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; - ICO; a big explosion, based on the "ERC; 721; encryption cat game blocked the network, and developers imagined the development of assets on the chain for a while. Infinite possibilities; the earliest concept of real world assets (RWA) was also popular in the form of STO (Security Token Offering).

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.

STO; the initial popularity, due to the imperfect legal structure and the lack of financial infrastructure on the chain, it ended without a problem. 2020;'s; DeFi; builds a nearly complete financial infrastructure on the chain, and issuance, trading, and lending can 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. It just so happens that in the current world of encrypted assets, the rate of return on 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 the United States, which is considered to be a "risk-free return". National debt; when on-chain assets are no longer attractive, investors begin to explore real-world assets.

U.S. treasury bonds have the best liquidity and the lowest risk that is "widely believed", close to; 5%; the "risk-free" annualized return has attracted 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. There is no intermediary. Assets are directly cleared and settled on the chain according to algorithms, and there is no cumbersome "T+N" settlement due to complex traditional bookkeeping methods and out-of-sync ledgers process.

Globalization: due to geographical restrictions, some investors cannot purchase the assets he wants; 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 encrypted assets, from public chain tokens, governance tokens, utility tokens to; NFT; artworks, etc., in essence, all assets are highly correlated, from an economic point of view assets of the same type. Take "NFT" as an example, BAYC, Cryptopunk; and other projects have attracted a lot of attention from outside the crypto asset circle, and even many celebrities have participated in them, but we have done a simple data analysis to compare the prices of the top five blue chips; NFT; (USD; denomination) compared with the price of Ethereum, it is found that it is still highly correlated.

Source: Dune.com

Encrypted asset investors also want to diversify their risks and obtain some benefits outside the encrypted world. Real-world assets are relatively more diversified, with comprehensive 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

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; in; 2023; year; assets. Maple Finance;'s;Cash management pool and;Openeden;in;2023;year;5;announced the product launch, currently;Maple Finance;temporarily has no purchases, Openeden;has;1.7;M USD assets,;5;addresses 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; went online in; 2023; year; March; its underlying asset is; MatrixDock;; DeFi; in protocol. At present, the total amount is about; 6.8; M; U.S. dollar treasury bond assets, and there are nearly; 300; currency holding addresses. Relevant data 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, the contract issues the corresponding national bond tokens according to the rules and the set price.
• On-chain custodians, investors; USDC; there will be on-chain custodians
• The deposit and withdrawal channel, which converts the "USDC" raised by the issuer from investors to "USD" to the corresponding custodian
• The national debt management party generally needs to be a compliant fund entity or; SPV, which trades investors' funds in 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 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 –; Institutional-grade U.S. debt on-chain attempt

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 a qualified investor; the platform will add the wallet address of the certified investor to the white list, and only the white list address can hold and operate; sTBT; tokens.
• Investors will send ;USDC; to the smart contract of the platform, generally more than ;100;,;000 USDC.
• USDC; will be stored in the escrow wallet, and converted to; USD; into the bank account through deposit and withdrawal channels.
• The manager trades treasury bonds in the open market, and the treasury bonds are managed by a third-party institution
• After the investor purchases, the platform needs; 3; New York Bank working days to carry out a series of operations, and finally the purchased; sTBT; amount will be confirmed and sent to the investor's wallet.

Source: MatrixDock sTBT whitepaper

Relatively speaking, the purchase process takes three days, which is not user-friendly. sTBT; adopts; ERC; 1400; standard, realizes the rebasing of tokens (Rebasing), each;

Anchoring; 1; USD enables; sTBT; to trade between; Curve; Timely liquidity; at the same time, providing liquidity on "Curve" can obtain "Crv" token rewards and fee income.

In;sTBT; will increase the number of corresponding;sTBT;tokens in the user's wallet on the;3;PM;of each New York bank working day according to the income of the national bond market on that day. For example, ;100 sTBT; corresponds to; 100; US dollars in the user's wallet, if the profit of the day is; 1%;, after the "rebase" process, the user's wallet will have; 101 sTBT, corresponding to; 101; US dollars.

If the fair price of the treasury bond market falls on that day, the user's assets will suffer losses, and the "sTBT" balance in the user's wallet will not decrease, and the fair value of the actual secondary market transactions will fall. Doesn't continue to happen until fair value returns; rebase.

Chain treasury bond case 2;: T protocol –; treasury bond on chain without permission

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

• TBT, is the package of "sTBT", with a "rebase" mechanism to anchor the price of "TBT" at "1; US dollar, so that it can be traded on "Curve;"
• wTBT, right and wrong;rebasing;'s;ERC;20; standard token, can be exchanged with;TBT; and;TBT;The exchange rate will increase with the growth of the number after the;TBT rebase;.

Among them, "TBT" can be traded in the secondary market, and "USDC" can also be used to directly mint and immediately send the corresponding amount of "TBT" to investors without waiting for the "sTBT" minting time. ;T protocol;will charge a relatively high minting fee to cover the interest cost during the ;sTBT;minting 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; liquidity can be obtained at the same time; Velodrome; platform token rewards and transaction fee income .

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, and determine the price of bond tokens through the oracle machine or directly feeding the price to the contract. The ERC;20; standard can be 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. On-chain; AMM; 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 trade-offs.

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 tokens Price anchoring;1;:;1;, but in order to achieve trading on the "Curve;, Matrixdock sTBT; adopts a complex "rebase;" mechanism to increase the complexity of the product.

DoDo;'s; PMM; is relatively suitable, but requires external oracle machine support, and cannot realize the price discovery mechanism.

AMM is more suitable for blockchain scenarios. In order to adapt to "AMM" and realize 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, to enable token holders to receive future cash flow.

RWA; public chain

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

The integration of compliant assets and; DeFi;

In the above-mentioned national debt platform on the chain, Ondo Finance; designed a lending platform; Flux Finance; to realize the national debt token; OUSG; lending. Among them, "OUSG" holders need to go through "KYC" and qualified investor verification to join the whitelist, 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; and; Curve; do combination, but direct purchase; sTBT; The transaction volume is only a few thousand dollars.

T protocol; Directly take the route without permission, and can arbitrarily convert national debt tokens into other forms of tokens, so as to embed 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 usability and reliability of the public chain as a financial infrastructure
• ;Yes; AMM, lending agreement and other new agreements how to divide into the understanding of the existing regulatory framework
• Clarity of relevant responsible entities

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 the road for "RWA" is very long, from technological innovation to business models. Exploration, communication with regulation. But even the electronicization of stocks has gone through decades. The current "RWA" market on the chain is only a market of hundreds of millions. There is a huge room for development. While exploring its own development path, DigiFT is looking forward to the advancement of infrastructure, laws and regulations of "RWA", and will continue to pay attention to the progress made by various project parties and developers here.