[Web3] Real World Asset: The way to bridge Trad Fi and DeFi (Part 2)
Exploring the Key Players in Treasury RWAs: Franklin Templeton, Matrixdock, Ondo Finance, Mountain Protocol.
Special thanks to Bill Hsu from AppWorks for giving me feedback and suggestions!!!
The previous article introduces Real World Asset and discusses the factors that have caused it to grow dramatically in the last 12 months, as well as the benefits associated with it.
This essay will introduce the Treasury, one of the major assets in the RWA area. We will walk through four key players - Franklin Templeton, Matrixdock, Ondo Finance, and Mountain Protocol to understand different approaches and challenges of Treasury RWA development.
The main players and the T-bill Protocols
1. Franklin Templeton
Franklin Templeton is a global asset manager with $1.3T+ AUM. As a traditional financial institution, they have made much effort on digital asset adoption, and launched several blockchain related products, including their blockchain VC, PE, and mutual funds.
What is their T-bill product?
Regarding RWA, Franklin Templeton launched their Franklin OnChain US Government Money Fund (FOBXX) on the Stellar and Polygon blockchain networks. This fund invests at least 99.5% of its total assets in government securities, cash and repurchase agreements collateralized fully by government securities or cash.
They are a highly regulated entity, their auditors, custodians, payment agents, etc., are publicly disclosed on their website. This fund is only available for US investors, and users are required to do know-your-customer (KYC) and anti-money laundering (AML) checks while onboarding.
How does it work?
Franklin Templeton actively manages the fund and it aims to maintain a stable $1 share price. US investors (from retail to institutions) can buy BENJI tokens through their Benji Investments app to invest in the fund and receive the yields.
You might wonder where the blockchain is.
Franklin Templeton functions as a regulated Transfer Agent, maintaining an internal ledger of record. The company leverages blockchain technology, including Stellar and Polygon, as secondary ledgers to process transactions and record share ownership.
The integration of blockchain technology offers several advantages, such as increased security, accelerated transaction processing, and reduced costs, ultimately benefiting the Fund's shareholders.
2. Matrixdock
Matrixdock is the asset management arm of Matrixport, an Asia-based blockchain financial services firm.
What is their T-bill product?
Matrixdock’s tokenized treasuries product is called Short Term Treasury Bill (STBT), an ERC1400 token. STBT is backed by 6 month US T-bills and reverse repurchase agreements (Reverse Repo) collateralized by US Treasury securities.
STBT tokens are only transferrable to holders pre-approved via KYC/AML whitelisting mechanism. In addition, it is not available to US investors and their website blocks US site visitors.
How does it work?
Matrixdock set up a purpose trust through SPV (Special Purpose Vehicle), which is the issuer of STBT. The "orphan trust structure" serves to maintain a clear distinction between the STBT entities and the financial operations of Matrixdock. This separation protects the STBT entities from potential claims if Matrixdock encounters financial difficulties, which will also protect the STBT holders.
Accredited investors can deposit their stable coins, such as USDC/USDT/DAI, through the APP, and STBT tokens will be minted after the underlying T-bill or reverse repo is validated through interaction with the STBT smart contract. The minting of STBTs can take up to three New York Banking Days. The chart below shows the details of the minting process.
While Matrixdock's revealed information may not be as comprehensive as Franklin Templeton's, its collaboration with Chainlink increases transparency and simplifies the validation of off-chain assets through their on-chain tokenized representation.
Chainlink's Proof of Reserve (PoR) assures on-chain valuation of STBT reserves, preventing the entire STBT supply from exceeding the USD reserve value, so protecting asset holders. PoR gives assurance to stakeholders, allowing them to trust that asset representations are accurate.
3. Ondo Finance
Ondo Finance is an asset management firm. They not only provide treasury-backed tokens, but they also develop a money market protocol called Flux Finance, which is a modified Compound1 V2 fork that allows users to borrow and lend stablecoins by collateralizing their treasury token.
What is their T-bill product?
Currently, two products were launched:
OUSG (For global investor): Ondo short-term US Government bond fund, the primary holding of OUSG is Blackrock's iShares Short Treasury Bond ETF.
USDY (For non-US investors): US Dollar Yield Token, a tokenized note secured by short-term US Treasuries and bank demand deposits; the portfolio is posted on their website.
Whether investing in OUSG or USDY, investors are required to undergo KYC and AML processes. OUSG allows individuals from various regions to invest, though they must meet 2strict financial conditions and be whitelisted; In contrast, USDY only allows individuals from eligible geographies to invest but doesn’t consider investors’ financial status.
2024/02/16 update: USDY is also trading freely on secondary market, such as ByBit and DEXs on Solana and Mantle.
How does it work?
Ondo I LP is the fund entity that issues OUSG. It is highly regulated and follows a standard fund structure that involves many parties (e.g. limited partner, general partner, qualified custodians, and financial auditor etc.) behind the process from buying the underlying asset to issuing the token.
As mentioned above, Ondo’s tokens are only tradable between KYC’d accounts which are added to the Ondo whitelist. Them how are they going to acquire the non-KYC’d crypto native users?
Therefore, Flux Finance appeared.
Flux finance, launched by Ondo, serves as a money market protocol facilitating the lending of stable coins. Non-KYC'd users are able to earn interest closely aligned with T-bill rates by supplying stablecoins to the platform and minting “fTokens”. On the other hand, KYC'd accounts can optimize returns by increasing leverage through collateralization with OUSG tokens.
Flux finance, a money market protocol that facilitates the loan of stable coins. Non-KYC’d users can earn interest that is closely linked with T-bill rates by supplying stablecoins to the platform and minting "fTokens". On the other hand, KYC'd accounts may maximize returns by increasing leverage via OUSG token collateralization.
Currently, $23.9M of OUSG (22.5% of minted tokens) is put into Flux Finance. Through this mechanism, KYC’d and non-KYC’d investors both are able to achieve higher yield, and the TradFi yield may be bridge into DeFi in a compliant manner.
4. Mountain Protocol
Mountain Protocol is the issuer of stablecoin USDM. Although they are also a centralized stablecoin provider just like Circle (USDC) and Tether (USDT), they bring the real world yield onto the blockchain.
It is noteworthy that it follows the SEC's Regulation S and hence only serves non-US individuals.
What is their T-bill product?
USDM is backed by short-term US treasury with a dollar-weighted average duration of 60 days or less. It is a yield-generating token, with a current annual percentage yield of 5%.
Since its launch in September 2023, it has amassed over $150 million in TVL as of today (2024/01/16), representing a 10x growth compared to November 2023.
To issue USDM, the KYC process is still required. However, by integrating with Curve, liquidity becomes available on secondary markets for permissionless access. Unlike Ondo Finance (only for OUSG) or Matrixdock, there is no need for whitelisting, holding periods, or other restrictive features.
Furthermore, since USDM is an ERC20 rebasing token, with its balance fluctuating daily due to incoming rewards, it is incompatible with some DeFi protocols such as Uniswap. To address this, Mountain Protocol collaborates with Manta and introduces wUSDM (wrapped USDM), transforming the token into a non-rebasing form for seamless integration across the DeFi space, similar to Lido's wstETH.
In December 2023, Manta Network launched Manta New Paradigm, a liquidity incentive campaign that enables users to participate through staking and receive future token airdrop rewards. This campaign has significantly contributed to the growth of Mountain Protocol's TVL.
How does it work?
"USDM Reserves" are the accounts that hold the assets that back the USDM. E.Q. Capital, an investment manager with a Bermuda license, is now investing these reserves, which are kept separate from Mountain Protocol's daily operations.
Partnership with Wintermute
Moreover, Mountain Protocol has partnered with crypto market maker Wintermute. By leveraging Wintermute's liquidity, users are able to redeem USDM for USDC 24/7.
In short, Wintermute will trade USDM for USDC and hold USDM in their books until TradFi markets open. Then, Mountain Protocol can liquidate the T-bills held in “USDM Reserves”, onramp them, and repurchase the USDM from Wintermute. The details of the workflow is shown below:
The agreement addresses settlement delays associated with the banking system's T+2 settlement, ensuring USDM holders have uninterrupted, 24/7 redemption capabilities. Additionally, it mitigates USDM's exposure to banking risks by eliminating the need for long-term deposits, streamlining the process of timely redemptions.
The four companies discussed have adopted various methods to integrate real-world yields into the blockchain.
We delve into how they establish trusts to manage treasury assets and mitigate risks. Their treasury assets are similar, but providing more channels for people to access their products and optimizing user experience will be the key to competition.
In this article, we see that Ondo Finance expands beyond T-bill tokens to introduce Flux Finance, a money market protocol facilitating borrowing and lending using OUSG; Mountain Protocol integrates with Curve, making USDM available on the secondary market for permissionless access and collaborates with Manta Network to introduce wUSDM for seamless integration across DeFi protocols.
The challenges that Treasury RWA is facing
1. Regulatory and KYC
The mentioned companies highlight the necessity for strict regulations when bridging assets between tradFi and DeFi. This process requires KYC/AML procedures and whitelisting; also, many companies restrict users to be located in specified countries in order to access their product.
While prioritizing KYC is crucial for assuring product compliance and legality, it significantly restricts circulation and scalability. Despite the blockchain's borderless nature, regulatory constraints impede global accessibility.
We mentioned how MakerDAO and Flux Finance enable users to earn real-world yields without the need for complex KYC processes. How users can leverage Treasury RWAs while adhering to regulatory requirements will significantly impact the mass adoption of Treasury RWAs.
2. Technology to increase transparency and security
To achieve the secure and regulatory-compliant integration of Treasury RWAs, real-world information such as price, identity, and reserves value must be securely but thoroughly transferred to the blockchain.
We mentioned ChainLink Proof of Reserves as a solution, providing autonomous, reliable, and timely verifications that empower users, asset issuers, and on-chain applications to monitor cross-chain or off-chain reserves supporting tokenized RWAs.
Additionally, most RWAs operate on only one or two chains. To scale, we also need for data to be securely transferred cross-chain and connected to off-chain data irrespective of the blockchain they are moved to. Oracle-related protocols play an important role in RWA.
Conclusion
In the previous article, we explored how arbitrage opportunities between tradFi and DeFi are enticing crypto users to enter the space, seeking real-world yields and contributing to the rapid growth of RWAs.
The recent approval of the Bitcoin Spot ETF triggered a crypto bull market, where Aave and Compound are currently offering APY above 5% with significant volatility. This has resulted in a slowdown in the growth of Treasury RWAs, with some protocols even facing a downturn.
However, Treasury RWAs continue to offer the crypto ecosystem secure and stable assets. Their stability is less affected by the ups and downs of the crypto market, meeting the ongoing demand for stable assets, especially in developing countries facing high inflation.
I believe that Treasury RWAs empower users to earn returns on US Treasury assets with higher liquidity, reducing reliance on traditional stablecoins. I look forward to witnessing their ongoing integration into more web3 applications in the future.
Compound is a lending and borrowing DeFi protocol where the interest rate is determined algorithmically based on supply and demand in the liquidity pools.
OUSG focuses on US institutional investors and it is subject to SEC Reg D restrictions. Individuals must have $1M+ in assets or an annual income of $200K+ for the past two years, while entities need assets of $5M+.