RWA and Cardano

On November 26 2024 in a second video of the day, he turns to unfinished Cardano business, first crediting a paper by his friend Andrew Miller of the University of Illinois Urbana-Champaign.

Names co-authors Ethan Buchman of Cosmos, whom he hired at Ethereum, and Vlad Zamfir of Casper, and describes their Cycles protocol as a peer-to-peer clearing system that opens up the closed clubs excluding small firms.

Blockchain settlement systems have been used mostly for speculation and failed to help the real economy, whereas Cycles is an open decentralized clearing, settlement, and issuance protocol to clear more debt with less money.

Cycles uses a privacy-preserving multilateral settlement based on graph optimization and trusted hardware that resembles quantum money, and hopes to pair it with Midnight's TEE proof layer, urging them off SGX.

Turns to real world assets for Cardano, framing the Wyoming stablecoin claim that Cardano lacks a freeze-and-seize feature, which matters when a central issuer in a regulated marketplace can recall assets.

Gives a security token example where an issuer changes a stock class and must lock and replace tokens, a standard owner-custodian-issuer pattern rather than a peer-to-peer event.

Security tokens also pay dividends or coupons and need complex movement logic, like Alice being able to send to Bob only if certain criteria are met or Bob gives permission, a contingent flow.

Royalties, freeze-and-seize, and complex movement are all doable as smart contracts but a lot of code, whereas Cardano's hybrid issuance treats a native asset like ADA, unlike Ethereum's ether plus ERC20 contracts.

The native token idea came from Bitcoin color coins and has non-fungible and fungible flavors, with a long-planned third option, a security token or real world asset standard, deferred after the 2021 NFT rollout.

Cardano is becoming a complex multi-chain network where RWAs meet Midnight's private smart contracts and Bitcoin, which could act as a control layer, so sending Bitcoin creates a Cardano wrapped Bitcoin.

The Bitcoin network should never lose sight of wrapped BTC, needing a foreign-control provision beyond a private key, while Midnight can handle regulation, automated KYC and AML, and private identity as part of ownership.

Stablecoins fit this Circle-style freeze-and-seize use case with OFAC compliance and Japan's JFSA rules, and could come in two flavors: compliant tokens that earn passed-through treasury yield, and bearer tokens that do not.

Real estate deeds combine an NFT with complex logic, and NFT resale royalties for creators can be done with smart contracts but are complex, fragmented, potentially insecure, and expensive.

The plan was always to update the native asset standard to an RWA standard, and this debate settles it: they will write a smart contract to prove the capability, but it should be built into the system given its utility.

Cites Bridgewater and BlackRock estimating 20 trillion dollars of real world assets tokenized over ten years, which Midnight enables with a compliance and disclosure regime, since an RWA is bound to laws and always has an issuer.

A compliance and disclosure regime for RWAs preserves Cardano's crypto ethos while letting assets coexist, and with Midnight and Bitcoin DeFi it could capture most of the market, so IO's innovation division, which turned Babel fees into nested transactions, will start a working group under Sam Leathers.

Wants the working group to feed the Q1 2025 innovation process and write a CIP augmenting the native assets standard, with requirements drawn from real use cases like foreign ledger control, identity embedding, freeze-and-seize, dividends, and real estate metadata.

Cardano is becoming a universal ledger, and if it is the DeFi layer of Bitcoin it becomes the interface Bitcoin uses to reach Ethereum or Solana without trusting a risky multisig bridge that can lose wrapped BTC.

Invites the community to talk informally with Sam Leathers, after which IO writes a CIP for the Pragma, Intersect, and community process, targeting the 2026 upgrade, alongside Plutus 4 work Sebastien is reviewing and ZK optimizations.

Being a Libertarian building an open protocol is a balancing act: you hold beliefs but should not inflict them, so the ledger must stay open to everyone regardless of use case, and centralization always exists since your wallet is an N of one.

Describes three dimensions of an RWA, identity of the owner, privacy, and a DID, all enabled by Midnight, but says Cardano lacks a good standard for the cream filling of freeze-and-seize and royalty management.

While he opposes government freeze-and-seize and calls civil asset forfeiture a great evil, the capability also covers benign recalls like revoking an outdated license, software key, or NFT and reissuing it.

Argues freeze-and-seize is a user-issued asset capability, not something on ADA, using the example that a state revokes your old driver's license when issuing a new one so 14 copies cannot circulate.

Other chains will want control too, as Bitcoin users deserve more say than wrapped BTC on Ethereum, via special logic giving the Bitcoin network visibility, much like a Microsoft stock issued on a blockchain.

Praises the fast innovation process, citing the recursive SNARK team getting an ATMS Halo 2 recursive signature onto Cardano mainnet quickly, and says covering credit via systems like Cycles is the last mile of the financial world.

Closes that Cycles is a graph-based system that runs on top of a chain and pairs perfectly with Midnight's trusted enclaves for proof offloading and credit circles, calling 2025 an open, pedagogical year to finally get this done.