Exploring Energy Currency: The End of RWA is PoW

Author: Hacash Enthusiast

Recently, the cryptocurrency industry faced severe regulatory crackdowns from the U.S. SEC, with leading centralized exchanges under investigation and many proof-of-stake (PoS) cryptocurrencies classified as securities, creating a climate of fear. However, at this time, some of the most fundamental technologies and concepts are being re-examined, one being proof of work (PoW) and the other being real-world assets (RWA). Cryptocurrencies based on PoW are classified as commodities, aligning with existing regulatory frameworks; RWA maps physical assets from traditional markets onto the blockchain in token form, betting on future compliance narratives. Both old concepts and new ideas are receiving significant market attention.

Reasons for Early Failures of RWA

Looking back at history, as early as the 2017 boom of ICO token issuance on Ethereum, many projects proposed RWA (then referred to as asset tokenization). For example, tokenizing property rights allowed investors to purchase corresponding RWA tokens for investment dividends. Such projects were quite popular among investors at the time, primarily because more people tended to believe that cryptocurrencies linked to physical assets were more valuable or reassuring compared to purely virtual tokens with no real application.

This is also one of the key factors for the renewed market interest in RWA, especially among users newly entering the cryptocurrency space. However, in reality, almost no RWA projects from the past achieved the expected success. The main reasons for this can be summarized in five points:

• At that time, blockchain was a completely new concept. Cryptocurrency and tokens had not yet become trusted technologies among the public, and asset managers lacked the motivation to tokenize large-scale assets, generally holding a skeptical or wait-and-see attitude.

• The blockchain infrastructure was not mature. The exploration of decentralized application platforms was still ongoing, and even Ethereum, which is now the second-largest by market cap, faced constant skepticism about its future. Therefore, RWA projects at that time often needed to issue a separate chain for each category of asset for trading, increasing the difficulty of implementing RWA.

• Centralized management issues of off-chain institutions. RWA required off-chain institutions as guarantees before going on-chain, and trading parties had to rely on the credit endorsement of these institutions, which contradicted the aspirations of the crypto world.

• High difficulty in risk management. The maintenance of underlying assets, asset tokenization, and profit distribution all involve risk management. Once a default occurs, the risk of asset loss is enormous in the absence of any relevant RWA laws and regulations.

• Different asset attributes face different issues when going on-chain. Not all real-world assets can enhance liquidity by going on-chain; in fact, the costs associated with compliance and security maintenance for some assets may far exceed the benefits brought by liquidity.

Different RWA Assets

It wasn't until Ethereum was validated as a decentralized application platform and the emergence of DeFi that the current RWA narrative was established. Particularly, the leading DeFi project MakerDAO's shift towards RWA has drawn industry attention. MakerDAO's approach involves purchasing a large amount of U.S. Treasury bonds, using them as RWA on its chain.

U.S. Treasury bonds are a type of debt asset, and compared to other traditional real-world assets, they have significant advantages in liquidity, standardization, scalability, and security. Besides debt assets, other assets currently suitable as RWA include gold, real estate, loans, and equity. Among these, energy assets are often overlooked by the RWA market.

The most famous energy asset RWA is likely the Petro, announced by Venezuela in December 2017, backed by the country's oil reserves. Oil has significant advantages over other RWA assets, yet it ultimately did not succeed. Conversely, another RWA that proves energy consumption through a PoW mechanism has achieved historic success, represented by Bitcoin.

The Relationship Between RWA and PoW

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

In fact, behind PoW is the real electricity energy asset, where the consumed electricity is issued on-chain in the form of tokens. The process of converting electricity to tokens is decentralized and market-driven, and it is a direct process without any intermediary management. Moreover, asset maintenance and distribution are entirely determined by code and mathematics. It can be said that Bitcoin is not only the world's first electronic currency to achieve decentralization and prevent double spending but also the first to tokenize energy on-chain as RWA.

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

Energy has significant advantages over other traditional real-world assets in terms of liquidity, standardization, scalability, and security. Particularly, liquidity, asset standardization, and scalability have reached an extreme, as every person in the modern world relies on energy for their existence.

The process of tokenizing consumed energy as an asset is PoW. It requires machines to perform computational power calculations. Its characteristic is that it requires prior design of the economic model of the chain before energy is tokenized. For instance, the energy consumption tokenization process of Bitcoin involves setting a total supply of 21 million tokens, with energy consumption being dynamically adjusted, and the difficulty of the mainnet's total computational power is adjusted every two weeks, with proof of energy consumption halved every four years.

The End of RWA is Currency Based on PoW

As the most liquid and largest asset in an economic system, if we consider PoW-based currency as a type of RWA, then this currency system becomes an optimal RWA system. Transferring PoW currency is equivalent to transferring real-world assets, and you can exchange that asset for other assets available in the market. This PoW-based RWA product serves as a medium of exchange in the economy.

History and economics have shown us that currency exchange is much more mature and efficient than barter exchange. Therefore, instead of tokenizing real-world assets for exchange, it may be more effective to directly use the circulation and exchange of currency to replace the on-chain circulation of real assets. Thus, it can be said that the end of RWA is currency based on PoW.

From the perspective of RWA, the entire energy consumption of Bitcoin is dynamically adjusted and limited. It is expected that by 2140, the proof of Bitcoin's energy consumption will conclude, at which point the total value of Bitcoin will rely on the total historical energy consumption. If technology has significantly advanced by then, the cost of energy consumption will be greatly reduced. Since Bitcoin will no longer produce new coins and there will be no marginal cost in the market, the overall total value of Bitcoin will decrease without considering other factors. This will inevitably lead to a re-evaluation of Bitcoin in the market, potentially redefining it from its original currency function to a collectible, similar to the current market for ancient coins.

Therefore, sufficient design for PoW energy consumption is necessary. For example, simply changing the limited quantity to unlimited can avoid the issue of marginal cost disappearing after the proof of energy ends, causing asset value to decrease as energy costs drop. For instance, Dogecoin, which also consumes energy through PoW but has no total supply limit, does not face this issue. From this perspective, it implies that Dogecoin is more suitable than Bitcoin for circulation as a currency from a sustainability standpoint.

In addition to the design of the quantity of energy proof, there are also dynamic adjustment cycles for energy consumption, divisibility of energy proof, privacy, fairness in distribution, liquidity, and supply adjustment. Bitcoin and Dogecoin, aside from their differences in quantity, share the same problem as currencies: there is no supply adjustment mechanism. This leads to significant volatility in the value of assets supported by energy.

So, what kind of design is optimal from the perspective of energy currency? Answering this question will involve more factors to consider, and the author will conduct a detailed analysis in future articles.