US bonds drive the RWA track to heat up, how do different gene players innovate?
Original author: flowie, ChainCatcher
RWA, which has been continuously popular, covers a wide range of assets, including stablecoins, bonds, stocks, real estate, and how they integrate with the blockchain. Previously, we summarized the RWA track and the seven sub-sectors and representative vertical players in the RWA series of articles RWA Graph: Overview of the 10 leading projects and summaries of the 20 early projects.
However, looking at the overall development of the RWA track this year, it is mainly driven by US bonds. The projects with high Total Value Locked (TVL) in the RWA field are mainly US bond-related projects. The rise of DeFi protocols such as COMP and MKR also mainly revolve around US bonds. The introduction of US bonds onto the blockchain is the most typical case in the RWA field currently.
As for why US bonds have become the core of this round of RWA narratives, we have repeatedly mentioned in previous articles that a direct reason is the rise in US bond interest rates due to continuous rate hikes by the Federal Reserve. This has prompted many DeFi protocols or crypto investors to turn to obtaining risk-free high-interest returns from US bonds.
However, apart from the clear demand for returns, one less mentioned pain point is that investing in US bonds has always come with high barriers. Even for US citizens, the cumbersome KYC and account opening process keeps most people away, not to mention non-US citizens. At this time, how to integrate off-chain US bonds with the blockchain in a compliant manner, reduce the investment threshold for US bonds, and bring the returns of US bonds to on-chain users is a realistic problem faced by many projects but filled with obstacles.
Bringing US bonds onto the blockchain is not an easy task. As Kyle Samani, co-founder of Multicoin Capital, said, "This is a standard problem. You need all stakeholders, such as issuers, underwriters, fund managers, auditors, buyers, sellers, brokers, banks, etc., to agree to the new standards."
Tokenizing not only US bonds but also other assets such as bond markets, stocks, and real estate, to bring traditional off-chain assets into the blockchain, also involves the participation of many intermediaries, such as government regulators and management institutions. The compliance issues and legal risks involved are complex.
Perhaps we can start with the most representative and relatively easier-to-standardize aspect of bringing US bonds onto the chain to understand the process and real obstacles of implementing RWA, as well as how players in this track innovate in reducing user barriers and increasing liquidity.
How can players with different backgrounds bring US bond returns to the blockchain?
A seemingly emerging trend in the tokenization of US Treasury bonds on the blockchain has actually been brewing for a while. In addition to tokenized bond funds by asset management companies, emerging players in the on-chain bond agreement space are dedicated to tokenizing the returns of US Treasury bonds. Stablecoin protocols are also indirectly bringing bond yields to crypto users through asset reserves. According to RWA data research platform rwa.xyz, the tokenized bond market alone has already surpassed $680 million (excluding indirect methods of introduction), with an average yield of over 4%.
1. Early adopters in asset management: Arca, Franklin Templeton, WisdomTree
Asset management companies with a leaning towards traditional finance were among the early players to target tokenizing US Treasury bonds. In 2020, Arca Labs, the innovation arm of digital asset management company Arca, finally registered a fund with the US SEC after more than two years and nine submissions. The fund, known as a Blockchain Transfer Fund (BTF), invests in US Treasury bonds and falls under the regulation of the US Investment Company Act of 1940.
Arca Labs can convert the shares of this US Treasury bond fund into tokens called ArCoin, which are stored and recorded on the Ethereum blockchain. When users purchase ArCoin, they are effectively subscribing to Arca Labs' US Treasury bond fund. The pricing of ArCoin is determined based on the net asset value of the fund.
The ultimate ownership of ArCoin is maintained by a transfer agent regulated by the SEC and operated by Securitize, a blockchain company focused on tokenizing real-world assets. Currently, investors (both US and non-US) who have gone through Securitize's KYC/AML process or already possess a Securitize ID can purchase ArCoin, while Arca only accepts subscriptions in US dollars.
Franklin Templeton, the largest publicly traded asset management company with assets under management of over a trillion dollars, launched the government money market fund FOBXX on the Stellar blockchain as early as April 2021. FOBXX is the first US registered mutual fund that utilizes public blockchain for transaction processing and record-keeping of share ownership. It is regulated under the US Investment Company Act of 1940 and stands out as one of the most strictly regulated products offered by Franklin Templeton. FOBXX is currently one of the largest players in the tokenized bond market.
FOBXX's transfer agency will keep official records in bookkeeping form, and the blockchain serves only as a secondary record. In April of this year, FOBXX expanded to Polygon.
According to the FOBXX official website, at least 99.5% of its total assets are invested in securities, cash, and repurchase agreement securities or cash fully backed by the US government. The FOBXX fund is represented by a "BENJI" token per share, with the BENJI token price stable at 1 US dollar. Through its developed application called Benji Investments app, FOBXX distributes the returns of US Treasury securities to BENJI holders, who are shareholders of the FOBXX fund.
BENJI targets US investors, both individual and institutional investors can participate. To invest in FOBXX, one must have an exclusive on-chain wallet for transactions (created by the fund's transfer agent during account opening) and complete transactions such as purchases through the Benji Investments App. The private keys associated with the investor's wallet are held by the fund's transfer agent. Currently, investors cannot purchase BENJI with stablecoins. The BENJI tokens purchased by users are only used as proof of receiving US Treasury income and do not have much leverage.
Currently, FOBXX's total asset size is close to 300 million US dollars, with the Stellar Development Foundation injecting 20 million US dollars into it. FOBXX's annualized interest rate in the past year is 3.75%.
Wisdom Tree, one of the major ETF providers in the United States, also has a deep layout in tokenized US Treasury bonds. Wisdom Tree announced in January 2022 the launch of a new fintech product directly targeting consumers. The product, called "Wisdom Tree Prime," aims to provide US investors with selected investment opportunities from government debt to cross-asset categories, and the fund shares of the product will be represented in token form on the blockchain.
In December, the SEC approved WisdomTree's 10 digital fund portfolios. Like Arca's products, these funds are products under the 1940 Investment Company Act, issued on the Stellar and Ethereum blockchains, with the transfer agent keeping official records in bookkeeping form and the blockchain serving only as a secondary record. Investors also need to use the WisdomTree Prime mobile app launched by them for transactions such as purchases.
From the WisdomTree website, it can be seen that WisdomTree Prime's relevant US Treasury bond products include Short-Term Treasury Bond Digital Fund (WTSY X), Floating Rate Treasury Bond Digital Fund (FLTT X), 3-7 Year Treasury Bond Digital Fund (WTTS X), 7-10 Year Treasury Bond Digital Fund (WTST X), Long-Term Treasury Bond Digital Fund (WTLG X), and TIPS Digital Fund (TIPS X). Among them, the Short-Term Treasury Bond Digital Fund (WTSY X) manages approximately $1 million in assets. However, this product is still in testing and has not been opened to a wider audience.
According to WisdomTree, the target users of WisdomTree Prime are not institutional crypto investors, but rather individual retail investors in the United States. Currently, Stride and Galileo are their payment partners, and users can pre-fund their Prime accounts through ACH transfers, then deposit the earnings in Oak Ridge Bank. In addition, the WisdomTree Prime Visa debit card will initially be offered as a virtual card, which can be used for payments with Apple Pay, Google Pay, and Samsung, and will be replaced with a physical debit card soon after.
Overall, these types of traditional financial asset management companies have almost identical approaches in tokenizing US Treasury bonds, operating them in the form of fund share tokens. Holding fund share tokens requires the same requirements as investing in the fund, where token holders need to register their addresses as whitelist for the fund. Addresses not on the whitelist will not be able to execute transactions, and investors generally need to be US residents. Only fiat currency transactions are supported, and not transactions with stablecoins or other cryptocurrencies. Blockchain primarily serves as a secondary ledger, with the official records of fund transfer agents still managed in bookkeeping form.
In other words, while these asset management companies explore the tokenization of US Treasures, they have applied blockchain technology simply for recording purposes, and do not have much connection or interaction with the crypto world of DeFi.
It is worth mentioning that Compound founder Robert Leshner announced the establishment of a new company called Superstate on June 29. According to the application submitted, it is also planning to operate in the form of fund share tokenization similar to the traditional financial institutions mentioned above. However, Robert Leshner has relevant background in the US Department of Treasury, so it remains to be seen whether this operating model will bring new innovations.
2. Stablecoin players following the trend: MakerDAO, Frax Finance
Compared to the asset management companies mentioned above, stablecoin protocols like Maker indirectly gain returns from US Treasuries by using the treasury asset allocation method.
In recent times, MakerDAO, which has been widely discussed in the RWA space, has been increasing its investments in US Treasury assets. As one of the earliest DeFi protocols to venture into RWA, MakerDAO initially explored investments in solar energy, real estate, and other RWA asset allocations. However, due to the high default risks associated with these assets, there were not many follow-ups.
For MakerDAO, diversified asset allocation not only considers significant growth in profits but also reduces reliance on a single asset, thereby mitigating many single-point risks. Previously, almost half of MakerDAO's asset reserves came from stablecoins in the Primary Stablecoin Module (PSM), with nearly 70% being USDC stablecoins. This means that MakerDAO had to bear the risk of USDC drifting from its peg even without generating profits.
In contrast, US Treasury bonds are almost risk-free interest rate products, and with the continuous increase in US bond rates due to interest rate hikes, it makes sense for MakerDAO to invest in US Treasury bonds. According to official data, as of May, MakerDAO's RWA investment portfolio reached a total of 2.34 billion DAI, primarily used for purchasing US Treasury bonds. According to Dune's panel, more than half of MakerDAO's earnings come from interest-generating RWA assets.
With significant revenue growth, MakerDAO has also raised DAI savings rates multiple times this year, starting from 1% and currently at 8%, surpassing the risk-free rate of 5% offered by its underlying asset, the US dollar. The goal is to expand the usage of DAI and DSR (Dai Savings Rate).
Recommended reading: "How did DAI achieve an 8% excess 'risk-free rate'?"
It is worth mentioning that MakerDAO's approach to allocating US Treasury assets does not involve using an asset issuance platform but rather holding the assets through a trust legal structure. According to MIP 65 proposal, MakerDAO has entrusted Monetalis to design the overall legal framework. Monetalis is a trust legal structure based in the British Virgin Islands (BVI) that facilitates the integration of on-chain and off-chain operations.
Through this trust structure, MakerDAO is able to convert reserve assets into fiat currency first, then purchase US Treasury ETFs from custodial banks to obtain corresponding returns, and then distribute protocol income to DAI holders by increasing the deposit rate of DAI.
Currently, in addition to MakerDAO, algorithmic stablecoin protocol Frax Finance has also been exploring the use of RWA assets such as US Treasuries. Frax Finance and MakerDAO have faced similar dilemmas in the past, namely excessive reliance on USDC as collateral. Earlier this year, when USDC decoupled, both DAI and Frax fell below $0.9, further prompting Frax Finance to strengthen its reserves and reduce reliance on USDC.
Earlier this year, in an interview with the media, Frax Finance revealed that their 2023 plan includes opening a Federal Reserve Master Account (FMA) to directly hold US short-term bonds. However, this plan has been regarded by many crypto KOLs as almost "fantasy", and Frax Finance has not disclosed any further progress on this.
In the upcoming Frax V3 version, some progress on RWA asset reserves such as US Treasuries is revealed. In July, Sam Kazemian, the founder of Frax Finance, mentioned the idea behind this upgrade during interaction with the community: FRAX has been operating under the assumption that it is not decoupled from USDC. But when USDC decouples, the redemption value of 0.95 USDC + 0.05 USD FXS falls below $1.00. Therefore, FRAX v3 will change this situation through many new AMOs and functions tied to the "sovereign dollar".
On August 7th, the founder of Frax Finance proposed "using FinresPBC as the off-chain RWA partner for FRAX v3". FinresPBC is a stablecoin technology service provider. The proposal mentioned that FinresPBC will provide services to the Frax protocol, including holding US dollar deposits, issuing and redeeming Paxos USDP and Circle USDC stablecoins, and holding, purchasing, and selling US Treasury bonds. Every month, FinresPBC will publicly disclose the complete asset details and reports of all reserves held for the Frax protocol.
However, for the way like Maker DAO that introduces US bond income through trust laws, focusing on RWA research and encryption KOL @ kenjisrealm believe that there are still risks such as asset-side default, agent risk, regulatory risk, etc. Especially, the US Corporate Transparency Act in 2024 will be implemented, even DAO must disclose actual controllers and influential stakeholders, which conflict with Maker DAO's existing RWA framework.
However, in "RWA Talk: Compliance, Subdivided Tracks, and Outlook", dForce founder Mindao stated that if MakerDao itself sets up a trust to hold US bond assets, it will have at least one less layer of operational risk than indirect methods like Circle. More importantly, this model will affect the entire stablecoin market, and decentralized stablecoins may have the opportunity to overtake. Because decentralized stablecoins with US bond interest introductions have more appeal than centralized stablecoins. It can adjust the risk composition of underlying assets more flexibly, both in terms of profitability and programmability.
3. Crypto newbies seeking to reduce investment thresholds: Ondo Finance / Flux Finance, Matrixdock / T Protocol
Whether it is a traditional financial asset management company tokenizing US bonds or a stablecoin protocol indirectly bringing income to stablecoin users through trusts, the tokenization of their US bonds does not circulate in the market and is essentially an off-chain model. The limitations of this model are also obvious. The tokenization of US bonds by traditional asset management and crypto asset management companies mainly targets non-crypto investors in the United States, requiring strict KYC and generally requiring dedicated apps for subscription, which does not support cryptographic currency subscription, and the investment threshold is still relatively high. And stablecoin protocols only limit the income to users holding stablecoins.
For crypto users, they still face the pain point of how to invest more idle crypto assets in US bonds with low thresholds. For DeFi projects, they need to consider how to distribute US bond income to crypto users in a compliant and low-threshold manner through tokenization.
Currently, the RWA research platform rwa. xyz lists Ondo Finance / Flux Finance, Matrixdock / T Protocol, Maple, Backed, Swarm, and other DeFi protocols in the research report on the tokenization of US bonds. However, due to compliance requirements, most of the protocols for tokenizing US bonds require KYC, and the regional restrictions are also obvious, which means they face the problem of limited issuance scale.
But compared to the tokenization of US bonds by traditional asset management companies, its regulatory approach to bringing US bonds onto the chain is different. In addition, it supports the use of stablecoins, making operations more convenient. The following text selects a US bond tokenization protocol with a relatively higher TVL and some exploration in bypassing KYC for brief analysis.
Ondo Finance, founded in 2021, has team members with rich backgrounds in institutions such as Goldman Sachs, Fortress, Bridgewater, and MakerDAO, as well as DeFi protocols. Earlier this year, Ondo Finance announced the launch of tokenized funds, providing institutional investors with opportunities to invest in US Treasury bonds and institutional-level bonds.
Compared to the cumbersome registration process of mutual funds, Ondo Finance chooses to use exempted issuance for its funds. However, this means higher requirements for investors, requiring them to meet the criteria of accredited investors and qualified buyers defined by the SEC, namely individuals or entities investing at least $5 million. Accredited investors can invest using USDC or USD. USDC is converted to USD through Coinbase and then purchased by Clear Street, a bulk broker platform for institutional investors, in the form of US Treasury bond ETFs. The resulting income is distributed to institutional investors in tokenized form.
Despite the high investment threshold, Ondo Finance's launched lending protocol, Flux Finance, allows ordinary investors to indirectly earn income from US bonds. Flux Finance allows OUSG holders to pledge OUSG and borrow stablecoins. As a stablecoin provider in the Flux Finance lending pool, one can indirectly earn investment income from US bonds without the need for KYC. Currently, Flux Finance has a total supply of nearly $40 million.
In contrast to the exempted issuance approach, Matricdock, the on-chain bond platform launched by Matrixport, chose to establish a Special Purpose Vehicle (SPV) as the issuer and holder of US Treasury bonds. Matricdock has launched Short-term Treasury Bill Tokens (STBT), which are based on US Treasury bonds. According to regulatory requirements, customers still need to undergo KYC and register their addresses on a whitelist. There is a minimum investment requirement of $10 USD, and services are not provided to customers in mainland China, Singapore, the United States, Canada, and other regions.
Similar to OUSG, STBT allows users to invest using stablecoins. STBT transfers stablecoins into fiat currency through its issuer, which is used by "third-party custodians" to purchase underlying government bonds. However, it currently does not disclose the "third-party custodian" like Ondo Finance.
It is worth mentioning that in exploring the reduction of investment thresholds, Matrixport has launched the permissionless US bond investment protocol, T Protocol. Compared to Ondo Finance, which indirectly introduces permissionless US bond returns for crypto users through the borrowing and lending protocol Flux Finance, T Protocol achieves permissionless US bond investment by encapsulating the STBT issued by MatrixDock.
According to HashKey's report "HashKey: Tokenization of RWA with US Treasury Bonds as an Example", the TBT token launched by T Protocol is a wrapped version of STBT. After investors deposit stablecoins into T Protocol, TBT is minted, and when it accumulates to 100,000 USDC, partners are entrusted to purchase STBT. TBT is pegged to 1 USD and can be redeemed through the protocol, providing US bond returns in a rebase manner. Another type, wTBT, is a non-rebase version of TBT. HashKey believes that behind TBT is the protocol's purchase of STBT and USDC reserves that have not yet been used to purchase STBT, making T Protocol an intermediary between non-Matrixdock users and Matrixdock. TBT is also a potential competitor to stablecoins.
Summary: What are the noteworthy impacts of US bond RWA on DeFi?
Combining the aforementioned protocols that introduce US bond returns on chain and some analysis from Mint Ventures' podcast review article "RWA Talk: Compliance, Segmented Track, and Prospects", the impacts of US bond RWA on the crypto market are mainly twofold:
First, it helps retain on-chain crypto funds and slows down capital outflows. After a long bear market, it is difficult for many idle stablecoins and other crypto assets to find low-risk and profitable avenues. US bond RWA partially fills this demand for risk-free returns, mitigating capital outflows from the chain. From a longer-term perspective, the founder of dForce, Mindao, raised a question: stablecoins have tokenized the US dollar, but the original interest of the US dollar has never been tokenized. A currency cannot be a true currency if it lacks its own interest. Combining these two factors means that we have truly tokenized the US dollar currency on the chain, which is significant.
The second is the impact on the stablecoin landscape. On one hand, protocols like MakerDao reduce reliance on centralized stablecoins like USDC by allocating assets to US treasuries, reducing operational risks and attracting users to hold their stablecoins with attractive returns. On the other hand, platforms like T protocol and OpenEden issue stablecoins to help users gain exposure to profitable US treasuries, injecting new forces into the stablecoin market competition.
In addition, with the compliance of US treasuries as RWAs (Real World Assets) and the exploration of bridging crypto finance and traditional finance, there may be lessons to be learned for other RWA assets to enter the crypto market.
References:
"An Allocator's Guide to Tokenized Treasuries"
