Currently, the starting point of all RWA protocols is to allow investors to conveniently convert to real assets through stablecoins, and the high liquidity and low risk of U.S. government bonds naturally make them a better choice.

Background

As the macroeconomic environment changes, DeFi products are adapting and evolving. In DeFi 1.0, sustainable stablecoin returns were a pillar, but now low-risk instruments have lower yields than traditional financial markets. As a result, traditional financial products have become more attractive due to their low-risk characteristics, which has led to an interesting intersection between traditional finance and DeFi.

Defillama data shows that DeFi TVL has fallen from a high of over $180 billion to approximately $39 billion over the past year, a drop of over 78%, impacted by the sharp decline in crypto assets, which is not comparable to the volume of traditional assets.

Before the decline, a number of projects have tested the waters of bringing real assets to DeFi. For example, JPMorgan Chase, DBS Bank and SBI Digital Asset Holdings have used the Aave protocol on Polygon to complete foreign exchange and government bond transactions on Ethereum network. The banks exchanged tokenized versions of Singapore government securities for Japanese government bonds and Japanese Yen for Singapore dollars as a test.

Another example is MakerDAO's issuance of the world's first DeFi-based real-asset loan, with New Silver, a Fix&Flip loan pool on the Centrifuge protocol-based lending platform Tinlake, as the asset originator, using MakerDAO as the credit tool to obtain the first loan. Not only that, but in 2022 MakerDAO also launched a $220 million fund in association with BlockTower Credit to fund real-world assets. In 2021, Aave partnered with crypto company Centrifuge to launch RWA Market, a real-world asset marketplace that allows companies to invest in aspects of their business that allow users to in a market that is collateralized by real-world assets.

As the crypto winter hits in 2022, people are shifting towards exploring risk-free rates of return when the alluring APRs are no longer available, and tokenized real-world assets are revolutionising the way assets are managed and invested. As an important financing tool and financial instrument, bonds are a low-risk hedge asset and fixed income investment, and U.S. Treasury rates in particular are often recognized as the risk-free rate in the market. However, the plunge of high-yield products such as USTs, which had boasted 20% interest rates in the last bull market, is dampening the confidence of investors. Furthermore, the performance of yields in the DeFi space, which focuses on high returns, has not been satisfactory.  Take the leading lending projects, Compound and Aave as examples, LoanScan data show that as of May 8, USDC deposit rates on Compound and Aave fell to 1.76% and 5.54%, far below the U.S. Treasury rates.

Let's take a closer look at a branch of RWA called the on-chain government bonds, and the development of its projects within its ecosystem.

Ondo Finance

In January 2023, Ondo Finance announced the launch of tokenized funds to provide institutional investors with the opportunity to invest in U.S. Treasuries and institutional-grade bonds.

Ondo Finance, a large, highly liquid ETF managed through institutions such as investment giant BlackRock and Pacific Investment Management Company (PIMCO), is understood to have launched three tokenized U.S. Treasury and bond products, the U.S. Government Bond Fund (OUSG), the Short-Term Investment Grade Bond Fund (OSTB) and the High Yield Corporate Bond Fund (OHYG).

Of these, OUSG is anchored in U.S. dollar stablecoin, collateralized by short-term U.S. Treasuries, initially through the BlackRock Short-Term U.S. Treasury Bond ETF (SHV), with an expected yield of 4.65%; OSTB will invest in short-term investment grade corporate bonds, initially through the PIMCO Enhanced Short-Term Maturity Active ETF (MINT), with a yield of 5.45%; OHYG will invest in high-yield corporate bonds, initially through the PIMCO Enhanced Short-Term Maturity Active ETF (MINT), with a yield of 5.45%. OHYG will invest in high-yield corporate bonds, initially through BlackRock iBoxx High Yield Corporate Bond (HYG), yielding 8.02%. Bond investors can make on-chain transfers via a smart contract-approved tokenized fund equity, for which Ondo Finance will charge an annual management fee of 0.15%.

In light of the failure of unregulated businesses in the crypto space in 2022, Ondo Finance has chosen to partner with heavily regulated third-party service providers and hold assets in bankruptcy far qualified custodians. Among them, Clear Street, a bulk brokerage platform for institutional investors, is the fund's prime broker and will hold the fund's securities in DTC (Depository Trust Company) accounts; Coinbase Custody will hold any stablecoins held by the fund and Coinbase Prime will handle conversions between stablecoins and fiat currencies. Richey May, an accounting and financial advisory firm that has been repeatedly ranked as a top firm by Inside Public Accounting will serve as the fund's tax advisor and auditor.

For regulatory compliance reasons, however, Ondo Finance will be whitelisted, requiring investors to pass KYC and AML screening before signing subscription documents, either in stablecoins or U.S. dollars, while the SEC defines "eligible purchasers" as individuals or entities with at least $5 million invested.

Matrixdock

Matrixdock is an on-chain treasury bond platform launched by Matrixport, a Singaporean asset management platform. STBT is Matrixdock's first product, introducing a risk-free rate based on US government bonds.

STBT is an ERC-1400 token issued on the Ethereum chain, which is issued and redeemed by Matrixdock and is restricted by a contractual whitelisting mechanism to be transferred and redeemed only between Matrixdock's authorized account holders.

The mechanics of STBT are as follows:

1. The investor sends USDC or USDT to Matrixdock, which minted the corresponding STBT through a smart contract;

2. The STBT issuer converts the USDC into fiat currency through Circle;

3. The fiat currency is now under third-party custody, which purchases short-term debt maturing within six months through a U.S. debt trading account at a traditional financial institution or into the Federal Reserve's overnight reverse repo market;

4. The holder of STBT can move STBT back to their wallet address, such as a cold wallet or third-party escrow platform, after minting the coin;

5. The STBT smart contract will automatically allocate the bond or reverse repo yield to the holding address in the amount of STBT on a daily basis through the Rebase mechanism;

6. As shown from the chart below, the final result of the transaction shows that the STBT reserve will be a short US government bond (orange).

Once a minting request is submitted, Matrixdock will mint and issue the appropriate amount of STBT tokens in accordance with the T+3 settlement cycle and will distribute the tokens within a maximum of 4 business days of New York banks. Upon submission of a redemption request, Matrixdock will promptly redeem the STBT tokens through the following process: debit the STBT tokens from your account, stop the circulation of the STBT tokens or "burn" them, and redeem (at the time of redemption) the equivalent of your STBT tokens (at a rate equal to $1 per STBT token) to your account, deduct any related fees and transaction losses reflecting the pro rata (at the time of redemption) value of the underlying assets, and any transaction losses and/or transaction costs associated with the sale of the underlying assets that the Affiliated Entity believes are necessary to make the redemption effective.

It should be noted that the STBT issuer is a Special Purpose Vehicle (SPV) established by Matrixport. The SPV stakes its holdings of U.S. debt and cash to the holder of the STBT, who has a first priority right to liquidate the entity's asset pool. Even in the most extreme case, such as a Matrixport bankruptcy, the value of the STBTs is secured by the asset pool and the corresponding assets can be redeemed upon liquidation of these securities.

Defillama data shows that the current STBT liquidity is 65.88 million.

TProtocol

TProtocol is also a new on-chain government bond protocol. It is also a fork of the stablecoin protocol Liquity, using Matrixdock for its underlying layer. TProtocol introduced three tokens: TBT, sTBT and wTBT:

1. sTBT: Issued by Matrixdock and rebase once every business day at 6pm (HK time), with a constant peg of US$1. It can only be purchased by high net worth individuals or institutions that have gone through KYC.

2. TBT: A rebase token that allows retail investors to mint without a license and corresponds exactly to sTBT. Users can mint it in USDC and the price is always $1 (excluding fees). Users can redeem TBT for USDC at a price of $1 at all times.

3. wTBT: is an interest-bearing token, a packaged version of TBT, convertible to TBT. the purpose is to allow TProtocol to integrate into existing DeFi protocols, as most DeFi protocols do not support Rebase tokens.

Moreover, the cost for minting TBTs is 0.1% and the fee for redeeming TBTs is 0.3%. the APR of TBTs can be calculated using a formula. TProtocol places emphasis on asset transparency. The value of TBTs and wTBTs is backed by three asset classes: MC_sTBT, IDLE_FUND and PENDING_sTBT.

TBTs can be traded on decentralized exchanges, and TProtocol will launch a liquidity pool on Curve Finance to ensure minimal slippage. TProtocol also allows users to stake TBT-3CRV LPs for esTPS rewards to incentivize DeFi users to use the TProtocol protocol and TBTs, thereby significantly increasing TBT liquidity and ensure low transaction costs when exchanging TBTs.

TProtocol has just gone live on Ethereum mainnet, and users can participate in the early airdrop incentive with USDC 1:1 mint out of wTBT, with each Epoch having a corresponding TPS token as an incentive for early participation. In addition, TProtocol is also live on Velodrome on Optimism, where users provide liquidity to earn from government bond while also earning a bribe.

OpenEden

OpenEden is a crypto project that was launched in early 2022, co-founded by Jeremy Ng, former head of Asia Pacific at Gemini, and Eugene Ng, head of business development at Gemini.

The OpenEden T-Bill Vault is an on-chain pool that allows stablecoin holders to earn income from U.S. Treasury bills, currently yielding around 4.86%. The majority of the pool's assets will be invested directly in short-term U.S. Treasuries, while a small amount of USDC will remain on-chain for immediate withdrawal 24/7. Users can mint USDC from their wallets into TBILL tokens, then access their vaults and earn income. Unlike traditional finance that requires a 1 to 2 business day process. The redemptions are made on-chain, allowing for instant settlement via blockchain technology.

Ribbon Finance

On April 17, Ribbon Finance announced the launch of Ribbon Earn USDC (V2), a principal-protected government bond-based option product in partnership with another RWA protocol named BackedFi, with a yield of approximately 2%, which is lower than other tokenized treasury products.

According to the documentation, Ribbon Earn USDC V2 is an all-day product that generates income through the purchase of Backed IB01 $ Treasury Bond 0-1yr tokens backed by BlackRock certificates. As of April 10, it has an average expected yield of 4.64%, which is later enhanced by the purchase of odd options on ETH to gain exposure to short-term market volatility. Depositors receive the upside gains of the cryptocurrency market while keeping their principal protected.

Conclusion

In summary, with the exception of the no-license protocol,Tprotocol, the rest of the projects all require KYC. Since most of the government bond tokens do not support transfer functions, the use case of it is limited. In addition, another core of on-chain treasury bonds lies in the qualifications of the cooperating treasury bond acceptors, with large and opaque counterparty risk, smart contract risk, and Oracle risk, already widely criticized for the centralized nature of CeDefi.

Currently, the starting point of all RWA protocols is to allow investors to conveniently convert to real assets through stablecoins, and the high liquidity and low risk of U.S. government bonds naturally make them a better choice. When the RWA government bond platform actually runs a widely used interest-bearing stablecoin, the resulting Defi Lego is well worth waiting for. An example is the Layer 1 blockchain created based on the RWA platform, though the regulatory issues that come with it may be unavoidable.

References