In the midst of the RWA Craze, will Cryptocurrency Rise as the New Financial System or Fall as a Traditional Satellite?

Original Title: Onchain Capital Structure

Original Author: long_solitude

Original Translator: Daisy, Mars Finance

Will Cryptocurrency Tokenize Traditional Finance, or Will Traditional Finance Tokenize Cryptocurrency?

The financial industry has been undergoing a transformation of its business models. Over the past few decades, we have seen the rise of alternative investments such as private equity, venture capital, and especially private credit. Private credit has become one of the fastest-growing sectors in the financial field.

M&A star Ken Moelis recently lamented the decline of M&A bankers. Today, alternative hybrid financing structures are more profitable than buying and selling companies.

For investors like us who focus on cryptocurrency, alternative financing could well encompass on-chain structured products and tokenized elements of capital structures. But if this opportunity is eventually seized by unemployed M&A bankers rather than profitable founders of crypto projects, it will be a great regret.

So far, the only products within the cryptocurrency space that have truly been accepted by the traditional financial system are stablecoins and Bitcoin. DeFi (Decentralized Finance) has yet to truly take off outside the crypto sphere, with its performance still closely tied to trading volumes.

One of the future directions is a bottom-up approach to build a fully on-chain capital structure (debt, equity, and tokenized assets in between). Traditional finance loves returns and structured products. While many of us in the past have seen thousand-fold returns by hyping concepts, the future development of institutionalized on-chain finance will require us to adapt to new challenges.

We Once Dismissed This

For a long time, we have always lacked interest in Real World Assets (RWA). In the past, we viewed it as a "reification" of outdated thinking—just giving a digital shell to existing off-chain assets, which are still subject to a traditional legal system vastly different from "code is law." But now, we are reexamining this seemingly unimaginative yet highly practical opportunity.

The Limitations of Onchain Private Credit

Tokenizing private credit on-chain essentially only opens up a new financing channel for borrowers. Platforms like Maple Finance have indeed driven this process. However, in the event of capital impairment or default, lenders can only rely entirely on the existing legal system (as well as platform teams like Maple) to recover funds. Moreover, such debt is often issued in jurisdictions with weak rule of law or in frontier markets. Therefore, it is by no means the perfect solution advocated by proponents (for more background, please refer to our earlier analysis).

Adverse Selection Dilemma

Even more concerning is the issue of adverse selection. On-chain private credit aimed at crypto retail investors often exhibits poor asset quality. Opportunities that offer the most optimal risk-adjusted returns are always monopolized by giants like Apollo and Blackstone, and they never flow into the blockchain market.

Unique Advantages of On-Chain Native Businesses

Fortunately, there is currently a group of traditional institutions that have not yet entered (but have already become profitable) on-chain native businesses. These projects now need to innovate boldly in their fundraising methods based on the revenue-generating nature of their on-chain operations.

As for U.S. Treasury bond tokenization? It is nothing more than a trick to add a yield-enhancing element to DeFi strategies or a shortcut for crypto-native users to diversify their assets while circumventing fiat on/off-ramp restrictions, with very limited substantive significance.

Exploration and Challenges of On-Chain Native Debt

There have been several attempts in history to issue pure on-chain debt (such as Bond Protocol and Debt DAO), with these debts being backed by project tokens or future cash flows. However, none of them ultimately succeeded, and the specific reasons are not yet fully understood. Currently, the following explanations exist:

1. Capital and User Exhaustion in Bear Markets

At that time, very few projects could generate substantial income, and market liquidity was severely lacking.

2. DeFi's Lean Capital Nature

One of the most attractive qualities of this industry is its ability to operate protocols with hundreds of millions of dollars in value with a lean team, where the marginal cost of expansion is almost zero.

3. Over-the-Counter Token Advantage

Selling tokens over-the-counter to specific investors not only provides funding but also garners social credit and status endorsement—these resources can subsequently be converted into growth in TVL (Total Value Locked) and price appreciation.

4. Overwhelming Advantage of Incentive Mechanisms

Compared to liquidity mining, point rewards, and other fancy incentives, bond products are not competitive in terms of yield.

5. Regulatory Murkiness of Debt Instruments

Relevant regulations have never provided a clear definition.

It is for the reasons mentioned above that DeFi founders have always lacked the drive to explore alternative funding channels.

Programmable Revenue and Embedded Finance

We firmly believe that on-chain enterprises should have a lower cost of capital than traditional enterprises. The term "enterprise" here specifically refers to DeFi-related projects—after all, this is the only sector in the crypto space that truly generates revenue. The foundation of this cost of capital advantage lies in the fact that all revenue is generated on-chain and is fully programmable. These projects can directly link future revenue to credit obligations.

The Debt Trap of Traditional Finance

In the traditional financial system, debt instruments often have clauses that restrict the leverage level of a specific enterprise (covenants). Once a default clause is triggered, creditors have the right to initiate asset takeover procedures. However, the issue is that creditors not only need to estimate enterprise revenue performance but also need to constantly monitor cost expenses—because it is precisely these two variables, revenue and cost, that affect covenant metrics.

The Structural Breakthrough of On-Chain Credit

Based on programmable revenue, on-chain credit investors can completely bypass the enterprise's cost structure and directly lend based on revenue. This means that enterprises can obtain funding at a much lower interest rate than equity financing (based on PNL statements). Projects like Phantom, Jito, or Jupiter, for example, should be able to secure billions of dollars in funding from large institutional investors using their on-chain revenue as collateral.

Through flexible smart contract settings:

When project revenue shrinks, the proportion allocated to creditors automatically increases (reducing default risk). When revenue grows rapidly, the corresponding proportion is dynamically adjusted downwards (maintaining the agreed credit term)

This embedded finance architecture is redefining the flow of capital and value.

Exploring the Financialization of On-Chain Revenue

Take pump.fun, for example. If it were to secure $1 billion from a pension fund, when the new coin collateralization rate drops (as is the recent case), the pension fund can take over the smart contract until the debt is repaid. While the feasibility of such aggressive measures is still controversial, this direction is worth exploring.

Advanced Applications of On-Chain Revenue

On-chain revenue can not only fulfill basic credit obligations but also achieve:

Automatic settlement of different priority debt rights in the capital structure (subordinated debt and senior debt)Condition-triggered repayment mechanismsDebt auctions and refinancingSegmentation and securitization of income by business type

Limitations of Token Financing

Compared to selling tokens at a discount off-exchange to hedge funds (which often opportunistically hedge or dump), the above income securitization should be a more economical financing solution. Project income can be sustainably generated, while token supply is limited. Although token sales are convenient, they are not a sustainable way for projects aiming for long-term development. We encourage ambitious teams to pioneer a new financing paradigm rather than sticking to conventions.

Reference to Traditional E-commerce

The above model is known in traditional e-commerce as "merchant cash advance" or "factor rate loans." Payment processors such as Stripe and Shopify provide operational funding to merchants they serve through their own investment tools. The actual interest rates for such loans are usually as high as 50-100% or even higher, and they lack a price discovery mechanism—merchants, as price takers, are tightly bound to the payment system.

Breakthrough in On-Chain Embedded Finance

This embedded (in-app) financing model shines on-chain:

Programmable payments support conditional payments, real-time fund flows to achieve more complex payment strategies (such as targeted customer discounts). Stripe is pioneering this algorithmic prioritization model through merchant coverage and Bridge acquisition to drive stablecoin applications between merchants and consumers.

However, the key question is: Can this model open up to permissionless capital and promote competition? Payment companies are unlikely to give up their moats to allow external entities to lend to their merchants. This may well be the entrepreneurial opportunity for on-chain native crypto-commerce and permissionless capital solutions.

Dual-Class Shares

If a company's equity value is entirely derived from on-chain revenue (i.e., no other source of income), then equity tokenization is the inevitable choice. Initially, a standard equity form may not be adopted, and a hybrid structure between debt and equity can be used.

The recent launch of tokenized Coinbase shares by Backed.fi has attracted attention. This scheme holds the underlying stocks through a Swiss custody institution, allowing cash redemption for KYC-compliant users. The token itself follows the ERC-20 standard, enjoying the composability advantages of DeFi. However, such a design only benefits secondary market participants, with Coinbase as the issuer not receiving any tangible benefits—neither able to conduct on-chain financing through this tool nor innovate the application of equity instruments.

Although equity tokenization (and other assets) has become a popular concept recently, truly exciting cases have yet to emerge. We expect such innovations to be catalyzed by platforms with broad distribution channels and benefiting from blockchain settlement, such as Robinhood.

Another development direction of equity tokenization is to build an on-chain giant that can obtain nearly unlimited funding at extremely low cost based on on-chain revenue, proving to the traditional market that half-baked solutions are not viable — either all revenue is tokenized into a fully on-chain organization, or it continues to stay on Nasdaq.

In any case, equity tokenization must introduce new features or alter the risk characteristics of equity: Can a fully tokenized company lower its cost of capital due to its real-time on-chain income statement? Can it use on-chain oracles to validate event-triggered conditional equity issuance, changing the current market issuance (ATM) mechanism? Can employee equity incentives be based on on-chain milestones instead of time-based vesting? Can a company collect all trading fees generated from its own stock transactions instead of giving them to brokers?

Conclusion

We always face two development paths: top-down and bottom-up. As investors, we always pursue the latter, but more and more things in the crypto space are being realized through the former.

Whether it's equity tokenization, credit tools, or income-based structured products, the core question remains the same: Can new forms of capital formation be enabled? Can incremental functionalities be created for financial instruments? Can these innovations reduce the cost of capital for businesses?

Just as the traditional venture capital field has arbitrage between private and public markets (the trend is to stay private rather than go public), we anticipate that the binary opposition between on-chain and off-chain capital will eventually disappear — only superior or inferior financial solutions will exist in the future. It is quite possible that our judgment is incorrect, and on-chain credit linked to revenue may not necessarily lower the cost of capital (it may even be higher), but in any case, a true price discovery mechanism has not yet been formed. To achieve this goal, we need to go through the maturity process of on-chain capital markets, engage in large-scale funding practices, and attract new market participants.

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