Mint Ventures: The only positive solution to short-to-medium-term RWA, Web3 treasury bond business discussion

Original source: Mint Ventures

Author: Colin Lee

In the previous article, we mentioned that the subcategory that is most likely to explode in terms of scale and users in the short-to-medium term is treasury bond RWA. According to the data of rwa.xyz, the current national debt RWA (excluding US debt in MakerDAO) projects, the tokenized national debt assets are close to 700 million US dollars, which has increased by about 240% compared with the beginning of the year. In addition, the national debt RWA in MakerDAO has also rapidly grown to billions of dollars. The overall growth rate of national debt RWA is relatively fast.

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Based on the above industry background, let's analyze the mainstream treasury bond RWA in the market.

Significance of national debt RWA

In the previous "How to define the native benchmark interest rate in the encryption world?" " and "Prospects for a "Native Bond Market" in the Encrypted World", we discussed the native benchmark interest rate and possible bond market in the encrypted world. We can roughly think that the PoS rate of return of the public chain is the risk-free interest rate of the public chain, and the bond market may gradually develop around the interest rate.

But even if an encrypted native bond market similar to the scale of the traditional bond market at this stage is not rapidly developed on the chain in the future, the emergence of the "risk-free interest rate on the chain" LSD is still of great significance to investors: the public chain represents Investors who use currency (such as ETH) as the bookkeeping standard can obtain currency-based low-risk returns even in a bear market. From this perspective, part of the investment strategies in the traditional market can be more smoothly migrated to the encryption-native industry: such as the stock-debt balance strategy.

National bond RWA is the same as LSD. Once the risk-free interest rate of the traditional financial market can be introduced into the chain world, U-standard investors can use traditional allocation strategies. There are several advantages to this:

(1) U-standard investors still have a relatively safe and stable place to earn interest after the market has gone bearish. Taking the stablecoin market as an example, after the market began to gradually decline in mid-2021, the overall stablecoin market has dropped from a size of US$188 billion to less than US$130 billion today. The reduction in the size of stablecoins is also affecting the overall liquidity of the market;

(2) Equity-debt hybrid wealth management products are easier to launch and accepted by the market. In the traditional market, hybrid wealth management products are also familiar to most investors. This will also promote innovation in the field of DeFi asset management.

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The most typical example at present is MakerDAO. After the market bear market and the sharp rise in U.S. bond yields, MakerDAO included U.S. bonds in its investment scope. After entering 2023, MakerDAO's profitability has improved significantly.

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Therefore, it is reasonable to believe that after seeing MakerDAO's "demonstration", other DeFi projects will also hope to improve project profitability through more diversified strategies such as RWA. Especially in a bear market, RWA can provide a stable and sufficient source of income for the stable operation of the project.

The business model of national debt RWA

At present, there are mainly 5 business models for national debt RWA, namely: consignment model, platform model, infrastructure model, self-operated model and hybrid model.

The consignment model neither directly participates in the packaging of underlying assets nor provides user KYC services. It mainly acquires customers through encrypted native methods, focusing on business marketing, capital acquisition, and expansion of ecology and application scenarios. Representative projects are TProtocol and so on. This type of project is no different from the daily use of infrastructure such as Aave and Compound. It often obtains liquidity by establishing a fund pool, and then pools users' funds together, and then lends funds by a single borrower. Buy underlying assets such as U.S. bonds.

Platform model, that is, the project party only provides a series of service solutions such as on-chain, sales, and KYC, but does not package assets in person. Representative projects are Desmo Labs et al. This type of project generally provides three types of services: (1) asset/equity tokenization services; (2) verifiable information services on the chain; (3) user KYC services, etc. This type of project can theoretically help encapsulate any type of asset/equity from the traditional market, not limited to national debt RWA, and is closer to the Internet platform model in business. If you want to stand out in this track, you need to consider the ease of use of the project party's own one-stop solution, and also consider the project party's ability to acquire customers.

The infrastructure model, which provides services such as RWA on-chain, asset purchase, asset management, etc., but does not directly contact users who purchase treasury bonds at the C-end/B-end. Representative projects include Centrifuge, Monetalis Group, etc.

Self-operated model, that is, the project party finds the corresponding assets by itself, establishes a business structure with external partners, does a good job of risk isolation of assets, and tokenizes assets/equity. At present, there are many projects of this type of model, such as MakerDAO, Franklin OnChain US Government Money Fund, Frax Finance, etc. Compared with the previous two models, the off-chain business of this type of model is more complex, and requires effort in legal affairs, the establishment of the company's business structure, and the selection of assets and partners. However, an important advantage of this type of project also comes from this: the underlying assets are relatively controllable, and the project party has the ability to actively manage risks.

Mixed mode, that is, it can be a combination of the above four modes. This type of project can provide corresponding services such as on-chain, KYC, etc., and at the same time find assets by itself, and directly provide users with corresponding investment opportunities. A representative of this type of project is Fortunafi. Taking Fortunafi as an example, it provides four types of services: (1) Access Capital, which provides financing parties with access to funds; (2) Earn Yield, which has packaged assets, and users can directly invest after completing KYC; (3) Protocol Services, that is, providing governance, treasury management and other services to other agreements; (4) whitelabeled products, that is, providing RWA's full-process services on the chain. Of course, the RWA service of this type of project is not limited to national debt, and can also provide on-chain packaging services for other assets.

Of course, in addition to the above five models, there are also purer trading infrastructures such as DEX serving RWA, such as DigiFT. However, this type of project does not participate in the screening, on-chain, sales and other links of the underlying assets, so I will not go into details here.

Asset side: underlying assets and asset side architecture

Underlying assets

The following types currently exist in the market:

(1) U.S. bond ETF. Projects using this type of underlying asset include Backed Finance, Swarm, MakerDAO, and ARKS Labs, among others. The advantage of adopting this type of solution is simplicity: the management of the underlying assets is handed over to the issuer and manager of the ETF, including liquidity and the rolling continuation of bonds, and the project party of this type of project does not need to manage it personally. U.S. bond ETFs have not had any major risk problems so far, so for this type of project party, there is no need to worry about operational risks in asset management and other aspects. It only needs to include the largest and most liquid assets on the market immediately. Can.

(2) U.S. Treasury bonds. Projects using this type of underlying assets include OpenEden, TrueFi, Matrixdock, etc. This type of project often chooses shorter-term U.S. bonds, which are no different from cash in terms of liquidity. However, since the project is directly looking for a cooperating client, this type of project itself needs to bear the risks related to asset management, so it is very important to select a suitable partner.

(3) A combination of three types of assets: US Treasury Debt, US Government Agency Debt, and cash/repurchase agreements. Projects using this type of underlying assets include Franklin OnChain US Government Money Fund, Superstate Trust, TProtocol, Arca Labs, Maple Finance, etc. Similarly, for this type of project, the management of the underlying assets will be entrusted to a professional manager for management, and the sequel and liquidity issues of the underlying assets will be directly related to the project party. At the operational level, once the project party fails to select a sufficiently high-quality management party, problems may arise.

Fee Structure

The three underlying assets discussed above have different cost structures. Without considering the gas fee caused by on-chain transactions, the main rate structure is as follows:

Since the management of U.S. bond ETFs is handed over to the ETF manager, the main cost problem comes from the casting and redemption links. The rate of this link is often around 0.05% -0.5%; In terms of management and other aspects, management and transaction fees have been added. The cost of management fees is about 0.3% -0.5%. Transaction fees include bank transfer fees and other aspects, and the rate is also around 0.2%.

Asset business structure

The difference in the underlying assets will also affect the entire business logic architecture. The following categories exist in the current market:

(1) Trust structure: Projects currently adopting this scheme include MakerDAO, etc.

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The trust operation mechanism is that the sponsor transfers assets to the SPV to establish a trust relationship, the sponsor obtains the trust beneficiary right, and then the sponsor transfers the trust beneficiary right to ordinary investors. Taking MakerDAO's U.S. debt RWA structure as an example, it includes various roles such as administrator and audit, but part of the off-chain business structure is built by Monetalis Group. The corresponding asset purchases, regular reports, and on-chain are all completed by Monetalis Group. In this architecture, MakerDAO influences details such as scale and the purchase of underlying assets through governance.

(2) Limited partnership SPV business structure: At present, projects such as Maple Finance and Matrixdock have adopted this type of business structure. The project release will participate in the process of asset search and liquidity acquisition.

SPV stands for "Special Purpose Vehicle" - a special purpose vehicle. The main function of SPV is to raise funds from investors in the process of asset securitization/asset purchase. The original design purpose is to achieve bankruptcy risk isolation. Strictly speaking, the above-mentioned first trust structure can also be regarded as a kind of SPV structure. The current SPV development has become more and more mature. In addition to bankruptcy risk isolation, there are several advantages:

Simplify the financial management process and get rid of the problems of too many departments involved in the financial process and unclear business flow in the traditional company business structure;

· Facilitate penetration management. In general, a single SPV corresponds to a single project/asset, which may avoid management problems. For example, in a commercial bank, it is difficult for investors to gain insight into the status of the underlying assets, because the bank does not disclose too many details. This type of information may only be disclosed at the management accounting level used internally by the bank. For personal housing loans, the characteristics of this type of loans will not be disclosed in the financial statements and annual reports disclosed to the outside world, let alone the information specific to a single debtor. However, if the personal housing loan is packaged in the SPV, the loan information must be disclosed in more detail, such as the term, interest rate, collateral, loan amount, and sometimes the specific information of a single loan. In this case, the information that SPV can provide is much richer;

· Reduce taxes, for some underlying assets, SPV has lower tax standards.

Source: fb 435-a 0 d 8 d 8156 ca 5/Cash_Mngt_T&C.pdf

There are two layers in this business architecture:

The first layer, the user and the SPV: what the user directly gets is actually the SPV's creditor's rights, and the premise that the user's income is guaranteed is that the SPV can perform the contract on time;

The second layer, SPV and commercial banks: SPV will participate in the national bond market, and will also participate in the inter-bank market for reverse repurchase and other operations. In this process, if the reverse repurchase between banks defaults, there may be greater risks than directly holding US treasury bonds.

In addition, in this architecture, users face an additional level of risk: SPV itself may have some risks.

ARKS Labs has extended the above business architecture: nesting small SPVs in a large business architecture can achieve scalability of the business scale, and it is also very convenient to operate when adding new underlying assets in the future. This is very similar to the structure of MakerDAO mentioned in "RWA Talk: Underlying Assets, Business Structure and Development Path".

Source: ARKS Labs

(3) Lending platform + SPV architecture: TProtocol currently adopts this type of business architecture. Compared with the second SPV business architecture mentioned above, the difference is that in the second SPV business architecture, one of the relevant parties of SPV is the project party, and the project party will participate in the search and packaging of assets. In TProtocol, SPV is not related to TProtocol, but the initiator of RWA assets.

Take the following figure as an example, the initiator of SPV can be different institutions, and the subsequent on-chain service providers and asset brokers can also be different. TProtocol's business organization is more flexible, but this is not without cost: as more and more partners, SPV's subsequent control, including inspection and management capabilities for service providers, may also be reduced to a certain extent.

(4) On-chain fund share: Similar to the traditional fund purchase strategy, it is necessary to know the detailed buyer information and the one-to-one correspondence with the address. Franklin OnChain US Government Money Fund currently adopts such a business structure. This type of project is more like the "chain reform" that was often said in the past, that is, the project party puts the assets and purchaser information under the chain on the chain, and the future transfer information will also be recorded in bookkeeping and then re-entered on the blockchain. Record.

Although the RWA track is at an early stage at this stage, the requirements for the business structure of users and capital scale are not high, but as the value of RWA of national debt is gradually recognized by investors, the "scalability" of the structure becomes very important, can you Encapsulating new assets in a timely manner and accessing more off-chain service providers may be the winner in the rapid development stage of the track.

Client: KYC and other requirements

Due to the differences in the underlying assets and business architecture, the requirements of the project party for the user end also differ. Currently, there are 3 main differences:

(1) Initial investment threshold: Projects such as MakerDAO, ARKS Labs, and TProtocol do not set a user’s initial investment amount limit, but Maple Finance, TrueFi, Arca Labs, Backed Finance and other projects have set clear thresholds Initial investment amount limit. "No limit on the initial investment amount" is more in line with the habits of current DeFi users. Some projects with an initial investment amount of more than 100,000 US dollars are mainly aimed at users with higher net worth.

(2) KYC requirements: According to the difficulty of KYC, it can be divided into 3 categories: no KYC projects, such as Flux Finance, ARKS Labs and TProtocol; lightweight KYC, such as Desmo Labs, only need to upload passport and other information; heavy KYC, such as OpenEden, Ondo Finance, Maple Finance, Matrixdock, etc. need to submit KYC information comparable to the traditional financial industry. High KYC threshold not only means threshold in the traditional financial industry, but also unacceptable to DeFi users at this stage.

(3) Other requirements: Some projects also limit their investors to certain regions, such as only serving non-US users, or only serving non-US, non-Singapore, and non-Hong Kong users. This type of restriction is generally implemented by restricting IP addresses.

The requirements of some projects for users, such as KYC and regional restrictions, are often checked by third-party KYC service providers, and the project party does not directly participate in the KYC review process.

Revenue distribution strategy and composability

Revenue distribution strategy

At present, there are two main income distribution strategies in the market:

The first strategy is the most common, that is, to distribute directly through the creditor's rights relationship. Regardless of whether users hold SPV claims, or obtain national debt ETFs, national debt, etc. through other structures, end users can get most of the income generated by national debt. Excluding the minting and burning, and the earnings earned by intermediaries, users can get a net income of about 4 percentage points.

This income distribution method is very similar to LSD: most of the pledged income is returned to the user, and only a part of the handling fee is deducted.

The second strategy currently only appears in the MakerDAO project, that is, through deposit interest rates. Since the user's funds do not directly correspond to the underlying assets, MakerDAO uses a spread model similar to commercial banks: on the asset side, assets are invested in relatively high-yielding assets such as RWA; on the liability side, DSR is used to adjust the user's income. Up to now, DSR has been adjusted 4 times, namely: (1) from 1% to 3.49%; (2) from 3.49% to 3.19%; (3) from 3.19% to 8%; (4) Reduced from 8% to 5%.

This strategy gives the project team more flexibility, but the disadvantages may also be obvious: users lack a clearer analysis framework for future profitability. It was originally a national bond RWA, and the user directly understood that it should have obtained a return level similar to the national bond yield. However, through monetary policy, such as MakerDAO’s recent excess returns to depositors, it has soared to 8%. Later, if depositors increase enough If there is a large amount, the yield will fall to the vicinity of the U.S. bond yield. This kind of fluctuation is not friendly to investors who want a stable yield level.

For the yield of government bond RWA, clear and clear "predictability" is very important, so the first income distribution strategy may be better than the second strategy. However, once the project adopting the second strategy clearly anchors the yield of government bonds, there is no difference between the two from the perspective of yield.

Composability

Due to KYC requirements, the tokens of national debt RWA have also differentiated in terms of composability:

Some projects with strict KYC qualifications, such as Ondo Finance, Matrixdock, Franklin OnChain US Government Money Fund, etc., have whitelist restrictions on addresses, so even if there is a corresponding token transaction pool on the chain, it is impossible to do without admission Let users trade at will. For this type of project, unless the scale of the underlying assets is large enough, it is difficult to obtain the support of many DeFi projects and obtain richer composability.

Projects that do not require KYC currently have no difficulty in composability. The only thing that limits the composability of this type of project is the business resources of the project itself, BD capabilities, and the scale of the project itself.

Summarize

By sorting out the above national debt RWA projects, we can vaguely see the business models that such projects may win in the short to medium term:

Underlying assets: Using treasury bond ETFs may be a relatively tricky way to hand over issues such as liquidity management to giants in the traditional financial field. If it is a direct purchase of U.S. debt or mixed assets, it will test the ability of the project party to select a partner;

Business structure: There are already relatively mature models that can be applied. It is best to have strong scalability to facilitate faster expansion and include new asset categories in the future;

User side: In the short to medium term, projects that do not require KYC and have no capital threshold requirements have a wider user base. In the future, if regulatory requirements require KYC, the lightweight KYC project may become a more mainstream solution;

Income distribution: In order to make the investors of national bond RWA more stable and more assured about the rate of return, the best solution is that the rate of return provided by the project to users is consistent with the rate of return on national bonds;

Composability: Before the regulation has restricted the access permission of RWA assets on the chain, it is an important factor for each project to obtain greater business volume in the medium and long term to expand the usage scenarios of users' treasury bond RWA tokens as much as possible.

In the medium and long-term competition, perhaps due to the deepening of regulatory intervention, some lightweight KYC projects may have greater opportunities.