PoW Money Is the Endgame of Real World Assets (RWA)

Not long ago, the crypto industry faced severe regulatory crackdown from the U.S. Securities and Exchange Commission (SEC). Major centralized exchanges came under investigation, and a large number of Proof of Stake (PoS) based cryptocurrencies were categorized as securities, leading to widespread concerns.

However, amidst this regulatory climate, certain more fundamental technologies and concepts have garnered renewed attention: Proof of Work (PoW) and Real-World Assets (RWA).

Cryptocurrencies based on PoW have been classified as commodities, aligning them with existing regulatory rules. On the other hand, RWA involves tokenizing real-world assets from traditional markets and integrating them into the blockchain, betting on a future narrative of compliance. Both the old concept of PoW and the emerging notion of RWA have received significant market attention.

The Early Failures of RWA

Looking back at history, as early as the 2017 Ethereum ICO token issuance frenzy, many projects proposed Real-World Assets (RWA) tokenization (then referred to as "asset on-chain"). For example, projects aimed to tokenize property ownership, allowing investors to purchase corresponding RWA tokens to receive investment dividends.

Such projects were highly favored by investors at the time, primarily because compared to purely virtual and speculative tokens, cryptocurrencies tied to real-world assets were perceived as more valuable and trustworthy. This is also one of the key factors why RWA is once again gaining market attention, especially among newcomers to the cryptocurrency industry.

However, in reality, almost no RWA project achieved the expected success during that period. The main reasons for this can be summarized as follows:

• Blockchain was a completely new concept: Blockchain had not yet gained widespread trust as technologies, and entities responsible for managing real-world assets lacked the motivation to adopt blockchain for large-scale asset management, resulting in general skepticism or a wait-and-see attitude.

• Immaturity of blockchain infrastructure: Decentralized application platforms were still in the early stages of exploration. Even Ethereum, which now ranks second in market cap, faced continuous doubts about its future prospects. As a result, RWA projects at that time often required separate blockchains for each asset category, increasing the complexity of implementing RWA.

• Centralized management by off-chain institutions: Before being tokenized, RWA required off-chain institutions to act as guarantors, and all parties involved in transactions had to rely on the credit endorsement of these institutions, which contradicted the principles of decentralization pursued in the crypto world.

• Difficulty in risk management: Maintaining underlying assets, tokenizing them, and distributing returns all involved risk management. In the absence of any relevant RWA laws and regulations, the potential risk of asset loss due to defaults was significant.

• Different asset attributes encounter various problems: Not all real-world assets can benefit from being tokenized in terms of increased liquidity. In some cases, the costs associated with compliance and security maintenance for tokenized assets outweighed the benefits of improved liquidity.

These challenges hindered the successful adoption and implementation of RWA projects in the early days of the crypto industry. However, with advancements in blockchain, growing regulatory clarity, and improved market awareness, RWA is now being revisited with renewed interest and potential for success.

Different RWA Assets

It was only when Ethereum proved itself as a decentralized application platform and the rise of decentralized finance (DeFi) occurred that the foundation for the current RWA narrative was laid.

Particularly noteworthy was MakerDAO, a leading DeFi project that shifted its focus towards RWA, garnering industry attention. MakerDAO's approach involved buying a significant amount of US Treasury bonds to use them as RWA.

US Treasury bonds are categorized as debt-based assets and possess significant advantages in terms of liquidity, standardization, scalability, and security compared to other traditional real-world assets.

Apart from debt-based assets, other assets that are currently well-suited for RWA include gold, real estate, loans, and equities, among others. However, one category of assets that has been overlooked in the RWA market is energy-related assets.

One of the most famous RWA assets in the energy category is the Petro, announced by Venezuela in December 2017, which was backed by the country's oil reserves. While oil has its advantages compared to other RWA, it ultimately did not achieve success.

On the other hand, a groundbreaking success in the RWA domain was achieved by projects that utilized the PoW mechanism, with Bitcoin being the most prominent representative, using energy consumption as proof of reserve.

RWA and the Relationship with PoW

PoW is the consensus mechanism used by Bitcoin, and you might wonder how such a mechanism for a peer-to-peer electronic cash system can be related to RWA.

In reality, behind PoW lies real electrical energy assets. The consumed electricity is transformed into tokens and issued on the blockchain in a decentralized and market-driven process, without the intervention of any intermediary institution.

Furthermore, the asset maintenance and distribution are entirely determined by code and mathematics. Thus, Bitcoin is not only the world's first decentralized crypto that prevents double-spending but also the first to tokenize energy and turn it into an RWA.

From the perspective of RWA, what are the characteristics of energy-based PoW?

Energy possesses significant advantages over other real-world assets in terms of liquidity, standardization, scalability, and security. Particularly, it excels in liquidity, asset standardization, and scalability because every individual in the modern world relies on energy for their daily lives.

The process of tokenizing energy consumption is what PoW entails. It relies on machines to perform computational work. Its characteristics involve the need to design the economic model of the blockchain before the energy is tokenized.

For instance, in the case of Bitcoin's PoW, the process involves setting a total token supply of 21 million, dynamically adjusting energy consumption, and recalibrating the network's total hash rate difficulty every two weeks, with a halving cycle for energy consumption proof every four years.

PoW Money is the Endgame of RWA

As the most liquid and largest asset in an economic system, currency becomes the optimal RWA system when based on PoW. By transferring PoW-based currency, we effectively transfer real-world assets, allowing us to exchange this currency for other assets available in the market. This PoW-based RWA serves as a medium of exchange within the economy.

History and economics have taught us that monetary exchange is much more mature and efficient compared to barter economies. Therefore, instead of putting real-world assets on the blockchain for exchange, especially when avoiding centralized management of assets is not feasible, it is more efficient to directly use currency for circulation and exchange, effectively replacing the circulation of real-world assets. In this sense, PoW money is the endgame of RWA

From an RWA perspective, the energy consumption of the entire Bitcoin is dynamically adjusted and limited. It is estimated that by the year 2140, Bitcoin's energy consumption proof will come to an end, and at that time, Bitcoin's total value will be anchored to the total historical energy consumption.

If technology has made significant advancements by then and the cost of energy consumption has significantly reduced, since Bitcoin will no longer be producing new coins and has no marginal cost in the market, its overall value might decrease without considering other factors. This could lead to a market repositioning of Bitcoin, possibly turning it into a collectible, much like how ancient coins are collected in the current market.

Therefore, it is essential to carefully design the energy consumption of PoW, for instance, by making the quantity limitless rather than finite, to avoid the issue of marginal cost disappearing after the energy proof ends, and the asset value decreasing with reduced energy costs.

For example, Dogecoin, which also consumes energy through PoW but has no total supply limit, does not face this problem. From this perspective, it means that Dogecoin might be more suitable for circulation as a currency from a sustainability standpoint compared to Bitcoin.

In addition to the design of the energy consumption proof quantity, other factors to consider include the dynamic adjustment period, divisibility, privacy, fairness in distribution, liquidity, and supply adjustment. Both Bitcoin and Dogecoin, despite their differences in quantity, face the same problem as currencies: the lack of a supply adjustment mechanism. This results in high volatility of asset value that is supported by energy.

Determining the most optimal design from an energy currency perspective will require careful consideration of many factors, and I will delve into a detailed analysis in future articles