh the the space >> okay thank you um next question is around what type of real world assets do you think have the highest hopes of becoming crops aligned stable coins perhaps >> I think stable coins I think treasuries I think like I mentioned in one of the slides I think these are a bit easier here because you don't necessarily have this like physical uh issue that you have maybe with things like commodities like gold or oil where

like someone has to custody it or even real estate right where it's like you can't even move it somewhere else and I think that makes me more hopeful that we'll be able to find more like crops align solutions for for these types of assets. >> Okay. Uh there's one more question. Um, I don't know what this DTCC uh acronym is for. Do you know about >> So, I don't know if you know about this.

>> Um, it it sounds familiar. I'm not sure I would be able to answer right now, but feel free to reach out afterwards and and we can talk about it. >> Oh, great. Okay, great. That was uh that was really nice. >> [music]