TL;DR
Financial real-world assets (RWAs) represent the most promising area in the tokenization market, but their practical utilization is limited due to state inconsistency between off-chain and on-chain environments. Oraclizer’s state synchronization technology overcomes these limitations to enable complete on-chain integration of financial RWAs. Built on the Regulatory Compliance Protocol (RCP), this technology meets the strict requirements of financial institutions while ensuring contract completeness through real-time reflection of asset states. This forms a genuine connection between financial RWAs and DeFi, moving beyond the simple data transmission of existing oracle systems.
Practical Challenges of Financial RWA Tokenization
Financial real-world asset (RWA) tokenization is recognized as one of the largest market opportunities in the blockchain industry. According to a recent McKinsey report, the global asset base suitable for tokenization amounts to approximately $300 trillion, with 5-10% expected to be tokenized by 2030[1]. Financial assets, in particular, are considered the most suitable asset class for tokenization due to their scale and standardized characteristics.
However, financial RWA tokenization currently faces several fundamental limitations:
1. The Problem of State Consistency
Financial assets inherently have states that change continuously. Interest rate fluctuations, maturities, exercise of rights, liquidations, and various other events alter the state of assets, and these changes must be immediately reflected in all related systems. However, existing oracle solutions focus on one-way data transmission, making it difficult to fully reflect the complex state changes of assets.
Taking BlackRock’s recent tokenized treasury fund (BUIDL) as an example, this token must continuously reflect the state of its underlying asset, U.S. Treasury bonds. Not only price changes but also complex events such as maturity, interest payments, and reinvestments must be accurately reflected on-chain, which is difficult to achieve with simple data feeds alone[2].
2. Complexity of Regulatory Compliance
Financial RWAs operate under the strict supervision of various regulatory bodies. They must comply with numerous regulations, including Anti-Money Laundering (AML), Know Your Customer (KYC), securities laws, and more, which apply equally in on-chain environments. According to the FATF (Financial Action Task Force) recommendations, virtual asset service providers must “undertake reviews of existing records to keep documents, data, or information collected under the CDD process up-to-date and relevant.”[3]
However, existing blockchain protocols have limitations in meeting these complex regulatory requirements, particularly in effectively implementing regulatory enforcement such as asset freezing, authority revocation, and forced liquidation.
3. Economic Inefficiency
Continuously reflecting the state of financial RWAs on-chain generates numerous transactions, leading to high gas costs. Recording all state changes of financial assets on mainnets like Ethereum is economically inefficient. This leads many financial institutions to opt for private blockchains, ultimately limiting integration with DeFi.
The oracle problem extends beyond technical constraints to pose a fundamental question about whether financial RWAs can realize their full value on blockchain. Current oracle solutions focus on connecting data between blockchains and the external world but fail to fully reflect the complex states and regulatory environments of financial assets.
Oracle State Synchronization: A New Paradigm for Financial RWAs
Oraclizer introduces state synchronization as a new oracle paradigm to overcome these limitations. State synchronization goes beyond simple data transmission to bidirectionally synchronize the entire state of assets and their changes between on-chain and off-chain environments.
Why State Synchronization Matters
The concept of ‘state’ is crucial in finance. Financial contracts are not simply collections of data points but complex state systems with defined rights and obligations. For example, the ‘state’ of a bond consists of the following elements:
- Current owner and legal authority
- Principal and interest payment schedule
- Maturity date and early redemption conditions
- Credit rating and risk profile
- Collateral status and related obligations
- Tax treatment and regulatory status
Fully reflecting such complex states on-chain requires more than simple price feeds. Oraclizer’s state synchronization captures the complete state of financial assets, accurately maps them to the on-chain environment, and propagates changes bidirectionally.
Implementing Financial RWA State Synchronization with Oraclizer
Oraclizer implements complete state synchronization for financial RWAs through the following core components:
1. Regulatory Compliance Protocol (RCP)
Oraclizer’s Regulatory Compliance Protocol (RCP) is a framework derived from analyzing the recommendations and financial product guidelines of 15 global financial regulatory agencies, standardizing 31 regulations that directly impact tokenized capital markets into five groups:
- Traceability: Tracking the source and movement path of assets and transactions
- Confidentiality: Protecting sensitive financial information and maintaining privacy
- Enforceability: Controlling and enforcing assets according to regulatory requirements
- Finality: Ensuring legal definitiveness and irreversibility of transactions
- Tokenizability: Supporting effective tokenization of various asset types
RCP functions not as a simple set of regulations but as a fundamental framework for the tokenization of financial RWAs. This enables Oraclizer to meet the requirements of financial regulatory bodies while allowing full integration with DeFi.
2. Oracle State Synchronizer (OSS)
OSS is Oraclizer’s core engine that detects state changes in financial RWAs and propagates them on-chain. In particular, the pseudonymous identity system based on OCID (Oracle Contract ID) enables the implementation of system-wide AML (Anti-Money Laundering) that simultaneously satisfies regulatory compliance and privacy.
The main functions of OSS include:
- Detection and capture of state changes in external financial systems
- Validation of state transitions through zk proofs
- Coordination of state synchronization across multiple chains
- Contract locking mechanism to prevent double spending
- Regulatory compliance verification and reporting
3. L3 zkRollup Architecture
Oraclizer has adopted an L3 zkRollup architecture for scalability and cost efficiency. This layer, built on top of Base L2, provides the following benefits:
- High throughput: Capable of processing over 1,000 state transitions per second
- Low latency: Regulatory verification takes only 1-2 seconds
- Cost efficiency: 93% gas fee reduction compared to traditional oracles
- Extended state representation: Ability to process over 100 state changes with a single oracle call
This architecture enables processing the complex state changes of financial RWAs in an economically viable manner.
Figure 1: Financial RWA State Synchronization Architecture
Case Study: State Synchronization of Tokenized Treasury Bonds
Treasury bonds represent one of the most prominent examples of financial RWA tokenization. The following scenario illustrates how Oraclizer’s state synchronization maximizes the value of tokenized treasury bonds:
Scenario: Bank A’s Tokenized Treasury Bonds
Bank A has tokenized U.S. Treasury bonds through Oraclizer’s CANTON interface and launched them in the DeFi ecosystem. These tokenized bonds experience the following state changes:
- Initial issuance: Basic information such as legal ownership, interest rate, and maturity date of the bonds is recorded on-chain.
- Regular interest payments: Interest payments occurring every six months are automatically reflected on-chain.
- Credit rating changes: When credit rating agencies change ratings, this information is immediately updated on-chain.
- DeFi integration: The tokenized bonds are used as collateral in a lending protocol on Arbitrum.
- Regulatory events: If money laundering-suspicious transactions are detected, regulatory authorities can temporarily suspend trading of the tokens.
In this scenario, Oraclizer’s state synchronization works as follows:
- State capture: OSS detects changes in the bond state from Bank A’s financial system.
- State validation: The detected changes are validated according to RCP criteria, and zk proofs are generated.
- State propagation: Validated state changes are propagated on-chain via L3 zkRollup, and these changes are immediately reflected in Arbitrum’s lending protocol as well.
- Regulatory enforcement: If regulatory authorities detect money laundering-suspicious transactions, trading of the tokens is temporarily suspended through RCP’s enforcement mechanism.
- Contract completeness: When bonds mature, this event is reflected on-chain, and all related DeFi positions are automatically liquidated.
Such complete state synchronization allows tokenized treasury bonds to maintain consistent states in both traditional finance and DeFi, leading to maximized capital efficiency.
Business Value of Financial RWA State Synchronization
Oraclizer’s financial RWA state synchronization provides clear business value to various stakeholders:
For Financial Institutions:
- New liquidity channels: Access additional liquidity through connection with DeFi.
- Operational efficiency: Reduce manual adjustment processes through automated state synchronization.
- Regulatory compliance cost reduction: Reduce compliance costs through built-in regulatory compliance mechanisms.
- New product development: Develop innovative financial products that connect on-chain and off-chain.
For DeFi Protocols:
- Access to real-world assets: Diversify portfolios by accessing institutional-grade financial assets.
- Reliable price stability: Reduce system risk by leveraging the stability of real-world assets.
- Regulatory compliance pipeline: Meet regulatory compliance requirements demanded by institutional investors.
- Product innovation: Develop new DeFi products utilizing characteristics of traditional financial products.
For Regulatory Authorities:
- Enhanced transparency: Monitor all asset movements and state changes in real-time.
- Effective supervision: Enable immediate intervention when necessary through regulatory enforcement mechanisms.
- System risk reduction: Reduce system risk through consistent state maintenance between on-chain and off-chain.
Future Directions for Financial RWA State Synchronization
Oraclizer’s financial RWA state synchronization is a technology currently under development and is expected to evolve in the following directions:
1. Expansion to Various Financial Products
Starting with relatively simple financial products like treasury bonds, it will gradually expand to more complex financial products such as stocks, bonds, derivatives, and structured products. Specialized state models and synchronization mechanisms tailored to each product type are expected to be developed.
2. Evolution of Regulatory Frameworks
As the regulatory environment for financial RWA tokenization evolves, RCP will be continuously updated and complemented accordingly. In particular, the goal is to build a standardized regulatory compliance framework through collaboration with global regulatory bodies.
3. Enhancement of Privacy-Preserving Technologies
Privacy-preserving technologies will be further enhanced to ensure regulatory compliance while maintaining the confidentiality of financial data. Zero-knowledge proofs, trusted execution environments (TEEs), homomorphic encryption, and other technologies will be integrated to provide stronger privacy guarantees.
4. Expanded Interoperability
Interoperability between various blockchain networks and financial systems will be continuously improved. Integration with cross-chain communication protocols will enable the utilization of financial RWAs in a broader ecosystem.
Conclusion
The tokenization of financial RWAs is one of the most promising applications of blockchain technology, but it has not been able to fully realize its potential due to the state inconsistency problem between off-chain and on-chain. Oraclizer’s state synchronization presents a new paradigm to overcome these limitations.
Complete state synchronization based on the Regulatory Compliance Protocol (RCP) opens the way for financial RWAs to fully integrate with DeFi while meeting regulatory requirements. This has the potential to fundamentally transform the efficiency and accessibility of the financial system beyond mere technological innovation.
Oraclizer aims to build a win-win ecosystem that provides value to financial institutions, DeFi protocols, and regulatory authorities alike. Through this, we will break down the boundaries between traditional finance and blockchain, creating a more efficient and accessible financial system for all.
References
[1] BlackRock. (2024). Tokenized Securities Fund: BUIDL.
[2] FATF. (2021). Updated Guidance for a Risk-Based Approach for Virtual Assets and Virtual Asset Service Providers.
[3] Oraclizer Core Team. (2024). Regulatory Compliance Protocol for Asset Interoperability Between Traditional and Decentralized Finance in Tokenized Capital Markets.
