US debt becomes the driving force behind the RWA track, how do players with different genes innovate?

US Debt Transforming the RWA Track and the Impact on Innovation for Individuals with Different Genetic Backgrounds

The continuously popular RWA covers a wide range of assets, including stablecoins, bonds, stocks, real estate, and other assets, and how they can be integrated with the blockchain.

However, if we look at the overall trend of the RWA track this year, it is mainly driven by US bonds. The projects with high TVL in the RWA field are mostly US bond-related projects, and the surge in COMP, MKR, and other DeFi protocols also revolves around US bonds. The introduction of US bonds to the blockchain is currently the most typical case for RWA.

As for why US bonds have become the backbone of this round of RWA narrative, we have repeatedly mentioned in previous articles that one of the most direct reasons is the rise in US bond interest rates due to the continuous rate hikes by the Federal Reserve. This has led many DeFi protocols or crypto investors to turn to obtaining risk-free and high-interest returns from US bonds.

But besides the clear demand for returns, there is a rarely mentioned practical pain point, which is that the threshold for investing in US bonds has always been high. Even for US citizens, the cumbersome KYC and account opening process exclude most people, let alone non-US citizens. At this point, it is a real problem with practical value but also full of obstacles for many project parties to find a way to integrate offline US bonds with the blockchain in a compliant manner to lower the investment threshold and bring the returns of US bonds to blockchain users.

Introducing US bonds to the blockchain is not an easy task. As Kyle Samani, co-founder of Multicoin Capital, said, “This is a standard problem. You need to get all relevant parties, including issuers, underwriters, fund managers, auditors, buyers, sellers, brokers, banks, etc., to agree on the new standards.”

Not only the tokenization of US bonds, but also the tokenization of other bond markets, stocks, real estate, and other assets, to bring traditional real-world offline assets into the blockchain, also require the involvement of many intermediaries such as government regulators and management agencies. The compliance issues and legal risks involved are quite complex.

Perhaps we can start with the most representative and relatively easier to standardize aspect of introducing US bonds to the blockchain, understand the process and practical obstacles of implementing RWA, and summarize how the players in this track are innovating in reducing user barriers and increasing liquidity.

Author: flowie, ChainCatcher

How can different players bring US bond returns to the blockchain?

The seemingly emerging introduction of US bonds to the blockchain has long been in the works. In addition to asset management companies tokenizing US bond funds and new players in blockchain-based US bond protocols tokenizing bond returns, stablecoin protocols indirectly bring US bond returns to crypto users through asset reserves, and so on. According to the statistics from the RWA data research platform rwa . xyz, the tokenized US bond market has already exceeded $680 million (excluding indirect introduction methods), with a average maturity rate of over 4%.

1. Asset management companies that have positioned themselves early: Arca, Franklin Templeton, WisdomTree

Asset management companies with a leaning towards traditional finance may be among the first group of players targeting the tokenization of US Treasury bonds. In 2020, Arca’s innovation division, Arca Labs, finally registered with the US SEC to establish a fund for investing in US Treasury bonds after nine submissions over two years. This fund is also known as a BTF (Blockchain Transfer Fund) and is subject to regulations under the Securities Act of 1940 in the United States.

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 essentially subscribing to Arca Labs’ US Treasury bond fund. The price of ArCoin is determined based on the net asset value of the fund.

Notably, the ultimate ownership record of ArCoin is maintained by a transfer agent, which is regulated by the SEC and operated by Securitize, a blockchain company specializing in tokenization of real-world assets. Currently, investors (both US and non-US) who have undergone Securitize’s KYC/AML process or possess a Securitize ID can purchase ArCoin, while Arca only accepts subscriptions in US dollars.

Franklin Templeton, the largest publicly listed fund management company with assets under management exceeding trillions of US dollars, also made an early move in April 2021 by launching the government money market fund FOBXX on the Stellar blockchain. FOBXX is the first US registered mutual fund to use a public blockchain for transaction processing and recording share ownership. It is regulated under the Securities Act of 1940 and stands out as one of the most strictly regulated products offered by Franklin Templeton. FOBXX is currently the largest player in the tokenization of US Treasury bonds.

The transfer agent of FOBXX maintains the official records in a ledger format with the blockchain serving as a secondary record. In April of this year, FOBXX also expanded to Polygon.

According to the FOBXX official website, at least 99.5% of its total assets are invested in securities fully backed by the US government, cash, repurchase agreements, or cash collateralized securities. Each share of the FOBXX fund is represented by a token called “BENJI,” with the price of the BENJI token pegged at 1 US dollar. Through the Benji Investments app developed by FOBXX, the income from US Treasury bonds is distributed to BENJI holders, who are the shareholders of the FOBXX fund.

The target market for BENJI is US investors, and both retail and institutional investors can participate. To invest in FOBXX, investors must have an exclusive on-chain wallet for conducting transactions (which is 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, and the BENJI tokens purchased by users only serve as proof of receiving income from US Treasury bonds, providing limited leverage.

The total asset size of FOBXX is now close to $300 million, with the Stellar Foundation injecting $20 million into it. FOBXX has an annualized interest rate of 3.75% over the past year.

Wisdom Tree, one of the major ETF providers in the United States, also has a deep layout in tokenized US bonds. In January 2022, Wisdom Tree announced the launch of a new direct-to-consumer fintech product called “Wisdom Tree Prime.” The aim of this product is to provide US investors with selected investment opportunities ranging from government debt to cross-asset categories, with the product’s fund shares 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 governed by the Investment Company Act of 1940 and are issued on the Stellar and Ethereum blockchains, with transfer agents maintaining official records in bookkeeping form and the blockchain serving as a secondary record. Investors also need to transact through the WisdomTree Prime mobile app they have launched.

From the WisdomTree official website, WisdomTree Prime’s related US Treasury products include Short-Term Treasury Digital Fund (WTSY X), Floating Rate Treasury Digital Fund (FLTT X), 3-7 Year Treasury Digital Fund (WTTS X), 7-10 Year Treasury Digital Fund (WTST X), Long-Term Treasury Digital Fund (WTLG X), and TIPS Digital Fund (TIPS X). Among them, the Short-Term Treasury Digital Fund (WTSY X) manages approximately $1 million in assets. However, this product is still in testing and not yet open to a wider audience.

According to WisdomTree, the target users of WisdomTree Prime are not institutional cryptocurrency investors but individual retail investors in the United States. Currently, Stride and Galileo are their payment partners, and users can pre-fund their Prime accounts via ACH transfer and then store the earnings at Daofu Bank. In addition, the WisdomTree Prime Visa debit card will initially be provided as a virtual card and can be used for payment with Apple Pay, Google Pay, and Samsung Pay, with a physical debit card to be released shortly after.

Overall, these asset management companies with a bias towards traditional finance have almost identical approaches to tokenizing US bonds, operating through tokenized fund shares. Holding fund token shares has the same requirements as investing in the funds, where token holders need to register their addresses on the fund’s whitelist. Addresses not on the whitelist will not execute transactions, and investors generally need to be US residents. The transactions mainly support fiat currency trading and do not support cryptocurrency trading with stablecoins. The blockchain primarily acts as a secondary accounting method, with the official records of fund transfer agents still managed in bookkeeping form.

In other words, although these asset management companies’ exploration of tokenizing US bonds is relatively stringent in compliance, it only applies the blockchain’s technology in a simple way of record-keeping and does not have much connection or liquidity with the crypto world of DeFi.

It is worth mentioning that on June 29th, Robert Leshner, the founder of Compound, announced the establishment of a new company called Superstate. According to his application, it is also planned to operate in the form of tokenizing fund shares, following the traditional financial institution’s approach.

But since Robert Leshner has a background in the US Treasury Department, will he bring new ideas to this operation? We can look forward to it.

2. Stablecoin players who go with the flow: MakerDAO and Frax Finance

Compared to the above asset management companies, stablecoin protocols like Maker indirectly earn profits from US Treasury assets by allocating them in US bonds.

MakerDAO, which has been widely discussed recently due to its layout in RWA (real-world assets), has been increasing its investment in US bonds this year. As one of the earliest DeFi protocols to lay out RWA, MakerDAO initially explored investments in solar energy, real estate, and other RWA assets. However, these types of assets had many default risks, and the plans did not follow through.

For MakerDAO, diversifying asset allocation is not just about achieving substantial growth in income. On the other hand, it reduces reliance on a single asset, thus reducing many risks. Previously, nearly half of MakerDAO’s asset reserves came from stablecoins in the Primary Stablecoin Module (PSM), and nearly 70% of those stablecoins were USDC. This means that MakerDAO, without any income, still had to bear the risk of USDC disanchoring.

In contrast, US bonds are almost risk-free interest rate products. And with the continuous rise in US bond rates due to interest hikes, MakerDAO’s layout in US bonds is following the trend. According to official data, as of May, MakerDAO’s RWA investment portfolio reached 2.34 billion DAI, mainly used to purchase US Treasury bonds. According to dune’s panel, over half of MakerDAO’s revenue comes from interest-bearing RWA assets.

With considerable income growth, MakerDAO has also raised the DAI savings rate multiple times this year, first from 1% to 3.49%, and most recently to 8%. This rate is higher than the risk-free rate of 5% for the underlying asset USD, aiming to expand the usage of DAI and DSR.

It is worth mentioning that MakerDAO’s approach to allocating US bond assets does not use an asset issuance platform but rather uses a trust legal structure to hold US bond assets. According to MIP65 proposal, MakerDAO entrusted Monetalis to design the overall legal framework. Monetalis is based on the trust legal framework from the British Virgin Islands (BVI) to achieve on-chain and off-chain interoperability.

Through this trust structure, MakerDAO is able to exchange reserve assets for fiat currency, then have a custodian bank purchase US bond ETFs to obtain corresponding returns. Finally, by increasing the DAI savings rate, the protocol’s income is distributed to DAI holders.

Currently, in addition to MakerDAO, algorithmic stablecoin protocol Frax Finance has also been exploring the use of RWA assets such as US Treasury bonds. Frax Finance and MakerDAO have faced similar challenges in the past, specifically the excessive reliance on USDC as collateral. Earlier this year, the USDC peg broke, causing DAI and Frax to drop below $0.9, which further prompted Frax Finance to strengthen its reserves and reduce its dependence on USDC.

At the beginning of this year, Frax Finance revealed in an interview with the media that their 2023 plan included opening a Federal Reserve main account (FMA) to directly hold US short-term bonds. However, many crypto Key Opinion Leaders (KOL) saw this plan as almost “wishful thinking,” and Frax Finance has not disclosed any further progress on this matter.

In the upcoming Frax V3 version, there have been some developments regarding RWA asset reserves such as US Treasury bonds. In July, Frax Finance founder Sam Kazemian mentioned the thoughts behind this upgrade during an interaction with the community: FRAX has been operating under the assumption that it is not detached from USDC. But when USDC is decoupled, 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 features tied to the “sovereign dollar”.

On August 7, the founder of Frax Finance proposed the partnership of “using FinresPBC as FRAX V3’s off-chain RWA partner”. FinresPBC is a stablecoin technology service provider, and this proposal mentions that FinresPBC will provide services to the Frax protocol, including holding US dollar deposits, issuing and redeeming LianGuaixos USDP and Circle USDC stablecoins, as well as holding, buying, and selling US Treasury bonds. Every month, FinresPBC will publicly release a complete list and report of all reserves it holds for the Frax protocol.

However, for protocols like MakerDAO that use trust laws to introduce US Treasury bond yields, crypto KOL @kenjisrealm, who focuses on RWA research, believes that there are still risks involved such as asset defaults, agent risks, and regulatory risks. Especially with the Corporate TransLianGuairency Act coming into effect in the United States in 2024, even DAOs must disclose the actual controllers and influential interested parties, which conflicts with MakerDAO’s existing RWA framework.

But in the article “RWA Talk: Compliance, Segmentation Lanes, and Outlook,” the founder of dForce, Michelle Chu, stated that if MakerDAO establishes its own trust to hold US Treasury assets, it would at least reduce one layer of operational risk compared to indirect methods like through Circle. More importantly, this model will impact the entire stablecoin market, potentially giving decentralized stablecoins the opportunity to surpass centralized stablecoins. Decentralized stablecoins introduced with US Treasury bonds have greater allure than centralized stablecoins after incorporating interest payments. Whether in terms of profitability or programmability, they can more flexibly adjust the risk composition of underlying assets.

3. Cryptocurrency Newcomers Seeking Lower Investment Thresholds: Ondo Finance / Flux Finance, Matrixdock / T Protocol

Whether it is the tokenization of US bonds by traditional financial asset management companies or stablecoin protocols indirectly providing returns to stablecoin users through trust, the tokenization of these US bonds does not involve market circulation and is essentially an off-chain model. The limitations of this model are also quite apparent. The tokenization of US bonds by traditional asset management and cryptocurrency asset management companies mainly targets non-cryptocurrency investors in the United States, requiring strict KYC and subscription through specialized apps. They also do not support cryptocurrency subscriptions, and the investment threshold remains relatively high. Stablecoin protocols only limit the return to stablecoin holders.

For cryptocurrency users, they still face the challenge of how to invest more idle cryptocurrency assets in US bonds with a low threshold. For DeFi projects, they need to consider how to distribute US bond returns to cryptocurrency 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 exploring the tokenization of US bonds in its latest research report. However, due to compliance requirements, most tokenization protocols for US bonds require KYC, which also means they face limitations on the scale of issuance due to geographical restrictions.

But compared to the tokenization of US bonds by traditional asset management companies, their compliant ways of introducing US bonds onto the chain are different. Additionally, they support the use of stablecoins, making operations relatively more convenient. The following section provides a brief analysis of tokenization protocols for US bonds with higher TVL and some exploration in avoiding KYC requirements.

Ondo Finance, founded in 2021, has team members with backgrounds from institutions and DeFi protocols such as Goldman Sachs, Fortress, Bridgewater, and MakerDAO. Earlier this year, Ondo Finance announced the launch of tokenized funds, providing institutional investors with opportunities to invest in US treasury bonds and institutional-grade bonds.

Compared to the cumbersome registration process of mutual funds, Ondo Finance chooses to use an exempt offering for the issuance of funds, but this means higher requirements for investors, needing to meet the requirements of qualified investors and qualified buyers defined by the SEC, i.e., individuals or entities investing at least $5 million. Qualified investors can invest with USDC or USD, with USDC being converted to USD through Coinbase and purchasing US treasury ETFs through Clear Street, a bulk brokerage platform for institutional investors. The resulting income is then distributed to institutional investors through tokenization.

While the investment threshold is still high, Ondo Finance’s 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 income from investing in US bonds without KYC requirements. Currently, Flux Finance has a total supply of nearly $40 million.

Compared to the exemption issuance of funds, Matrixport’s Matricdock, a bond platform on the chain, has chosen the approach of establishing a Special Purpose Vehicle (SPV) as the issuer and holder of US Treasury bonds. Matricdock has launched a product called Short-term Treasury Bill Token (STBT), which is based on US Treasury bonds. According to compliance regulations, customers still need to undergo KYC and register their addresses on the 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, through its issuer, converts stablecoins into fiat currency for “third-party custodians” to purchase underlying government bonds. However, it has not disclosed “third-party custodians” like Ondo Finance.

It is worth mentioning that Matrixport has launched the permissionless US bond investment protocol T Protocol to explore lowering the investment threshold. Compared to Ondo Finance, which indirectly introduces non-permissioned US bond returns to cryptocurrency users through the Flux Finance lending protocol, T Protocol achieves non-permissioned US bond investment by encapsulating the S T B T issued by MatrixDock.

According to HashKey’s report “HashKey: Tokenization of RWA using US Treasury bonds as an example,” the T B T token launched by T Protocol is a packaged version of STBT. After investors deposit stablecoins into T Protocol, T Protocol mints T B T. When the accumulation reaches 100,000 USDC, it entrusts its partners to purchase S T B T. T B T is anchored to 1 USD and can be redeemed through the protocol, distributing US bond returns through rebasing. There is also another form of T B T called w T B T, which is a non-rebase version of T B T. HashKey believes that behind T B T is the protocol’s purchase of S T B T and USDC reserves that have not yet been purchased, and T Protocol acts as an intermediary between non-Matrixdock users and Matrixdock. T B T is also a potential competitor to stablecoins.

Summary: What are the noteworthy impacts of US bond RWA on DeFi?

Combining the above-mentioned protocols for introducing US bond returns on-chain and some analysis from Mint Ventures’ podcast review article “RWA Talk: Compliance, Segment Tracks, and Outlook,” the impact of US bond RWA on the cryptocurrency market is mainly twofold:

First, it retains on-chain cryptocurrency funds and mitigates capital flight. After experiencing a long bear market, many idle stablecoins and other crypto assets find it difficult to find low-risk and profitable avenues. US bond RWA to some extent fills this demand for risk-free returns and mitigates capital flight on the chain. From a longer-term perspective, dForce founder Mindao raised a thought: Stablecoins have tokenized the US dollar, but the native interest of the US dollar has never been tokenized before. If a currency does not have its own interest, it cannot become a true currency. When these two are combined, it means that we have fully tokenized the currency of the US dollar on the chain, which is significant.

The second is the impact on the stablecoin landscape. On the one hand, stablecoin protocols like MakerDao reduce their reliance on centralized stablecoins like USDC by diversifying their asset allocation to include US Treasury bonds, which lowers operational risks and attracts users to hold their stablecoins due to their profitability. On the other hand, platforms like T protocol and OpenEden, which are investment platforms for US Treasury bonds, introduce stablecoins as a means for users to obtain exposure to profitable US Treasury positions. This, to some extent, injects new forces into the competition within the stablecoin market.

In addition, as compliant issuance of US Treasury bonds and the bridging of traditional and crypto finance through technology exploration continue, there may be valuable insights for other real-world asset (RWA) entry into the crypto market.

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RWA', translated to English, would be 'Research, Writing, & Analysis'.