RWA Application Case Study: 5 Experiments of On-Chain US Treasuries

Author: DigiFT

In 2017, the Ethereum ERC20 token standard brought about a boom in on-chain financing -- the explosion of ICOs, while the ERC721-based CryptoKitties game congested the network, leading developers to envision the infinite possibilities of on-chain assets; the earliest concept of real-world assets (RWA) also became popular at that time in the form of STO (Security Token Offering).

Historically, every transformation of financial infrastructure has been based on changes in accounting methods; from the earliest counter sales of paper securities, to electronic bookkeeping, and now to tokenization on-chain, the representation of financial assets has continuously evolved towards efficiency, transparency, and trustworthiness.

The initial boom of STOs came to an end due to the imperfect legal framework and the lack of financial infrastructure on-chain. In 2020, DeFi built a nearly complete set of on-chain financial infrastructure, enabling efficient execution of issuance, trading, and lending on-chain, providing development momentum for the subsequent entry of traditional finance.

Beyond the technical level, the progress of laws and regulations has made it possible for assets to be massively tokenized on-chain, as governments in places like Singapore and Hong Kong explore the issuance of relevant licenses.

Driven by both technology and law, a token on the blockchain can represent real-world assets. At the same time, in the current world of crypto assets, the yield on native on-chain assets has significantly decreased during the bear market, with the staking yield of stablecoins on mainstream lending platforms being only 2.5%, far below the "risk-free return" of U.S. Treasury bonds; when on-chain assets become less attractive, investors begin to explore real-world assets.

U.S. Treasury bonds offer the best liquidity and are "widely regarded" as having the lowest risk, with nearly 5% "risk-free" annual returns attracting a massive number of investors. Cryptocurrency holders also wish to participate, not only for the returns but also to hedge against the risks of crypto assets.

Both the old and new worlds have the motivation to understand each other, and on-chain treasury bond products have begun to emerge as a testing ground. This article explores five on-chain treasury bond projects currently on the market to analyze their solutions, legal frameworks, current status, and potential risks.

Development Motivation: Why Do We Need On-Chain Treasury Bonds?

Before discussing these solutions, we first need to understand the "why," what the development motivation is; the solutions come from the combination of technology and law, requiring both technological advantages and the drive of individuals to promote the design of solutions and the improvement of related regulations.

We believe that both traditional finance and web3 finance have the motivation to promote the development of on-chain assets.

1. Why Do Traditional Financial Investors Want On-Chain Tokenized Assets?

Asset Security: After experiencing the collapse of several banks/financial institutions, the black box of the traditional financial system is no longer widely trusted; the self-custodial nature of crypto assets ensures control over assets as long as one holds the private key, making investors more eager to hold tokenized crypto assets.

Asset Flexibility: Once tokenized on-chain, assets become permeable and can seamlessly integrate with other financial applications, providing users with a better experience and reducing usage costs, typically in lending, staking, trading, and even enabling programmable assets through certain smart contract designs.

Transaction Costs: Transactions and lending are executed through on-chain smart contracts without intermediaries, with assets directly settled and cleared on-chain according to algorithms, avoiding the cumbersome T+N settlement process caused by complex traditional bookkeeping methods and ledger discrepancies.

Globalization: Due to geographical restrictions, some investors are unable to purchase the assets they desire; through DeFi infrastructure, investors have the opportunity to easily access global assets.

Source: Binance research

2. Why Do Web3 Investors Want to Purchase Real-World Assets?

Asset Diversification: Although there are many types of crypto assets, from public chain tokens, governance tokens, utility tokens to NFT artworks, all assets are essentially highly correlated and are the same type of asset from an economic perspective. Taking NFTs as an example, projects like BAYC and Cryptopunks have attracted significant attention from outside the crypto asset circle, with many celebrities participating. However, a simple data analysis comparing the prices (in USD) of the top five blue-chip NFTs with the price of Ethereum shows that they remain highly correlated.

Source: Dune.com

Crypto asset investors also wish to diversify their risks and gain some returns outside the crypto world. Real-world assets are relatively more diversified, with established compliance, investor protection tools, and information disclosure requirements, making them attractive investment targets for crypto investors, enabling asset hedging and portfolio allocation.

Current 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 launched in January 2023, with treasury bond assets of $71.8M (67 addresses participating) and $118.4M, respectively. Maple Finance's Cash Management Pool and Openeden announced product launches in May 2023; currently, Maple Finance has not made any purchases, while Openeden has $1.7M in assets with 5 addresses participating. The products offered by the above four platforms require investors to undergo KYC and prove themselves as qualified investors/institutions, with a minimum purchase of 100,000 USDC.

T protocol launched in March 2023, with its token's underlying asset being MatrixDock's sTBT. It removes whitelist restrictions through token wrapping to achieve permissionless treasury bond tokens and embeds them into several DeFi protocols. Currently, there are approximately $6.8M in treasury bond assets with nearly 300 holding addresses. The relevant data is as of May 11, 2023.

Except for T protocol, the processes of other products are divided into on-chain and off-chain parts, which involve multiple parties in the following components:

• Issuer, generally a subject established by the project party deploying a smart contract on-chain. Investors invest USDC, and the contract issues corresponding treasury bond tokens based on rules and set prices.
• On-chain custodian, where investors' USDC is held by an on-chain custodian.
• In-and-out channels, converting the USDC raised from investors by the issuer into USD for the corresponding custodian.
• Treasury bond manager, generally a compliant fund entity or SPV, trading bonds in the public market with investors' funds.
• Third-party custody, where the treasury bonds managed by the manager are operated in accounts held by third-party licensed custodians.

Since on-chain treasury bond products combine on-chain and off-chain elements, the off-chain side follows traditional financial processes, involving multiple parties, and still requires waiting for the clearing and settlement of relevant institutions in steps like custody and in-and-out transactions, leading to friction at various stages.

On-Chain Treasury Bond Case 1: MatrixDock sTBT -- Institutional-Level U.S. Treasury Bond On-Chain Attempt

Except for T protocol, the user experience processes of the platforms are roughly the same. Taking MatrixDock as an example, its subscription process is as follows:

1. Investors need to undergo KYC and verify as qualified investors; the platform will add the wallet addresses of certified investors to a whitelist, and only whitelisted addresses can hold and operate sTBT tokens.
2. Investors send USDC to the platform's smart contract, generally needing to exceed 100,000 USDC.
3. The USDC will be held in a custody wallet and converted to USD through the in-and-out channels to the bank account.
4. The manager trades treasury bonds in the public market, with the bonds held by a third-party institution.
5. After purchase, the platform requires 3 New York banking days to perform a series of operations, ultimately sending the confirmed quantity of sTBT to the investor's wallet.

Source: MatrixDock sTBT whitepaper

Relatively speaking, the subscription process takes three days, which is not user-friendly. sTBT adopts the ERC1400 standard, implementing token rebasing, with each sTBT pegged to 1 USD, and the yield realized through rebasing (increase in token balance).

Pegging to 1 USD allows sTBT to trade on Curve and between other stablecoins with low slippage and fees; whitelisted investors can also trade sTBT directly on Curve for immediate liquidity; providing liquidity on Curve can earn Crv token rewards and fee income.

sTBT will increase the corresponding quantity of sTBT tokens in users' wallets at 3 PM on each New York banking day based on the day's treasury bond market yield. For example, if a user's wallet has 100 sTBT corresponding to 100 USD, and the yield for the day is 1%, after the rebasing process, the user's wallet will have 101 sTBT, corresponding to 101 USD.

If the fair market price of treasury bonds drops that day, the user's assets incur losses, but the sTBT balance in the user's wallet will not decrease; the actual fair value in secondary market trading will drop. Rebase will only continue once the fair value returns.

On-Chain Treasury Bond Case 2: T Protocol -- Permissionless On-Chain Treasury Bonds

T protocol is a permissionless on-chain treasury bond project based on MatrixDock sTBT, issuing two tokens:

• TBT, which is a wrapped version of sTBT, has a rebasing mechanism to peg the TBT price to 1 USD, allowing it to be traded on Curve.
• wTBT, a non-rebasing ERC20 standard token, allows for two-way conversion between TBT and wTBT; the exchange rate with TBT will increase as the quantity of TBT increases after rebasing.

TBT can be traded in the secondary market and can also be minted directly with USDC, immediately sending the corresponding amount of TBT to investors without waiting for the minting time of sTBT. T protocol charges relatively high minting fees to cover the interest costs during the minting period of sTBT.

wTBT can be sent to Optimism Rollup via cross-chain bridges, with liquidity available for user trading on the decentralized exchange Velodrome; providing liquidity can earn both Velodrome platform token rewards and trading fee income.

Future Development Trends and Possibilities

Token Standards

While researching existing on-chain treasury bond projects, we noticed that the token standards for interest-bearing bonds are still not well-developed. Most projects use the basic ERC20 token standard, determining the price of bond tokens through oracles or directly feeding prices into the contract. The ERC20 standard can be compatible with lending and staking protocols as long as accurately readable price parameters are fed in.

However, challenges arise in constructing secondary markets. On-chain AMMs are tailored for specific scenarios. For bonds, while the relative price is stable, it still fluctuates and periodically pays dividends or interest; the traditional bond market uses an order book model, with orders concentrated near the current price, allowing traders and market makers to respond quickly to market changes. However, due to the characteristics of blockchain, the order book model is not suitable, and various AMMs have their own trade-offs.

For bond tokens, Uniswap V2 has excessive slippage; Uniswap V3's concentrated liquidity can reduce slippage, but in extreme market conditions, significant price fluctuations can lead to liquidity loss; Curve requires token prices to be pegged 1:1, but to achieve trading on Curve, Matrixdock sTBT employs a complex rebasing mechanism that adds to the product's complexity.

DoDo's PMM is relatively suitable but requires external oracle support and cannot achieve a price discovery mechanism.

AMMs are more suitable for blockchain scenarios, and to adapt AMMs for secondary market trading, new token standards may be needed. Among them, Maple Finance has designed ERC2222, the Fund Distribution Token (FDT), which is an extension of the ERC20 token standard, allowing token holders to receive future cash flows.

RWA Public Chains

The special asset attributes of RWA require specific oracles, data services, token standards, and on-chain identity systems. Current mainstream blockchain platforms cannot provide the relevant entities and services, and RWA-related infrastructure, public chains/Layer 2 will also be one of the future development directions.

Integration of Compliant Assets and DeFi

Among the aforementioned on-chain treasury bond platforms, Ondo Finance designed the lending platform Flux Finance to facilitate the lending of the treasury bond token OUSG. OUSG holders need to undergo KYC and qualified investor verification to join the whitelist, while liquidity providers for stablecoins can be permissionless. Flux Finance is managed by another overseas entity, isolating it from Ondo Finance's legal entity.

MatrixDock's sTBT is combined with Curve, but directly purchasing sTBT still requires undergoing KYC to join the whitelist. Compared to the current issuance of over 70M sTBT, the daily trading volume on Curve is only a few thousand dollars.

T protocol directly follows a permissionless route, allowing treasury bond tokens to be converted into other forms of tokens, thereby embedding them into various DeFi applications.

Financial institutions are highly regulated. For compliant asset issuers, every additional product issued or new business line developed requires a complete legal process, which is why advancing compliant products is challenging:

• Doubts about the availability and reliability of public chains as financial infrastructure.
• Understanding of how new protocols like AMMs and lending protocols fit into existing regulatory frameworks.
• Clarity on the relevant responsible parties.

Conclusion

From physical to electronic to tokenized, financial assets are always evolving towards higher efficiency and lower costs. The world of crypto, due to its open nature, has given rise to countless innovations, with Ethereum being the largest innovation testing ground. However, it is precisely because of this open nature that the road for RWA is long, from technological innovation to business model exploration to communication with regulators. Even the electronicization of stocks took decades, and the current on-chain RWA market is only a few hundred million, compared to the trillions in traditional finance, and the $30 trillion scale of U.S. Treasury bonds leaves vast room for development. While DigiFT explores its own development path, it looks forward to the advancement of RWA infrastructure and legal regulations, and will continue to pay attention to the progress made by various project parties and developers in this area.