A Quick Look at the U.S. Bond and RWA Fixed Income Markets on the Chain

Author: Cabin VC

The concept of RWA (Real World Assets, real world assets) is being discussed more. In a recent report by Citigroup, it is estimated that up to 4-5 trillion US dollars of funds may flow into this market by 2030.

RWA mainly refers to the asset category of non-blockchain systems. The most popular RWA mainly includes the following categories: cash (US dollar), metal (gold, silver, etc.), real estate, bonds (mostly US debt), insurance, consumer goods, etc. , also covers non-equity assets such as real estate, artwork, climate assets, and intangible assets (such as carbon credits). Its asset scale far exceeds that of Crypto native. Referring to traditional market data, the market value of fixed-income bonds has reached 127 trillion US dollars.

However, in the past ten years of development, due to barriers in compliance, technology, and cognition, RWA has made slow progress. Taking the STO concept that ran out in the second half of 2018 as an example, it is difficult to make a breakthrough in its market size for a long time.

Subsequent top DeFi protocols such as MakerDAO and Aave have successively introduced the RWA market, allowing mortgage lending of real assets, but the concept of RWA has not yet stirred up a bigger splash.

However, in the market downtrend, the income of native assets on the DeFi chain has dropped sharply, and the role of risk-free income products in DeFi has been valued. The fixed-income DeFi market represented by on-chain treasury bonds (U.S. bonds) has become a Narratives with more possibilities under the RWA category. **

**RWA on the chain itself needs reputation, compliance institutions, market consensus and other prerequisites to carry it. Whether it is in terms of asset liquidity requirements or DeFi/TradFi needs, short-term treasury bonds are relatively more suitable for starting. **We can focus on the segmented scene in the concept of RWA, and the Dune data also shows this trend:

In the DeFi market, the overall TVL has dropped from the high point in November 2021 (about 178.79B) to the current 54.25B, a drop of almost 70%. Relatively speaking, the U.S. bond yields caused by interest rate hikes have been higher than the more volatile DeFi returns.

A risk-free annualized return of close to 5% is enough for the market to focus on the income of stablecoin issuers such as USDC/USDT on US bond interest. Compared with RWA asset classes such as real estate and traditional funds, on-chain U.S. bonds may be a safer, more compliant, and more liquid choice.

In the face of a huge bond market expectation, the U.S. bonds on the chain will no longer use stablecoins to increase the release of liquidity at a lower cost, and at the same time add another layer of expectations to DeFi Lego. From this perspective, the DeFi risk-free rate of return will be benchmarked between 2-year and 5-year (4.5%), at least not lower than 4% of the 10-year U.S. bond.

Looking at the value of RWA from the two aspects of liquidity and pricing power, U.S. bond RWA will be a way for institutions and funds to freely flow into the encryption field from the traditional market. U.S. debt itself is liquidity, or it can introduce new liquidity to the market .

Focus on the following three directions:

U.S. bonds and public fixed income RWAs on the chain

• OndoFinance：

Through the issuance of tokenized funds, four kinds of bonds are provided for investors, namely, U.S. money market funds (OMMF), U.S. treasury bonds (OUSG), short-term bonds (OSTB), and high-yield bonds (OHYG). After participating in the KYC/AML process, users can trade fund tokens and use these fund tokens in DeFi protocols. (For example, OUSG holders who pass KYC can deposit their tokens in FluxFinance, a decentralized lending protocol developed by Ondo, to leverage USDC)

*Ondo requires KYC and some personal information, as well as a minimum USDC size requirement.

• Cytus Finance：

Cytus aims to allow investors to obtain U.S. treasury bond income without paying out stablecoins under compliance. Cytus Finance's U.S. Treasury bond pool is a mix of one-year, semi-annual, three-month and one-month bonds. There are currently two liquid fixed-income pools available: a 5-6% yield real estate debt pool and a 2-3% yield U.S. Treasury bond pool.

*Compared to Robinland, a sister company that can only serve US users, Cytus aims to provide services to users outside the US, but still requires users to complete the KYC process to comply with SEC regulations.

• T Protocol

T Protocol is a permissionless U.S. debt product on the chain, based on Liquity fork, which aims to provide complete DeFi composability for U.S. debt without permission. Users can mint TBT through USDC (the underlying layer is Matrixdock's STBT). TBT can always be redeemed for USD 1 USDC, and the proceeds are distributed through rebase.

There are other Tokens in the agreement: sTBT is a rebasing token issued by an institution that has passed KYC as collateral for TBT; wTBT is an interest-earning asset encapsulated by TBT. Users can participate in other tokens while obtaining bond income. DeFi activity. There is liquidity in DEX such as velodrome and veSync.

*Its official website indicates that it cannot be used in the United States or other sanctioned regions, but KYC is not required in actual use.

• GOOD

Interest rate derivatives have also appeared in the market, aiming to smooth out interest rate fluctuations through interest rate swaps. The IPOR interest rate reflects the benchmark interest rate of the DeFi market, and open source allows others to integrate into smart contracts. DeFi users can achieve the following purposes of hedging, arbitrage, and speculation by trading IPOR. Its approach is similar to LIBOR (London Interbank Offered Rate, London Interbank Offered Rate).

Insufficient mortgage loan agreement based on RWA assets

Protocols based on RWA assets can provide Undercollateralized loans, allowing DeFi investors to lend funds to different financial institutions (such as bonds, real estate), etc. Since financial institutions do not need to provide on-chain asset collateral when borrowing agreements, its The interest paid is often higher, allowing DeFi investors to obtain higher stable currency income and returns.

Such agreements provide organizations with undercollateralized loans in different ways. The progress of mature Maple Finance, TrueFi, Goldfinch and other agreements on RWA assets can reflect the latest trend of the combination of RWA assets and DeFi.

• Maple Finance

A new liquidity pool introduced by Maple Finance: a cash management pool to invest in U.S. Treasury bills through an independent special purpose vehicle (SPV) as the sole borrower of the cash management pool. Maple and the cooperative platform collect management fees, and the rest of the income is distributed to depositors.

*Non-U.S. qualified investors who have passed KYC can participate.

Synthetic Assets

Since RWA’s off-chain asset on-chain compliance requirements are the highest among all tracks, its development is often restricted (refer to the previous smash hit Mirror in the Terra ecology, stock RWA asset class is excellent, but compliance issues most difficult).

In this case, the innovation of DeFi and RWA assets may return to the direction of synthetic assets.

The track is represented by the Synthetix protocol. Synthetic assets can lock stocks, commodities, etc. as collateral to create synthetic assets, which can be traded on the chain in the form of linked derivatives.

In any case, DeFi and off-chain asset income need a suitable interface. In the market downturn, DeFi needs internal or external self-healing capabilities. RWA assets with stable value and real demand may bring newer use cases.