The Rise of Composable RWAs

Transcript

Hello. Bonjour. I am Frederick, co-founder and CEO of Dune and excited to be with you here today. This is my fourth ECC. First in Paris, then in Brussels, then here last year, and it's great to be back here. I think it's the best location >> [snorts] >> we've had. So, very excited to be here. I'm going to today talk about the rise of composable RWAs. So, RWAs is a big topic, but why are they on the blockchain and what can you do with them? That's what we're going to explore today. So,

basically blockchains are these amazing rails that are 24/7, global, programmable, and you know, this has been understood for a long time. Like I got into this space 10 years ago, and you know, I think many of us that got excited back then saw that these are amazing interesting properties of of this financial system. So, that's been great, but unfortunately, for a long time, the assets were not that interesting.

So, you had these very very cool global permissionless financial system, but there wasn't that many interesting actual assets to leverage or use on this financial system, and and that kind of matters. So, you had the sort of crypto native sort of non-state money type of things like arguably ETH and definitely Bitcoin and whatnot. And then beyond some of those things, it was quickly pretty thin in terms of sort of real hard interesting assets to do anything with. But luckily, this has recently been changing.

So, there's been just in the last year and and even, you know, shorter, there's been some amazing unlocks in this industry for what kind of assets you can put on the blockchain, which is a total game-changer. So, last summer, we got the genius act regulating stablecoins in the US. Then, just now, a few weeks ago, the SEC and CFTC, in unusual fashion, actually collaborated on a bunch of regulation around what is digital commodities, which was very helpful. And then also, just recently, the SEC approved sort of Nasdaq to tokenize trading, essentially making the

blockchain the way they track their books and and trades. So, all these are amazing unlocks for for the industry. And finally, there's a clear regulated way to put more assets on the blockchain. And as I'm sure you know, mostly what's been happening is that sort of stablecoins dollars has been put on the blockchain. So, right now, there's about 330 billion worth of stablecoins put on blockchains. This has grown 12x since 2020, so in the about last 5 years, and you can see the chart here, and it's going up and to the right, and it's very exciting, and it's

the most obvious sort of first real-world asset, if you will, that's being put put on the blockchain in a major way. Then, and then basically within this this market, you have two clear leaders. There's USDT from Tether, and there's USDC from Circle. Tether has about 60% market share, Circle has about 25% market share. This has been stable even as the the market has grown, so they maintain their position. But what's also happened is there's a lot more stablecoins being issued. We're tracking about 215 of them, and so there's a lot happening on sort of the long tail and and a lot more

experimentation going on there with different layers of issuance and whatnot. But the headline is still pretty much the same in terms of Tether and Circle dominance. All right, but then you have these other categories, which is sort of RWAs, so real-world assets, which has also grown a lot. So, we have um now has seen 27x growth in real-world assets on chain in in the last 2 years. So, this has grown to 27 billion now issued on on the blockchain.

And then the question is, why do this? Why put a stock or a T-bill or something on the blockchain? Well, there are a few reasons. So, [clears throat] one is instant settlement. It's easy to to actually understand who holds the thing. There's transparency. You can look at the blockchain and see what's happening, as I'm going to show you some stuff today about. It's programmable, so you can do all kinds of crazy things with coding directly on the asset. This is pretty insane relative to bunch of paperwork and legal lawyers, whatnot, making things happen and creating logic around assets. You have default 24/7 access, global.

There's fractional ownership, so you can very easily split up the assets into smaller units and whatnot. And then, it should be more cost-efficient. You have fewer middlemen, lower fees, these things. And lastly, you have composability. So, basically, the fact that you can take some asset and then plug it into DeFi lending, all kinds of different things. And that is what we're going to look at today. So, we're going to look at RWAs and and see what's happening in terms of composability, to what extent are these assets really being put to use on the blockchain beyond just being sent back and forth or hold in in custody.

So, >> [clears throat] >> if we look at the overall market, like I told you, there's little over 300 billion stablecoins. About 10% of that is real-world assets. And then about less than 10% of that is put in DeFi right now. So, you basically have sort of this uh 10% 10% breakdown of how much is actually happening. So, we're going to look at these 2 billion. So, first of all, this is basically all happened in the last year. So, a year ago, there was 33 million sort of worth of real-world assets in DeFi protocols. Now there's 2 billion.

And 2 billion doesn't seem that much relative to the 300 billion overall stablecoin market cap, but this has actually grown 60x in a year. So, incredibly fast growth, and you know, in tech in general, it's very important to be mindful of growth rates, not just absolute numbers. So, this is is very interesting. And so, where where are these assets being put? Well, there's basically two main dominant players. There's Morpho and Aave, and here Aave is split into two products. So, there's Aave, the sort of general well-known DeFi protocol, and then there's Aave Horizon, which is their

institutional product. So, you can see there's about 800 million in Morpho, 800 million in the general Aave product, and then about 400 million in Aave's institutional product. So, beyond that, there's not much. So, they're really dominating. And just to explain quickly, so everybody's with me, Morpho is permissionless lending protocol. It allows lenders to lend their money into vaults. These vaults are managed by vault managers who can decide where this money goes to generate yield. And then, you have the markets where where these things are

placed, and then borrowers can decide to put money into that system from the other end. So, obviously, a well-known lending protocol on the blockchain. So, [clears throat] real-world assets in Morpho has grown 40x over the last year. So, it's gone from 2 20 21 million to 830 million in about a year. So, again, very very strong growth rate. And as you can see from the chart here, it's first and foremost institutional credit. So, this gray section is really what it's all about. So, you see there's all these asset classes, but really it is, you know, tiny bit of gold, and

there are some T-bills and whatnot, but it really is institutional credit that people are putting on the blockchain and into DeFi. So, what does that mean? Well, institutional credit basically means that you are lending to someone that is an institution that is vetted. So, instead of going to an open-ended system and just say, I'll lend my money to whoever, that you do in like an open-ended pool, institutional credit means that someone takes care to find a borrower that is trustworthy and sort of low risk, basically.

And so, Maple is a system that enables this. So, basically, why do people do this? Well, you can yield about 6% through Maple versus about 3 and 1/2% on a T-bill. So, you basically go sort of one step out on the risk curve, you get a little bit more yield, and you have exposure towards credible sort of borrowers on the other side. And so, just also quickly to explain the um other institutional product. So basically, this is a gated product that they have in the blockchain where they permission who gets access to the product. So it's not a free-for-all

to attract institutions. And what you can see then is that a lot of Maple's supply goes into Aave. So basically, 99% of of their syrup USDC on base goes into Aave and 99% of syrup USDT tether on the plasma chain goes into Aave. So there's a lot of Maple supply and it a lot of it goes into Aave essentially.

Um And what you can see also is that basically institutions, when they use real-world assets on the blockchain, they optimize for high yield. So they're not putting things on the blockchain or holding these assets on the blockchain to have like a safe haven. Like things like basically tokenized T-bills and these type of things, you can see here sort of the in Aave Horizon, this institutional product, you know, how much bigger 10% APY product is versus the sort of T-bill exposures that you have on on the right side here. So it's clear that when people go on chain, it's because they want to like leverage up

lend out the money and and create extra yield on on their assets. So it's sort of a high-risk environment, even if sort of less high-risk than than some of the other crazy crypto things. Um In terms of um sort of tokenization, you have also this is Centrifuge, which um sort of helps put uh some of these assets on the blockchain. So they're sort of intermediary between uh various parties that want to issue stuff on the blockchain and the blockchain itself. Um so they have 1.5 billion of um products put on the blockchain, which you can see the supply of here. Um these are sort of like stock indices, um T-bill exposure, that type

of stuff. But they only have 12 million of all of this in the blockchain. So I don't have a chart for it because it would be basically unseeable on a chart like this. So Centrifuge has like managed to put a lot of real-world assets on the blockchain, but they've really not been put into use on the inside of smart contracts and whatnot. And so why is that? Well, for first of all, the product is relatively new. So you know, could be that it just uh hasn't been around for that long. But I think also what you see is that when there's institutional holders on the other end, there's a lot of restrictions on their for instance, just in the wallet infrastructure, it's not obvious how you put take like if you have money with a

custodian that you can like put that in various smart contracts and start to sort of do more creative things with it. Um also pure sort of compliance and these type of reasons that it's hard for some of these players to move into smart contracts and whatnot. And then in general, the liquidity is thin. These are sort of relatively new markets, um new assets that haven't been on the blockchain before. And so you know, it it's not necessarily at the certain scale that you you find a good return or you have counterparty to to work with.

So >> [clears throat] >> what where does that leave us? What does this mean when it comes to real-world assets and uh composability on the blockchain? So we've learned that about 10% of stablecoins um is so real-world assets are about 10% of stablecoins in terms of supply. Uh of those, 10% are actually utilized inside of smart contracts. Um so in general, quite small relative to stablecoins, but it's grown 60x in the last year. It's still been very nascent and the assets have just come onto the blockchain. So you know, this growth rate is is pretty incredible and in general, you should really

worry more about growth rates than absolute numbers in in many cases. And so this is still going to be very interesting to follow. Um what we also learned is that basically when institutions go on chain, they do so to earn an extra yield, not to just passively hold a T-bill. Um so it remains sort of a high-risk uh or high-risk type of endeavor for for the players engaging. Um and then we see you know, the permissionlessness of of DeFi really attracts real-world assets into their smart contracts. So when there's more gated, vetted things, it's it's harder. Um but when you can connect to these

permissionless protocols like Morpho, you do suck up a lot of this um this type of assets. And so basically, that's what I had for you. So Dune is the on-chain data platform. We have hundreds of thousands of charts, bunch of things like this and much more and you can fork and play around and create your own analysis on all these things, connect to APIs and whatnot. So if you're not familiar, um go check it out. And with that, I think we have some time for questions. Thank you. No questions?

Yeah, thanks thanks for the presentation. I have a question might be a bit uh humble, I don't know how to say it, but um so I saw you described that uh permissionless was something good for RWA. And actually, I recently was learning about the topic and basically permissionless used to be a bad thing for RWA because it was having so much friction with regulation. So maybe you can help me clear out those concepts to me. Yeah, good question. I think I think it depends a little bit on on like what layer you're at. Like I think it you kind of want it to be regulated on the issuance layer, but then on the on the blockchain, you know,

you know, part of the whole idea of this talk is kind of like, you know, one of the features of the blockchain is that it's very composable, it's programmable. So you can like build all kinds of logic and you know, you don't have to do any paperwork or sort of, you know, it's sort of a machine-to-machine thing. And I think that's remains important to find, you know, these markets and liquidity. So if if it becomes too bogged down in like all the stuff you can do on chain um with uh sort of regulations, then you kind of break those properties. It's not that useful anymore. Um but where like the bridge between the real world and the blockchain needs to be regulated so

that you can trust that the asset is redeemable and things like that. So I think that's how I would think about it. What's your What's your business model? Uh how do you make money basically? Uh so we have sort of a big uh pile of crypto data. We have a lot of um people working in on top of that and sharing it. And we basically charge for API access, for enterprise features, for getting this data into other systems. Um so you kind of have the dashboard layer that is what most people know and see and we have like a million users on that. But we also have thousands of businesses working with this data in other environments and

we sort of pay for if you want more compute, private data, access in other systems, these type of things. Uh so I had a question on like essentially the dollar amounts that are being put in right now, um if it's around 2 billion, is that essentially just these institutions trying it out like pilot programs? And uh if they're successful, what kind of numbers do you think could actually come on chain in the next, let's say, 5 years?

Um yeah, good question. I mean, I definitely think there's a lot of pilot programs um but I would say some of these amounts are also somewhat sizable. Like uh I think if you're running like a pure pilot, um I don't know exactly what numbers means for the different players and whatnot. But but I think 2 billion is is sort of more than, you know, nothing. It's it's actually like a reasonably sizable number versus, I don't know, if you think something like private company fundraising or something, if someone raises $2 billion, it's like more than people kicking the tires. So um I think you know, it's probably still a lot of experimentation, a lot of people trying things out. I think as I

mentioned, you know, the regulatory unlocks are very very recent. So it's quite reasonable that it's going to take some time to play out and not everybody knows what they're doing or what they want to do. So I would definitely still deem it like, you know, very very early and it's unclear sort of, you know, where it would go from here. But I think yeah, when when you've grown have something that grows 60x year over year, you know, just keep keep track of that growth rate. But but that those type of trajectories quickly become, you know, big big things. So I think I I think I don't have all the answers, but uh you know, you can follow a lot of the data at least. Yeah.

I want to ask your opinion about the main drivers for DeFi AUM growth for the next 18 months. Do you think it's money going to come from growth in stable coins AUM or more from uh generalization of RWA into DeFi? Is it going to be a mix of both? Like what do you think would be the main drivers? Um So, I I think in general like the main driver will still be stable coins because it's just sort of clearer bigger clearer sort of play for a bunch of people around payments, around sort of B2B payments and treasury management and all this stuff. So, that train is like

really left the station, I think, and it's like there's a lot happening and just absolute number numbers are so much bigger that this is still going to be the biggest thing. I think on RWAs, you know, I just looked at sort of composability as one of basically seven arguments for using real-world assets on the blockchain. I think still a lot of stuff around just like fees and settlement is like a huge deal and like why Block BlackRock is quite excited and you know, these things were like if it can just be boring, more efficient back-end technology, that's like a huge deal. And I think still the DeFi stuff and these things are you know, more more out there on the like sort of innovation side and on the risk side and

you know, anytime you put hundreds of millions of dollars into a smart contract, that's kind of scary in a way. And so, I think there's still going to be a way to go before that is like truly something that will happen at large scale, but I think just the sort of boring, straightforward things like more efficient payments with stable coins and just like if if BlackRock can like make their back office more efficient, like that's pretty huge in and of itself. All right, I think we're on time. Thank you so much. Oh, did we Yeah.

Hi Fredrik. Thank you for the presentation. Um as you mentioned, composability is one if not the biggest strengths of DeFi. Uh but on the flip sides, it's also one of its weakest link. Um because especially with illiquid assets that are put as in collateral that we can send in on-chain instruments that are being tokenized right now. Uh because when it breaks somewhere at what corner of the DeFi markets, it's also spillover into a balance sheet issue at the protocol level everywhere that assets that illiquid assets is put as collateral as well. And as we've seen

with result uh the last week. And I would like to have your uh state on it. Thank you. Well, so I think you know, it in general sort of using illiquid assets as collateral has its risks. Uh you know, the the price can move very quickly or sort of not move and then move a lot and all these things. So, I think it's it these are just like sort of totally standard finance questions of like what type of lending should you do against some asset that is very liquid or acting weird. And I think sort of crypto has done a lot of crazy experiments like this and a lot of

them haven't worked out and um I I don't think there's any sort of anything that's inherently more problematic with the blockchain in terms of this. This is just like the the financial structure around it. So, um in in any case, I do think it's actually better on the blockchain in many cases because you have you know, it is is it just flows more naturally. You can monitor way more of it. You can see the exposure. So, it has a lot of inherent benefits, but if if some asset is inherently very illiquid, uh you know, that problem is is sort of totally independent of the infrastructure it runs on. So, yeah.

All right. Thanks. Thanks everyone.