Tokenized RWAs - brave new world or unnecessary fad? - Timo Lehes | Swarm

great to be here um nice to meet you everyone and um yeah I'm Teo from swarm so let me get right into it uh we started swarm in 2019 uh the original idea actually um came up when Philip and I my co-founder lived in Silicon Valley and uh we decided to build this infrastructure for basically building like defi applications that supports uh real world assets and today I'll be focusing on um basically how to do OTC trades for predominantly for real world assets but really for any crypto asset because you know the problems are in many cases overlapping so I'm going to dive into that um as a company we're headquartered in Berlin we have a team across London Berlin Czech Republic Ukraine um and so yeah we're kind of a distributed setup and um yeah we're about uh 14 people at this point in time so um doc so how do you do an OTC trade you know obvious issue is you need to be able to trust the counterparty so the different Market structures that we were looking at like that already existed pre- blockchain where you know the bilateral OTC market which is effectively you know person meets another person we want to trade something how do we do that when number one we don't know each other number two maybe we in this case would have to trust each other and if we can't trust each other well then we have to meet to make sure that the transaction happens so a lot of people people tried to solve this problem by I think the most the first one that came up in the blockchain space was when Nick Spanos was trying to do this at a venue in New York basically have a bunch of people show up in a in a shop to trade Bitcoin for US dollar so he did that you know he got shut down for obvious reasons and then things kind of moved on but you know the problem with that is obviously that you know the trust aspect of doing an OTC trade is almost insurmountable unless you have a mechanism to to cater for it and so then you have the second solution which is then kind of the dealer intermediated o OTC or you go to an OTC desk or a market maker to basically say hey I want to buy you know half a million dollars worth of bitcoin uh and they say okay fine um you know we'll give you a price X during 30 seconds go and then you need to basically decide if you want to do that or not and that's typically like those time frames are common when you have something called like eotc um which is provided by some of the market makers as well as some of the custodial companies out there if you have a more manual process you would basically have an email process saying hey I want to buy half a million worth of BTC they send you an email back you have this price until you know 300 p.m. UTC fine I'll take it and then the deal goes off sometimes off Fiat rails as well so you kind of have to wait for the money to end up in the bank before you know that that transaction has concluded so it's a very kind of like in the in the non eotc or non- crypto situation it's actually a very nerve-wracking thing where you kind of unless you're like institutional it's it's pretty nerve-wracking just sitting there waiting for your you know half a million bucks or whatever you did in terms of transaction size um to arrive in your bank account and then the exchange markets I don't know if you've seen But like a lot of the big exchanges have OTC markets as well so they basically say okay you can buy off the order book you can buy directly from us um for example binance as an OTC service which they uh they basically ask you to have I think is they want to keep like a quarter of a million bucks in your trading account only then can you start chatting with an OTC agent and start doing trades on that platform and then of course on the other side of that it's going to be whatever price that they offer you know they have a lot of liquidity so maybe the price is good but in the end it's kind of a convoluted process alog together um but still you know having said all of that with the potential like with the actual issues on the OTC side of things it is volume wise it is one of the bigger ways to transact it's actually a higher much higher volume than spot on exchanges so OTC in crypto as well as across traditional financial asset classes is a big deal so the risks again like if you really think about what's going on there the counterparty risk is is huge huge right so the the thing you need to overcome is just that you need to know that the other person is going to fulfill on their commitment so so how do you do that if you're in a situation where you want to sell you know a bunch of tokens to someone for E who's going to send the first transaction I might send you you know one eth worth of tokens you return it back and say okay now we kind of establish some level of trust but in the end this chain can can basically break at any point so it's you know it's something that is kind of unsolved um in some ways and then then basically there's like a pricing problem as well so if you're dealing with um an OTC desk or a centralized counterparty you can almost like compare that to dark pools in traditional Finance or just like a centralized OTC in crypto where you don't really know if you're getting a good deal or not what is the spread that they're charging compared to market price and you know if if I went on a deep deeply liquid order book what would my average you know price be for that block trade um on there so it's kind of hard to know if you're getting a good deal or not just like you know if you like the number you click and buy which is not ideal so we built something called doc um it's basically decentralized application with a UI um everything sits on permissionless infrastructure we deployed it um both the UI and the domain is on E obviously smart contract are on ethereum polygon and base and with the idea that you know this is to me this is like almost one of the most obvious use cases for blockchain I mean obviously number one just transferring value across the globe um instantly and in a kind of a seamless way just by sending Stables or eth or Bitcoin that was like the first you know obvious use case but I think the Second Use case is to exchange value with each other and do that through an atomic trans action so that we don't have to you know meet in person or we don't have to trust a intermediary or a third party we can just kind of go ahead and and do the transaction ourselves so it's an open infrastructure anyone can just go and use it um and um as mentioned evm based and what happens is I basically put in an offer for whatever asset I want to offer up or I put up like a buy order I'm offering you know have a million usdc for X number of you know token and then I'm basically waiting to see if somebody else wants to take that other side of the of the order or I think the more kind of useful use case is really when we agree on telegram email or otherwise that we're going to do a transaction and then you know we basically say okay let's agree on even on down to price and how the transaction is going to happen we agree on all of that and then instead of starting to try to do that transaction like manually we just like put up a block on Doc and then the other party basically just takes the other side of that trade and then we have an atomic transaction that both parties can basically trust and you know the buyer in this case will see that the asset that they're buying has been already deposited into a smart contract so they know that it's there so once they put in the usdc it swaps so this takes care of like I don't know I suppose there's a lot of people here that are building crypto projects and I'm sure you're getting all these emails of people that want to buy your token you know hey I'm representing this family office they have 200 Bitcoin to invest in defi we are very interested in buying your token whenever we get these shitty emails we basically just say okay great just let us know what block size you're buying we'll put up an OTC order on DC and you can go and take out the other side and obviously they never do but anyway um that's a different story then the other stuff that we did was we built support for uh partial orders so you know sometimes if you want to sell like a a large volume of something you might want to offer that at a particular price but if you're only selling a smaller volume then you want a different price so you basically want to be able to dictate whether the order should be taken out fully as a block trade or if it should be like a partial order so so we allow for partial orders or we allow you to enforce that if you're going to buy at this price you have to buy the full block so it's basically like you know just a way to manage different um deal structures and then we have the private offer which is a way to say I will only offer this to a particular wallet and that's quite useful when you've agreed with someone that you're going to do a deal but you don't want somebody else to come and take out the deal you know and front run somebody else so it's solved the whole front running issue and you basically just go there and say okay um give me your wallet address that you want to make do this transaction from and so when I put in my cide order I'm going to dictate and say you can only do this transaction with this particular wallet so all the other um transaction attempts will fail including all front running and um and what whatever types of bots that you would have out there um and then of course the time expiration this is Val for x amount of time it's just like another useful feature um so yes I think you know in terms of like thinking about like how OTC should work on blockchain I think we you know we gave that some thought and we came up with a solution um I think it's been working really well well for us and then so now we started also like adding a couple of very um rwa specific items to that as well because like if you're trading crypto um a lot of that is like pretty straightforward just from a kind of a regulatory and otherwise point of view but then when you're trading RW you need a couple more things to make that um feasible at like professional or institutional level and so one of the things is what we call off select which is basically so when we built the permission layer for swarm um we built a way to put um basically nfts into your wallet that would say I have the following qualification levels so it's basically a soulbound nft that once you've qualified for something we put that into your wallet and that allows you to interact with our smart contracts and that allows you to basically perform those transactions um so that function we've also built into doc which means that you can now use basically a requirement for the buyer to say hey I'm going to sell this asset to you but only if you're not from North Korea or the us or some other place so you can basically start introducing restrictions on requirements on the counterparty um if it's more of like an open offer so it's like I can offer this to anyone as long as they're not XYZ so that's what something we call off select and the other thing um is U Dynamic pricing so basically instead of just having like a fixed price block trade you can start introducing things like because a lot of the RW obviously are priced somewhere else in a different Market Market so the way we deal with that is like for for some of our products like tokenized Tesla Microsoft micr strategy Apple we have all the big public stocks on chain um you can basically say I want to sell this at you know Market plus 5% um over a weekend or you can start like doing Dynamic pricing into something that's related to an oracle feed um in terms of the the price of the of the deal itself and just on that as well um we provide something that's called best price so when you put in your OTC offer we have reference points that are Oracle driven that basically give you you know what is the best price out there and I I often found like many times when I was doing OTC through I guess a few years ago through copper infrastructure that they were offering up some deal and then I would have to go like to a couple of different pricing sources to see if that deal was actually a good deal or not but then the deal was only valued for 30 seconds this becomes like a you know tricky thing to kind of figure out uh quickly enough so that I think that best price actually knowing like if I do this now where does that sit in the market is it super attractive or am I underpricing what am I doing that's another key feature um for for creating orders and then Communications is the other part where I think also on RW I mean I think um some of the aspects of RW are like obviously not natively available on chain so you'd have to have a lot of like metadata related to rwa so then you can start talking not only about deal structure but also about like if I'm buying tokenized gold where does the gold sit can I move the gold is there an nft representing the gold bar or is it more like a you know um a commoditized gold token that I'm buying so stuff like that so Communications is is needed especially if you think about like the fully decentralized peer-to-peer model where I don't even know who you are like we're doing a deal but like I don't actually have to know who you are you just like we're doing the deal and you're fulfilling some of the criteria that I have to do the deal and then we can just communicate um even anonymously and then just you know get a get a transaction done uh discoverability we also like providing these like search functions and stuff for what assets are out there in terms of OTC offers and then the affiliate participation is something we thought about where so basically if you have like a lot of a lot of projects have like a single asset that they're providing and so what we built there is like an ability for them to create individual C offers on their website for their particular asset so they basically become you know um like a user of DC but only for that particular asset so it doesn't really become a market but it just like solves the actual problem of selling that asset um you know to to a counterparty without ending up with this whole back and forth like oh hey where are you can you send a transaction first and you know should we do this through an escrow or what have you so none of that is needed anymore so that I think that's it's one of the core things here um and then yeah so so really using decentralized transparent applications based on Smart contracts is is really the obvious way to do OTC like you think about transactions on the internet um I was buying and selling a lot of things on eBay when I lived in the US and it was always the issue like I was into mountain biking buying like you're building all these expensive things you never know if the other guy is going to send the thing so then they started and that's why they bought PayPal basically to fix the escrow problem so like you know how do I know that you're going to send the thing well how do I know that you're going to pay for the thing and then so this was like the back and forth that was always going on so I think blockchain solves all of that it's it's like the only no-brainer way to do these transactions really and then of course it's solves a lot of the issues that are you know that I already mentioned on the traditional OTC side as well as the OTC through centralized exchanges so you know the whole like information symmetry that's common in OTC markets is this really a good deal is it not a good deal and you know you can basically it just enhances like transparency um when you can see all the deals that are available out there and the counterparty risk is I think that's the main one obviously because like it's just like the whole issue of fulfilling on the deal um so how do I know that's going to happen especially if it's a Fiat transaction that was always an issue you just sit there and wait for the money to arrive and there's always like oh we sent the money and then it's like oh but it hasn't arrived and then I I've done that so many times it's just U it's a horrific situation uh sometimes you're dealing with client funds and you know the stuff hasn't arrived and then it's just like you know it's not a good situation um yeah so I think that's that's something that yeah that was like a big problem um and then on the liquidity side um especially with in relation to rwas there I think we have like um so a lot of the rwas are not like you don't find obviously deep Unis swap pools or other pools with deep liquidity for a lot of the RW maybe with the exception of well the obvious most kind of liquid rwa is is stable coins but uh even for gold like you know there's some liquidity out there but as you go like towards more and more unusual assets even for our tokenized Tesla Apple micro strategy and all the other stuff that we put on chain it takes time to build up build up liquidity um in amm pools that or even order books to make that like a a feasible trading situation so there the OTC protocol is actually super useful because we can basically say somebody can come in and say which is regularly happening on Swarm it's like hey I want to buy you know 50,000 worth of coinbase uh on chain and then so we just go back to the trfi market fulfill that order and feed through the tokenized coinbase stocks and then they receive them so this is a way for us to basically also receive interest from the market and then we just go and execute that in in the institutional brokerage and the way that that happens is we buy the we buy the stocks buy the coinbase stocks they sit in um through an entity which is an insolvency protected company in Germany so the token holder has the legal rights to the underlying shares so even if we disappear or go bankrupt um they still have legal rights to the underlying stock so that's like there's always like a on toone Match this is not a synthetic model that we're doing so I think that that's really important as well but really coming back to that whole liquidity issue it's like those assets don't have that much liquidity and even and if you take a tokenized fund for example that's not also going to be potentially a low liquidity high value transaction scenario so somebody wants to buy in a million bucks into a Penta fund or let's say half a million or quarter of a million into a panta fund um it's not a market that's going to be very liquid but for the buyer that transaction size is obviously significant and then there needs to be somebody to provide that you know on the other side so that's not going to be like a highly liquid Unis swap or or um you know uh binance Market but it's actually going to be a oneoff transaction high value but it still needs to be served somehow and I think we can serve those orders well through doc um yeah so I think and and yeah there just like a bunch of stuff um that you know are are just like beneficial here like I said like the direct Market access that anyone can go and use this infrastructure we think is a big deal because it really solves like one of the things where you know when you're trying to do especially like on a global scale you're trying to do a number of things then you have all these issues with uh geographical proximity and otherwise and and this really solves it so um and I think maybe one comment on the Regulatory Compliance side as well it's just like the way we think about that is like we started by building an open infrastructure that is completely permissionless and open for any type of transaction and then we allow for people to start introducing layers of compliance SL requirements in terms of what they want to see from the buyer seller on the other side so any requirements that they might have on geographical level AML level chain analysis level other types of qualifications we build that into the protocol so that in the end you know we can replace a lot of the infrastructure that's centralized with uh fully decentralized Solutions even though like you know having said that the actual issuance of that nft saying that I am from here and I'm allowed to buy this thing uh that's a centralized activity generating that nft but once it's there the buyer or seller on the other side can trust that okay now he has that he or she has that nft I can go ahead and do the deal yes that's on compliance yeah that's that's what was going to go through and um any anything you want to you know uh check out or I think the easiest way to access doc. e if if you don't have like Brave or something like that if you just want to use a normal browser you can basically go to doc. e.

link because that's going to take you through uh to the application as well and uh this is something that is you know obviously live and kicking today so it's we're on Bas polygon ethereum as mentioned and you can just go go go in go there and check it out um do the transaction and you know do something small just kind of see how it works and then yeah join the you know Community give us feedback tell us if something sucks um yeah thank you any questions about that at all all right thanks guys oh we have one here uh hello thank you for your talk uh can you tell us uh can you dive into a little bit more detail what types what categories or of rwa are now trading on your s Marketplace and like yeah is is it Lively what is the activity like what is the volumes like yeah so the assets that we have today are um the the kind of what we well what we regarded as the top tech stocks so we did you know Apple Tesla Microsoft micro strategy coinbase uh cang Nvidia um and that was part of that was part of a community vote so those were the first things and the reason why we did that was just because people know what those assets are and uh we're also able uh to sell them to retail through a prospectus that we have in Lenin so it's basically a combination of like what are the products that we can offer to a retail audience because we thought that was an an important aspect which is different from Ono Ando is more focused on institutional buyers and they have a very high bar for qualif purchasers um and for us it was important to be able to offer retail directly and then we have a couple of Treasury bonds like US Treasury bonds like but that's like a non-differentiated offering because there's a ton of that already on chain so I don't think that's a big deal but it's quite useful sometimes um for certain use cases and then um yeah we'll we'll start um later this month we'll start on some Commodities um as well so that's coming and I know that some of that's been done before but there's new regulation coming in Europe um where you have asset reference tokens and they need to be implemented in a particular way to be compliant in Europe so we're doing that and uh and I think I I mean volumes are still I mean pretty low if you look at the total tvl on Swarm right now on the website I don't it's like 10 million plers I don't know exactly what the number actually actually haven't looked the last couple of weeks been busy but um but yeah so I think it's it's somewhat early days and also sometimes when I look at some of our peers in the market and and and some of their volumes I think that you know um yeah it's like five wallets holding a har Mill so it's pretty obvious what's going on there so one more question hi um so in order for us to tokenize the rwas we have to mimic the rear World operations that happen as well so I'm referring here here to tokenizing can you hear me yeah okay sorry so I'm referring here to tokenize shares because as long as you do own a share you get the governing rights as well within the company and also there are dividends down down the way so just going on and off so how is swarm um resolving uh so resolving that yeah so on the I think starting on the dividend side that's the easier one because the institutional brokerage account where the um uh stocks are held that's the account that receives the dividends also for you know from trfi so once we receive that we just convert that to usdc and then we look at like which wallets are token holders for that particular asset and then we make that um dividend claimable through a smart contract so then you go to it's it's similar way that you claim rewards on Swarm as a liquidity provider you just go there and and then basically UI is going to tell you you now have this many smt in that in the rewards case to claim and with the um stocks it's basically you now have this much usdc to claim as part of a dividend payout so that I think I think Dividends are pretty straightforward because basically just like convert from Fiat to to crypto stable coin and then you provide that on a smart contract governance much more tricky so governance you know it's it's basically a situation where at different tiers of shareholding you have different rights and then also would' have to like basically do a um a collective voting process and basically act as a proxy so our issuing company in Germany called swarm X gmbh would then have to be because that's the formal shareholder in a register of the tradire company so swarm X would have to basically act as a proxy voter for all the token holders so if the token holders don't agree on how to vote we'd also have to you know manage that situation so that I think that's a much more complicated situation but we've done a bunch of Dow votes in the past so I think we have the mechanics to do it but I don't think the primary reason why people today at least buy tokenized stocks is to get access to governance because if your primary reason to buy stocks is to get access to governance you should go to trfi for tokenized stocks I think the primary reason should be you know you typically would want to borrow against it you want to activate the asset you want to create some yield around it and that's like most that's the most common reason why people would um buy tokenized stocks yeah anyone else some guy over there in corner hi uh thanks for the talk I wanted to ask you mostly deal with stocks you described uh what about other types of uh RW as well as like uh real estate or yeah mostly real estate okay yeah I think I don't know if I mean I've been in this like what's called what was originally called security token space um since 2017 and you know they tokenized the ski resort in Aspen um I don't know six years ago it's a real estate use case real estate has always been like this um no-brainer use case in some ways because it's quite expensive to buy a whole property and get access to all the you know rental incomes and so on but I think like there still seems to be some hurdles there in terms of well you know I really have to understand what the property is and what is yielding and who's managing it and how is is that happening it's like there's a lot of questions around individual real estate assets when you tokenize them and I I haven't seen like that the market has really solved those questions yet um at least not for retail buyers so it's like I think I think it's a huge opportunity it's just like it takes some time to unfold like what is the right way to do it is it like through a property management company or what is the best way to do it I I think the whole like tokenization of your own house is not a generally a very good idea because that's like creates a lot of complications as well so I think in real estate there's a lot of things that still need to unfold in terms of making that market scale but once I'm sure that in certain categories like commercial or certain types of properties that people understand really well like maybe residential with a very clear rental income structure if somebody puts out a token for that and they basically start Distributing the rental income on a continuous basis that's something I can trust because then if I buy fraction of that I'm seeing that you know the tick is happening and I'm kind of you know understanding that this is actually working then I think that market can take off so we have I mean I don't know we've been I don't know how many real estate tokenization companies we've talked to since 2017 when we really started with like looking at this space um but none of them actually have come to us with a clear enough offer to you know for us and also from a regulatory standpoint that offering is a little bit more complicated than then like the public stocks the great thing about those all the risk disclosures and all the other things that are complex about offering something to retail have already been disclosed when they ipoed so it's like all the risks are known and um those assets are much easier to tokenize so that that's really the the main reason why real estate hasn't taken off but as mentioned um we are doing Commodities so we haven't just haven't announced that yet but there's like you know one very obvious commodity that we're definitely doing that's coming you know in a couple of weeks and then from that we're going to build out more Commodities because we think that's something we can offer as well that people are taking an increasing interest in you know as they become more like Savvy around macroeconomics and stuff like that so all right we're good it's lunch time thank you