Bankless Tokenizing US Treasury Bonds and the RWA Revolution

Author: Jack Inabinet, Bankless Analyst; Translation: LianGuaixiaozou

Larry Fink, CEO of BlackRock, boldly referred to the crypto industry as the “next generation market”. Boston Consulting Group also predicts that the value generated by opportunities in the crypto industry will be 42 times larger than the current TVL of DeFi in just 7 years.

What kind of crypto phenomenon is TradFi (traditional finance) enthusiastic about? Of course, it’s tokenized assets! Supporters of real-world assets (RWA) have long been promoting a bull market led by tokenization. However, until recently, this field has been struggling to attract attention from the crypto world.

Although protocols like RealT and Centrifuge have successfully created on-chain representations of real-world assets, they have been struggling to attract a sizable market. Due to regulatory uncertainties, TradFi institutions with underwriting capabilities for such transactions have been hesitant to lend, and the off-chain situation of these types of products is opaque (as well as relatively low returns), which hinders the participation of native crypto enthusiasts in these markets.

Tokenization has been progressing slowly for a long time, but fortunately, there is a class of assets that is most likely to trigger mass adoption: US Treasury bonds!

Today, we will use MakerDAO as a case study to validate the bullish view behind the tokenization of US Treasury bonds, reveal why upgrading US debt into financial products will stimulate the adoption of the next wave of RWA, and think about how tokenization will develop next.

1. The RWA journey of MakerDAO

MakerDAO is no stranger to real-world assets. Since April 2021, its stablecoin DAI has been partially backed by RWA.

In the early days, Maker obtained RWA through customized credit agreements. However, Maker quickly realized the limitations. Customized credit is difficult to scale and carries high risks; each loan requires time-consuming due diligence and is collateralized by relatively illiquid assets (such as property deeds or accounts receivable).

In the process of pursuing scale expansion and risk reduction, Maker chose to completely bypass the challenges of customized credit by becoming a lender to the US government!

First, Maker’s Monetalis Clydesdale vault generates income by investing in highly liquid US Treasury bonds. This is followed by the BlockTower Andromeda vault (a similar investment tool) and the Coinbase Custody vault.

Especially with the introduction of these vaults, Maker is ultimately able to deploy idle stablecoins through large-scale RWA deployment. The high liquidity allows Maker to manage duration by expanding and reducing positions, just like traditional financial entities, as stablecoin reserves are built and reduced.

Although only 2% of DAI was collateralized by RWA before the launch of Monetalis Clydesdale in October 2022, the balance sheet of Maker has undergone fundamental changes in the 10 months since Monetalis Clydesdale was launched.

Currently, 47% of outstanding DAI is collateralized by RWA, and these vaults generate 58% of Maker’s revenue.

RWA has brought in significant income in 2023, and Maker is able to benefit MKR and DAI holders by restarting MKR burn and increasing the DAI savings rate (DSR)!

Since July 19, the marginal MKR buyback pressure caused by the burn undoubtedly contributed to a staggering 40% rebound of MKR against ETH.

The significant DSR yield counteracts the decline in DAI outstanding debt, but the result has been a failure – this tragic fate has befallen almost all stablecoin supplies, except for USDT – but it will definitely incentivize people to use the Maker money market: the SLianGuairk protocol.

Since the increase in DSR, the TVL of the SLianGuairk protocol has skyrocketed and is currently close to $450 million.

Maker ranks fifth among the top 100 cryptocurrencies with its best performance so far this year, and the differentiating factor that sets it apart in 2023 is undoubtedly its RWA investment portfolio, which is a revenue-generating machine.

2. Why choose US Treasury bonds?

In the traditional financial industry, US Treasury bonds are the best collateral; adopting US Treasury bonds (to some extent) seems natural in the decentralized financial system.

Unlike other types of securities such as corporate bonds or accounts receivable, the default risk of US Treasury bonds is almost zero and they are dubbed “risk-free” because the government has the ability to print new money to repay old debts. In practice, this means that holding a portfolio of short-term US Treasury bonds is similar in risk profile to holding US dollars, while also earning additional income.

Tokenized stablecoins, such as USDT, can serve as settlement and payment tools, but the current stablecoin model is not feasible for consumers who are seeking returns!

Traditional financial yields are currently at levels not seen in decades, while native crypto yields are far below the highs of the bull market, making it a great opportunity for protocols to leverage RWA; Maker is just one of many protocols trying to gain a competitive advantage by using US Treasury bonds as collateral.

Ondo Finance has attracted nearly $160 million in deposits for its Ondo US Short Government Bond Fund (OUSG). Ondo’s associated money market, Flux Finance, has a TVL of nearly $40 million, with outstanding loans of $25 million, and its fUSDC deposit receipts can even be used in DeFi protocols such as Pendle.

Based on credit-based RWA protocol, Maple Finance has not avoided the game of tokenizing US Treasury bonds! Maple Finance recently launched its own cash management pool, allowing funds to be put to use by investing in US Treasury securities and reverse repurchase agreements (another type of extremely low-risk security).

Frax Finance is another stablecoin issuer that hopes to expand the range of V3 products by issuing FraxBonds. A recent governance vote approved FinresPBC as the financial channel for V3 to provide access to US Treasury bonds, establishing a high-quality source of income for FraxBonds and providing unlimited scalability.

3. Tokenization of the Future

US Treasury bonds may be the starting point for large-scale tokenization, but it won’t be too far off to adopt other forms of high-quality debt securities—securities that will be accepted by the money market and require little scrutiny or management, such as AAA-rated mortgage-backed bonds and time deposits! The secure income streams they generate can easily be transformed into various financial products, helping to meet the endless demand of market participants for passive returns.

There is no doubt that the biggest obstacle to the tokenization of the future is the current lack of regulation. Large financial institutions are simply waiting for further clarification on regulations regarding cryptocurrencies before entering, and the success of tokenization depends on the resolution of the unresolved regulatory and legal issues in the cryptocurrency field.

The inconsistent global regulatory framework is also a major risk for tokenization. While cryptocurrencies may be a global phenomenon, different regulations in different countries will only divide the market. This will pose significant challenges for companies that have to navigate between different digital asset frameworks and hinder the formation of a truly global asset market, thereby undermining the full potential of tokenization.

Once the regulations in the cryptocurrency field become clear, the path will be paved for participating institutions, and our initial tokenization products will occupy the traditional financial market and continue forward without turning back!

Companies like to create operational and cost efficiencies, and once they realize that they can save time and costs through tokenization, they will quickly move everything onto the chain. Everyone will escape the traditional financial system to gain liquidity in the global blockchain market, which means they can enjoy instant settlement and complete transparency.

Despite the regulatory barriers, one thing is certain: tokenization will continue to exist!

While we wait for regulatory clarity, please note that the cryptocurrency field is increasingly adopting US Treasury bonds (as well as specific types of securities that the money market will accept), laying the foundation for an inevitable bull market dominated by asset tokenization.

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