Arthur Hayes' View on Crypto Traps: Permissioned DeFi, RWA, Tokenized Ownership of Bonds

BitMex founder Arthur Hayes released another lengthy article "Expression" over the weekend, in which he mentioned his view on crypto traps such as Permissioned DeFi, RWA, and tokenized bond ownership like USDT. This Key Opinion Leader (KOL), who comes from a traditional finance background but has been involved in the crypto space for a long time, is discontent with the involvement of traditional financial institutions in DeFi and real-world assets. He even believes that investing in related tokens is a value trap. What are the reasons behind his stance?

Permissioned DeFi

Arthur Hayes believes this is one of the most absurd crypto topics at present. Just from the literal meaning of "permissioned decentralized finance network," it is destined to fail.

Hayes sees these projects as catering to institutional investors who are restricted by various regulations and, in many cases, cannot trade on true DeFi projects. Traditional retail-filled DeFi markets are the best market type, as they provide opportunities for "smart" institutional capital to profit from "dumb" retail investors, as institutions have faster computers to execute trades without human emotions, at least that's how it operates in the TradFi market.

Hayes considers this as a scam for institutional investors, but there are always many venture capitalists eager to seize on this theme and burn capital because the theme looks so attractive:

Which investor wouldn't want a piece of a trading platform that brings together institutional investors with vast capital bases and DeFi, heralding a new way of organizing financial markets?

Arthur Hayes cautions:

If you wish, go ahead and use the project, but please exercise some critical thinking, and whatever you do, do not join when it launches governance tokens.

Real World Assets RWA

RWA, Real World Assets, is also a hot topic in the crypto space recently, but Arthur Hayes' concept is that any cryptocurrency relying on national laws will never succeed on a large scale. Public decentralized blockchains are very expensive because they do not require the existence of a nation.

Why pay a premium for decentralization when centralized options are already very cheap and liquid?

He uses tokenized real estate as an example. Many young people cannot afford to buy their own homes, but what if they could own a small part of a house or apartment and climb the property ladder? It's a noble goal but comes with some issues.

Firstly, young people trying to leave the nest or start their own families do not want a piece of a house or apartment floating in space. They want to actually live in it. Buying tokens that give fractional ownership of non-fungible assets does not solve this problem.

Secondly, each property is unique. The lack of standardization hinders a truly liquid market. For example, when you buy tokens representing 1/10th of a house, how do you find someone willing to buy from you at a fair price when you want to sell? The buyer needs to understand the location, local real estate regulations, taxes, and ultimately, the specific property they are interested in. This can never achieve the liquidity of owning a fraction of standardized stocks or bonds. As usual, it's easy to get in but hard to get out in such investments.

Lastly, and most importantly, investors have long been able to own parts of real estate by buying shares in Real Estate Investment Trusts (REITs), which are large-scale and highly liquid. Many traditional stock exchanges worldwide offer such securities. They are managed by reputable large companies. Hayes doesn't understand why there is a need for these blockchain gimmicks and the issuance of tokens.

Buying these illiquid RWA tokens involves risks. But even worse is investing in governance tokens of the RWA issuance platforms themselves.

Bond Ownership Tokens

Another popular way of expressing RWAs is by creating tokens representing ownership of income-generating debts. Tokens offering the income from U.S. Treasury securities are most popular. The greatness of Tether, people believe, is that it allows those without access to U.S. dollar banking services to use tokens pegged to the dollar on public blockchains like Ethereum and Tron 24/7. However, Tether does not pay any interest; Tether itself earns 100% of the interest from investing the dollar reserves in Treasury securities.

Hayes supports stablecoins that offer Treasury bond yields, allowing stablecoin holders to earn more net interest margin (NIM), but he advises against investing in governance tokens of such projects.

Hayes believes that if the U.S. dollar interest rates are significantly above zero, the project should make a profit and distribute it to governance token holders. If U.S. dollar interest rates drop close to zero again, the project will incur losses as it must cover developer, legal, and compliance costs without enough interest income to share. Therefore:

As an investor, why pay to hold this governance token?

Arthur Hayes' View: Leave the Real World to Traditional Finance

In short, leave the "real" world governed by national laws to TradFi intermediaries. They can offer more coherent and cheaper investment products to express the same themes. True DeFi projects should rely only on well-written code, not on laws interpreted and judged by fallible humans.