RWA Application Case Discussion: 5 Experiments of U.S. Bonds on the Chain
Original Author: DigiFT
In 2017, the Ethereum ERC 20 token standard brought on-chain financing – the explosion of ICO, the ERC 721-based encrypted cat game blocked the network, and developers imagined the infinite possibilities of assets on the chain for a while; the earliest real-world assets The concept of RWA (RWA) was also popular in the form of STO (Security Token Offering) at that time.
Every change in financial infrastructure in history is based on changes in bookkeeping methods; from the earliest selling of paper securities at the counter, to electronic bookkeeping, and now to tokenization on the chain, the manifestations of financial assets have continued to evolve. Evolution of efficiency, transparency, and credibility.
The initial popularity of STO ended without a problem due to the imperfect legal structure and the lack of financial infrastructure on the chain. DeFi in 2020 has built a nearly complete financial infrastructure on the chain. Issuance, transactions, and lending can all be executed efficiently on the chain, bringing development momentum to the subsequent entry of traditional finance.
In addition to the technical level, the progress of laws and regulations has brought the possibility of large-scale chaining of assets, such as the exploratory issuance of relevant licenses by governments such as Singapore and Hong Kong.
Under the dual promotion of technology and law, a token on the blockchain can represent real-world assets. Just in the current world of encrypted assets, the return rate of native assets on the chain has dropped sharply in the bear market, and the pledge return of stablecoins on mainstream lending platforms is only 2.5%, which is far lower than that of U.S. Treasury bonds, which are considered "risk-free returns"; When on-chain assets are no longer attractive, investors start exploring real-world assets.
U.S. treasury bonds have the best liquidity and the lowest risk that is "widely believed", with a "risk-free" annualized return close to 5%, attracting a large number of investors. Holders of cryptocurrencies are also expected to participate, not only for the benefits, but also for hedging the risks of crypto assets.
Both the old and the new world have the motivation to understand each other, and on-chain treasury bond products have begun to emerge as a test field. This article explores five on-chain treasury bond projects currently on the market to analyze their solutions, legal structure, current status, and possible risks.
Development Momentum: Why do we need on-chain treasury bonds?
Before discussing these solutions, we must first understand "why", what is the driving force for development; the solution comes from the combination of technology and law, which requires both technical advantages and the motivation to promote the design of the solution and the improvement of relevant regulations .
We believe that both traditional finance and web3 finance have the impetus to promote the development of assets on the chain.
1. Why do investors in traditional finance want tokenized assets on the chain?
Asset security: After experiencing the collapse of many banks/financial institutions, the black box of the traditional financial system is no longer widely trusted; the self-custody attribute of encrypted assets ensures the control of assets as long as you hold the private key, allowing investors It is more desirable to be able to hold tokenized encrypted assets.
Asset flexibility: After being tokenized on the chain, assets are penetrable and can be seamlessly integrated with other financial applications to bring users a better user experience and reduce usage costs, such as loans, pledges, transactions, and even Assets can be programmed through a certain smart contract design;
Transaction costs: transactions and loans are realized through smart contracts on the chain, without intermediaries, assets are directly cleared and settled on the chain according to algorithms, and there is no cumbersome T+N settlement process due to complex traditional bookkeeping methods and asynchronous ledgers.
Globalization: Due to geographical restrictions, some investors cannot purchase the assets they want; through the DeFi infrastructure, investors have the opportunity to easily access global assets.
Source: Binance research
2. Why do web3 investors want to buy real world assets?
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Source: Dune.com
Development Status
Development Status
The projects studied in this paper include: Matrixdock sTBT, Maple Finance, Ondo Finance OUSG, T protocol and Openeden.
Among them, Matrixdock's sTBT and Ondo Finance's OUSG will go live in January 2023, with US$71.8M (67 addresses participating) and US$118.4M in treasury bond assets respectively. Maple Finance's Cash management pool and Openeden announced their product launch in May 2023. At present, Maple Finance has not purchased it yet. Openeden has $1.7M in assets and 5 addresses participate. The products provided by the above four platforms all require investors to go through KYC and prove that they are qualified investors/institutions, with a single purchase of at least 100,000 USDC.
T protocol was launched in March 2023. The underlying asset of its token is MatrixDock's sTBT. It removes the whitelist restrictions through token encapsulation, realizes a license-free national debt token, and embeds it in several DeFi protocols. At present, the total amount of treasury bond assets is about 6.8 M US dollars, and there are nearly 300 currency holding addresses. Relevant data is as of May 11, 2023.
Except for T protocol, other product processes are divided into two parts, on-chain and off-chain, and the participating components are:
The issuer is generally the smart contract deployed on the chain by the subject set up by the project party. Investors invest in USDC, and the contract issues the corresponding government bond tokens according to the rules and the set price.
On-chain custodian, investors’ USDC will have an on-chain custodian
The deposit and withdrawal channel converts the USDC raised by the issuer from investors into USD to the corresponding custodian
The treasury bond manager generally needs to be a compliant fund entity or SPV to trade the investor's funds in the open market for bonds
Third-party custody, the manager's treasury bond custody is operated in the account of a third-party licensed custody institution
Since the treasury bond product on the chain is a combination of on-chain and off-chain, on the off-chain side, it is consistent with the traditional financial process, involving multiple parties, and still needs to wait for the liquidation and settlement of relevant institutions in the steps of custody, deposit and withdrawal, etc. There is friction.
On-Chain Treasury Bond Case 1: MatrixDock sTBT – Attempt to On-chain Institutional U.S. Bonds
Except for T protocol, the user experience process of the platform is roughly the same. Taking MatrixDock as an example, the purchase process is as follows:
Investors need to pass KYC and be verified as qualified investors; the platform will add the wallet addresses of certified investors to the white list, and only the white list addresses can hold and operate sTBT tokens.
Investors generally need more than 100,000 USDC to send USDC to the smart contract of the platform.
USDC will be stored in the escrow wallet, and converted into USD to the bank account through deposit and withdrawal channels.
The management party trades treasury bonds in the open market, and the treasury bonds are managed by a third-party institution
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Source: MatrixDock sTBT whitepaper
Relatively speaking, the purchase process takes three days, which is not user-friendly. sTBT adopts the ERC 1400 standard to realize token rebasing (Rebasing), each sTBT is anchored at 1 USD, and the income is realized through rebasing (increase in token balance).
Anchoring 1 USD allows sTBT to be traded between Curve and other stablecoins, with low slippage and fees; whitelist investors can also directly trade sTBT on Curve to obtain timely liquidity; at the same time, provide liquidity on Curve Sexuality can obtain Crv token rewards and fee income.
sTBT will increase the corresponding number of sTBT tokens in the user's wallet at 3 PM on each New York bank working day according to the income of the treasury bond market on that day. For example, 100 sTBT in the user's wallet corresponds to 100 US dollars. If the profit of the day is 1%, after the rebase process, there will be 101 sTBT in the user's wallet, corresponding to 101 US dollars.
If the fair price of the treasury bond market falls on that day and the user's assets suffer losses, the sTBT balance in the user's wallet will not decrease, and the fair value of the actual secondary market transaction will decline. The rebase will not continue to occur until the fair value returns.
Chain treasury bond case 2: T protocol – treasury bond on chain without permission
T protocol is a permissionless on-chain treasury bond project based on MatrixDock sTBT, issuing two tokens:
TBT, a package of sTBT, has a rebase mechanism to anchor the price of TBT at $1, so that it can be traded on Curve
wTBT, a non-rebasing ERC 20 standard token, can realize two-way exchange with TBT; the exchange rate with TBT will increase as the number of TBT rebase increases.
Among them, TBT can be traded in the secondary market, and can also be directly minted with USDC and the corresponding amount of TBT will be sent to investors immediately without waiting for the minting time of sTBT. T protocol will charge a relatively high casting fee to cover the interest cost during the casting period of sTBT.
wTBT can be sent to Optimism Rollup through the cross-chain bridge, and there is liquidity on the decentralized exchange Velodrome for users to trade; providing liquidity can obtain Velodrome platform token rewards and transaction fee income at the same time.
Future Development Trends and Possibilities
token standard
While researching the existing treasury bond projects on the chain, we noticed that the token standards for interest-bearing bonds are not yet perfect. Most projects use the most basic ERC 20 tokens to determine the price of bond tokens through oracle machines or directly feeding prices to contracts. The ERC 20 standard is compatible with lending agreements and pledge agreements, as long as the price parameters that can be accurately read are fed.
But in the construction of the secondary market, there are difficulties. AMMs on the chain are all aimed at specific scenarios. For bonds, the relative price is stable, but the price still fluctuates, and there will be dividends or interest periodically; the traditional bond market adopts the order book model, and the orders are concentrated around the current price, and traders and market makers can quickly respond to the market. On the chain, due to the characteristics of the blockchain, the order book model is not suitable, and various AMMs also have their own choices.
For bond tokens, Uniswap V2 slippage is too high; Uniswap V3 liquidity concentration can reduce slippage, but in extreme market conditions, large price fluctuations are easy to go out of the range and cause lack of liquidity; Curve requires token prices to be anchored 1: 1, but in order to realize the transaction on Curve, Matrixdock sTBT uses a complex rebase mechanism to increase the complexity of the product.
DoDo's PMM is relatively suitable, but it needs external oracle machine support, and the price discovery mechanism cannot be realized.
AMM is more suitable for blockchain scenarios. In order to adapt to AMM for secondary market transactions, new token standards may be required. Among them, Maple Finance designed ERC 2222, Fund Distribution Token (FDT), which is an expansion of the ERC 20 token standard, enabling token holders to receive future cash flow.
RWA public chain
The special asset attributes of RWA require specific oracle machines, data services, token standards, and on-chain identity systems. The current mainstream blockchain platforms cannot provide related subjects and services, RWA-related infrastructure, public chain/Layer 2 will also be one of the future development directions.
Convergence of Compliant Assets and DeFi
In the above-mentioned on-chain treasury bond platform, Ondo Finance designed the lending platform Flux Finance to realize the borrowing of the treasury bond token OUSG. Among them, OUSG holders need to be verified by KYC and qualified investors to join the white list, and the provider of stable currency liquidity can be license-free. Flux Finance is managed by another overseas entity, which is isolated from the legal entity of Ondo Finance itself.
MatrixDock's sTBT is combined with Curve, but direct purchase of sTBT still needs to go through KYC to join the whitelist. Compared with the current 70+M sTBT circulation, the current daily transaction volume of Curve is only a few thousand dollars.
T protocol directly takes the route without permission, and can arbitrarily convert national debt tokens into other forms of tokens, thus embedding them in various DeFi applications.
Financial institutions are highly regulated. For compliant asset issuers, a complete legal process is required every time additional products are issued and new business lines are developed, which is why it is difficult to promote compliant products:
Doubts about the availability and reliability of public chains as financial infrastructure
How to understand the division of new agreements such as AMM and lending agreements into the existing regulatory framework
in conclusion
in conclusion
From entities, to electronics, to tokenization, financial assets are always evolving in the direction of high efficiency and low cost. Due to its open nature, the world of Crypto has spawned countless innovations. Ethereum is the largest innovation test field, but it is precisely because of its open nature that RWA has a long road ahead, from technological innovation to business model exploration. to communicate with regulators. But even the electronicization of stocks has gone through decades. The current RWA market on the chain is only a few hundred million market. While exploring its own development path, DigiFT looks forward to the advancement of RWA's infrastructure, laws and regulations, and will continue to pay attention to the progress made by various project parties and developers here.
