In 2017, the Ethereum ERC20 token standard brought an explosion of on-chain financing - ICO. CryptoKitties games based on ERC721 blocked the network. For a time, developers imagined the infinite possibilities of on-chain assets; the earliest concept of real-world assets. (RWA) was also popular at that time in the form of STO (Security Token Offering).
Every change in financial infrastructure in history is based on changes in accounting methods; from the earliest selling of paper securities at the counter, to electronic accounting, and now to tokenization on the chain, the expression of financial assets continues to evolve. Efficiency, transparency, and credibility evolve.
The initial popularity of STO came to an end due to the imperfect legal structure and the lack of financial infrastructure on the chain. DeFi in 2020 has built a nearly complete set of on-chain financial infrastructure. Issuance, trading, and lending can all be efficiently executed on the chain, bringing development impetus to the subsequent entry of traditional finance.
Beyond the technical level, progress in laws and regulations has brought about the possibility of large-scale listing of assets on the blockchain, with governments such as Singapore and Hong Kong exploratoryly issuing relevant licenses.
Under the dual promotion of technology and law, a token on the blockchain can represent real-world assets. Just in the current world of crypto assets, the return rate of native assets on the chain has dropped significantly in the bear market. The pledge return of stablecoins on mainstream lending platforms is only 2.5%, which is far lower than U.S. Treasury bonds, which are considered "risk-free returns"; When on-chain assets are no longer attractive, investors begin to explore real-world assets.
U.S. Treasury bonds have the best liquidity and are "widely considered to be" the lowest risk, with a "risk-free" annualized return of close to 5%, attracting a large number of investors. Cryptocurrency holders are also looking to participate, not just for their returns, but also to hedge against the risks of crypto assets.
Both the old and new worlds are motivated to understand each other, and on-chain treasury bond products are beginning to emerge as a testing ground. This article explores five on-chain treasury bond projects currently on the market to analyze their solutions, legal structures, 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; solutions come from the combination of technology and law, which require both technical advantages and someone with the motivation to promote the design of the solution and the improvement of relevant regulations. .
We believe that both traditional finance and web3 finance are motivated to promote the development of on-chain assets.
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 guarantees control of the assets as long as the private key is held, allowing investors to Would rather be able to hold tokenized crypto assets.
Asset flexibility: After being tokenized on the chain, the assets are penetrable and can be seamlessly integrated with other financial applications, bringing users a better user experience and reducing usage costs, such as lending, pledging, trading, and even Achieve asset programmability through certain smart contract design;
Transaction costs: Transactions and lending are realized through smart contracts on the chain. There is no intermediary. Assets are directly cleared and settled on the chain according to algorithms. There is no cumbersome T+N settlement process due to complex traditional accounting methods and ledger asynchronousness.
Globalization: Due to geographical restrictions, some investors are unable to purchase the assets they want; through 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?
Asset diversification: Although there are many types of crypto assets, from public chain tokens, governance tokens, utility tokens to NFT artworks, etc., in essence, all assets are highly correlated and are of the same type from an economic perspective asset. Taking NFT as an example, projects such as BAYC and Cryptopunk have attracted a lot of attention from outside the crypto asset circle, and even many celebrities have participated. However, we did a simple data analysis and compared the top five blue-chip NFT prices (USD denominated) and Ethereum prices were compared and found to be still highly correlated.
Source: Dune.com
Cryptoasset investors also hope to diversify their risks and obtain some returns outside of the crypto world. Real-world assets are relatively more diversified and have complete compliance, investor protection tools and information disclosure requirements. They are very attractive investment targets for crypto investors and can realize asset hedging and portfolio allocation.
Development status
The projects studied in this article include: Matrixdock sTBT, Maple Finance, Ondo Finance OUSG, T protocol and Openeden.
Among them, Matrixdock’s sTBT and Ondo Finance’s OUSG were launched 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 the product launch in May 2023. Currently, Maple Finance has not purchased it yet, and Openeden has 1.7M US dollars in assets and 5 addresses are participating. The products provided by the above four platforms 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 whitelist restrictions through token encapsulation, realizes permissionless government debt tokens, and is embedded in several DeFi protocols. The current total amount of treasury bond assets is approximately 6.8M US dollars, and there are nearly 300 currency holding addresses. Relevant data is available as of May 11, 2023.
Except for T protocol, other product processes are divided into two parts, the on-chain and off-chain parts. The participating components are:
- The issuer is generally a smart contract deployed on the chain by a subject established by the project party. Investors invest in USDC, and the contract issues corresponding treasury bond tokens according to rules and set prices.
- On-chain custodian, investors’ USDC will have on-chain custodian
- Deposit and withdrawal channel, convert the USDC raised by the issuer from investors into USD to the corresponding custodian
- Treasury bond managers generally need to be compliant fund entities or SPVs, which use investors' funds to trade bonds in the open market.
- Third-party custody, the manager’s treasury bond custody is operated in the account of a third-party licensed custody institution
Since on-chain treasury bond products are a combination of on-chain and off-chain, the off-chain side is consistent with the traditional financial process and involves multiple parties. Steps such as custody, deposits and withdrawals still need to wait for the clearing and settlement of relevant institutions, and all links must be completed. There is friction.
On-chain Treasury Bond Case 1: MatrixDock sTBT – An attempt to put institutional-grade U.S. bonds on the chain
Except for T protocol, the user experience process of the platform is roughly the same. Taking MatrixDock as an example, the subscription 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 whitelist, and only whitelist addresses can hold and operate sTBT tokens.
- Investors send USDC to the platform's smart contract, generally requiring more than 100,000 USDC.
- USDC will be stored in the custody wallet and converted into USD through deposit and withdrawal channels to the bank account.
- The manager trades treasury bonds in the open market, and the treasury bonds are held in custody by a third-party institution
- After the investor purchases, the platform takes 3 New York banking days to perform a series of operations and finally send the confirmed purchased amount of sTBT to the investor's wallet.
Source: MatrixDock sTBT whitepaper
Relatively speaking, the subscription process takes three days and is not user-friendly. sTBT adopts the ERC1400 standard to realize the rebasing of tokens. Each sTBT is anchored at 1 US dollar, and the income is realized through rebasing (increase in token balance).
Anchoring 1 USD allows sTBT to be traded with other stablecoins on Curve, with very low slippage and fees; whitelist investors can also directly trade sTBT on Curve to obtain timely liquidity; while providing liquidity on Curve You can get Crv token rewards and fee income.
sTBT will increase the corresponding number of sTBT tokens in the user's wallet at 3PM on every New York Bank working day based on the day's treasury bond market returns. For example, 100 sTBT in the user's wallet corresponds to 100 US dollars. If the profit on 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 government bond market falls that day and user assets suffer losses, the balance of sTBT in the user's wallet will not be reduced, and the fair value of actual secondary market transactions will fall. Rebase will not continue to occur until fair value returns.
On-chain treasury bonds case 2: T protocol – permissionless on-chain treasury bonds
T protocol is a permissionless on-chain treasury bond project based on MatrixDock sTBT, which issues two tokens:
- TBT is a package of sTBT. It has a rebase mechanism to anchor the TBT price at 1 US dollar, so that it can be traded on Curve.
- wTBT is a non-rebasing ERC20 standard token that can be exchanged with TBT in both directions; the exchange rate with TBT will increase as the number of TBT rebase increases.
Among them, TBT can be traded in the secondary market, or it can be minted directly with USDC and the corresponding number of TBT can be sent to investors immediately without waiting for the casting time of sTBT. T protocol will charge a relatively high minting fee to cover the interest cost of sTBT minting during this period.
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 earn both Velodrome platform token rewards and transaction fee income.
Future development trends and possibilities
Token Standard
While researching existing on-chain treasury bond projects, we noticed that the token standards for interest-bearing bonds are not yet complete. Most projects use the most basic ERC20 tokens and determine the price of bond tokens through oracles or directly feeding prices to contracts. The ERC20 standard is compatible with lending protocols and pledge protocols, as long as price parameters that can be accurately read are input.
But it encountered difficulties in building the secondary market. On-chain AMMs are targeted at specific scenarios. For bonds, the relative price is stable, but the price still fluctuates, and there are periodic dividends or interest payments; the traditional bond market adopts an order book model, where orders are concentrated near the current price, and traders and market makers can quickly respond to the market. Due to the characteristics of the blockchain, the order book model is not suitable on the chain, and various AMMs also have their own choices.
For bond tokens, Uniswap V2’s slippage is too high; Uniswap V3’s concentrated liquidity can reduce slippage, but in extreme market conditions, large price fluctuations can easily fall out of the range, leading to a lack of liquidity; Curve requires token prices to be anchored 1:1, but in order to realize transactions on Curve, Matrixdock sTBT uses a complex rebase mechanism to increase the complexity of the product.
DoDo's PMM is relatively suitable, but it requires external oracle support and cannot implement a price discovery mechanism.
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 ERC2222, Fund Distribution Token (FDT), which is an expansion of the ERC20 token standard and enables token holders to receive future cash flow.
RWA public chain
The special asset attributes of RWA require specific oracles, data services, token standards, and on-chain identity systems. The current mainstream blockchain platform cannot provide related entities and services. RWA-related infrastructure, public chain/Layer 2 will also be one of the future development directions.
The integration of compliance assets and DeFi
Among the above-mentioned on-chain treasury bond platforms, Ondo Finance designed the lending platform Flux Finance to realize the lending of treasury bond tokens OUSG. Among them, OUSG holders need to go through KYC and qualified investor verification to join the whitelist, while stablecoin liquidity providers can be license-free. Flux Finance is managed by another overseas entity and is isolated from the legal entity of Ondo Finance itself.
MatrixDock's sTBT is combined with Curve, but direct purchase of sTBT still requires KYC to be added to the whitelist. Compared with the current 70+M sTBT issuance, the current daily trading volume of Curve is only a few thousand US dollars.
T protocol directly takes the permission-free route and can convert treasury bond tokens into other forms of tokens at will, thereby embedding it in various DeFi applications.
Financial institutions are highly regulated. For issuers of compliant assets, each issuance of additional products and development of new business lines requires complete legal processes. This is why it is difficult to promote compliant products:
- Doubts about the availability and reliability of public blockchains as financial infrastructure
- How to understand how new agreements such as AMM and lending agreements are classified into the existing regulatory framework
- Clarification of relevant responsible entities
in conclusion
From physical, to electronic, to tokenized, financial assets are always evolving towards high efficiency and low cost. Due to its open nature, the world of Crypto has seen countless innovations. Ethereum is the largest experimental field for innovation. However, it is precisely because of its open nature that RWA has a long road ahead, from technological innovation to the exploration of business models. Communicate with supervisors. But even the electronicization of stocks has taken decades. The current on-chain RWA market is only a market of hundreds of millions. Compared with the trillions of traditional financial instruments and the 30 trillion U.S. Treasury bonds, there is still a huge There is room for development. While exploring its own development path, DigiFT is looking 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.