Exploring energy tokens: the end of RWA is PoW

Not long ago, the encryption industry was severely regulated by the US SEC. The top centralized exchanges were investigated, and a large number of cryptocurrencies with a proof-of-stake (PoS) mechanism were classified as securities. But at this time, some of the most original technologies and concepts have been re-examined, one is Proof of Work (PoW), and the other is Real World Assets (RWA). PoW-based cryptocurrencies are characterized as commodities, which comply with the old regulatory rules; RWA maps physical assets in the traditional market to the chain in the form of tokens, betting on future compliance narratives, old things and new concepts, both of which are also subject to The market is highly concerned.

Reasons for early failure of RWA

Looking back at history, as early as 2017, when the Ethereum ICO tokens were first issued, many projects proposed RWA (then called asset on-chain). For example, the rights and interests of real estate are tokenized, and investors can purchase the corresponding RWA tokens to realize investment dividends. Such projects were very popular among investors at the time. The main reason was that more people tended to think that cryptocurrencies that could be linked to entities were more valuable or more reassuring than tokens that were purely virtual and had no practical application.

This is also one of the key factors for RWA to attract market attention again, especially for users who have recently entered the encryption industry. But in reality, almost no RWA projects have achieved the expected success in the past. The reasons are mainly the following five points:

• **Blockchain was a brand new thing at the time. **Encryption and tokens have not yet become a technology that the public trusts. The managers of real assets lack the motivation to chain large-scale assets, and generally hold a skeptical or wait-and-see attitude.
• **The blockchain infrastructure at that time was not mature. ** The exploration of decentralized application platforms is still ongoing. Even Ethereum, which is now the second largest in market value, has been doubted about its prospects in the past. Therefore, the RWA project at that time almost required a separate chain for each type of asset to be traded and circulated, which increased the difficulty of RWA implementation.
• **Centralized management of institutions under the chain. **RWA needs an off-chain institution as a guarantee before going to the chain, and all parties to the transaction need to rely on the institution’s credit endorsement, which is not in line with the pursuit of the encryption world.
• **Risk management is difficult. **The maintenance of underlying assets, asset chaining, and income distribution all involve risk management. In the event of default, without any relevant RWA laws and regulations, the risk of asset loss is huge.
• **Different asset attributes will encounter different problems on the chain. ** Not all actual assets on the chain can improve the liquidity of assets. On the contrary, the cost of compliance and security maintenance of some assets on the chain is far greater than the benefits of liquidity.

Different RWA assets

It was not until Ethereum was tested by the market as a decentralized application platform, and at the same time, the emergence of DeFi laid the foundation for the current RWA narrative. In particular, MakerDAO, the leading DeFi project, has turned to RWA, which has attracted industry attention. MarkerDAO’s approach is to use U.S. debt as the RWA on its chain by buying a large amount of U.S. debt.

U.S. debt is a debt asset. Compared with other traditional real-world assets, it has huge advantages in terms of liquidity, standardization, scalability, and security**. In addition to debt assets, assets such as gold, real estate, loans, and equity are currently more suitable for RWA. Among them, there are other types of assets that are ignored by the RWA market, namely energy assets.

The most famous energy asset RWA should belong to the petro coin announced by Venezuela in December 2017, using the country’s oil as a reserve. Oil also had a huge advantage over other RWA assets, but ultimately it didn’t pan out. And another kind of RWA**, which uses the energy consumed as a proof reserve through the PoW mechanism, has achieved historic success, and the representative project is Bitcoin.

The relationship between RWA and PoW

PoW is the consensus mechanism of Bitcoin. How can the mechanism of a point-to-point electronic currency system become RWA?

In fact, behind PoW is the real power energy asset, and the consumed power is issued on the chain by converting it into tokens. And this electricity-to-token conversion process is decentralized and market-oriented, and it is a direct process without any intermediary agency management, and it is completely determined by code and mathematics in terms of asset maintenance and distribution. It can be said that Bitcoin is not only the first electronic currency in the world to achieve decentralization and prevent double spending at the same time, but also the first RWA to capitalize energy on the chain.

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

Compared with other traditional real-world assets, energy also has huge advantages in terms of liquidity, standardization, scalability, and security. Especially in terms of liquidity, asset standardization and scalability have reached the extreme, and everyone in the modern world cannot live without energy.

The process of putting energy consumption on the chain as an asset is PoW. It needs to rely on machines to calculate computing power. **Its characteristic is that the economic model of the chain needs to be designed in advance before the energy is put on the chain. **Just like the energy consumption of Bitcoin, the chain process is to set a total of 21 million tokens first, and the energy consumption is also dynamically adjusted. The difficulty of the total computing power of the main network is adjusted every two weeks, and the proof of energy consumption The halving cycle every four years.

The end of RWA is a PoW based token

Currency is the most liquid and largest asset in the economic system. If PoW-based tokens are regarded as a kind of RWA, then the token system becomes an optimal RWA system. When we transfer PoW tokens, it is equivalent to transferring real-world assets, and you can exchange this asset for other assets that are being sold in the market. This PoW-based RWA product is a token that acts as a medium of exchange in the economy.

History and economics have taught us that currency exchange economies are much more mature and efficient than barter exchanges. Then, compared to exchanging real-world assets on the chain, if it is impossible to avoid the centralized management of assets, it is better to directly replace the circulation of real assets on the chain with the circulation and exchange of tokens. **Then it can be said that the end of RWA is PoW based tokens. **

From the perspective of RWA, the energy consumption of the entire Bitcoin is dynamically adjusted and limited. It is expected that the proof of Bitcoin energy consumption will end by 2140. At this time, the total value of Bitcoin will be based on the total historical energy consumption. If the technology at that time has been greatly improved, the cost of energy consumption will be significantly reduced. Since Bitcoin has no output and there is no marginal cost in the market, the total value of Bitcoin as a whole will follow without considering other factors. lowered. Then it will inevitably cause the market to reposition Bitcoin, and it is very likely that the original token function will be completely defined as a collectible, just like the collection of ancient coins in the current market.

Therefore, it is necessary to fully design PoW energy consumption, such as simply changing the limited quantity to unlimited, which can avoid the marginal cost disappearing after the energy proof is completed, and the asset value will decrease with the energy cost reduction. For example, energy is also consumed through PoW, but Dogecoin, which has no total amount limit, does not have this problem. From this perspective, it means that Dogecoin is more suitable for circulation as a token than Bitcoin from the perspective of sustainability.

In addition to the design of the number of energy certificates, there are dynamic adjustment cycles for energy consumption, energy certificate segmentation, privacy, distribution fairness, circulation and supply adjustment, etc.**. Except for the difference in quantity, Bitcoin and Dogecoin have the same problem as tokens: There is no supply adjustment mechanism. This results in very high volatility in the value of energy backing assets.

So what kind of design is optimal from the perspective of energy tokens? Answering this question will involve consideration of more factors, which I will analyze in detail in future articles.