Incorporating real-world assets (RWAs) as DeFi collateral has been a dream for many in the crypto space since the advent of smart contract platforms. Tokenizing assets from the analog world promises to give DeFi greater collateral diversity, revenue streams, fractionalized ownership, and reduced costs and volatility.
After an initial wave of tokenized real estate projects failed to get off the ground in 2018 and 2019, RWAs seemed to gain their first sense of legitimate traction during the 2021 bull market on the back of private credit protocols like Maple Finance, TrueFi, Goldfinch, and Centrifuge. The idea of these protocols is that stablecoin lenders can enjoy above average returns by lending to undercollateralized borrowers that are vetted by the protocol.
In theory, borrowers use this capital to finance productive endeavors in the real world. However, a closer look shows that the majority of the borrowing growth in 2021 and early 2022 was mostly due to crypto-native businesses using Maple Finance and Truefi. These businesses likely used the funds for cheap leverage or on-chain arbitrage strategies rather than producing net-new services in the real world.
While some private credit protocols such as Centrifuge and Goldfinch are enjoying steady growth, their numbers pale in comparison to the rise of a newer RWA subcategory experiencing consistent growth throughout 2023: on-chain U.S. Treasuries.
The demand for U.S. Treasury yields has ballooned over the last 15 months during the Fed’s historic rate hike that has increased the Federal Funds Rate from 0.25% in March 2022 all the way to 5.25% today. With crypto’s top lending protocols offering ~3% on stablecoin yields today, Treasury yields offer a more attractive low-risk alternative. This has led to the rise of a handful of protocols that bring these off-chain yields on-chain. The two most notable include:
Ondo Finance’s OUSG — A stablecoin that essentially wraps a U.S. Treasury bill ETF and passes the interest to its holders. Ondo’s service is only available to qualified purchasers (individual or family-owned business with >$5 million in investments) and OUSG can only be transferred between whitelisted addresses. Ondo offers a fork of Compound V2, Flux Finance, that allows OUSG to be used as collateral to borrow stablecoins such as USDC, USDT, and Dai.
While these types of projects are a step in the right direction, their restrictions render them almost unusable to the average crypto investor. Most protocols restrict their offerings to non-U.S. users and the KYC enforcements block the tokenized assets from composing with DeFi’s permissionless services. Once again, clear regulations will be required for tokenized treasuries to gain legitimacy within the cryptoeconomy.
In the short term, U.S. Treasuries will continue to play a significant role in two of crypto’s largest stablecoin protocols. On June 21, MakerDAO purchased another $700 million worth of U.S. Treasuries to bring its total holdings to $1.2 billion. The protocol’s $2.3 billion worth of RWA collateral is now the protocol’s largest collateral type comprising 49% of Maker’s assets. These RWA components of MakerDAO are generating substantial fees for the protocol as well. According to MakerDAO’s strategic finance core unit, stability fees from RWAs have accounted for 78.5% of all stability fees generated year-to-date. This shift is indicative of Maker’s commitment to building a diversified collateral base that can become decoupled from DeFi’s volatility.
On the same day as Maker’s latest Treasury purchase, Circle recommitted to using Treasuries to back its USDC stablecoin. The company had previously liquidated all of its $24 billion holdings during the U.S. debt ceiling standoff last month in favor of overnight repurchase (repo) agreements. With the debt ceiling conflict passing on June 3, Circle resumed Treasury purchases in its BlackRock-managed USDC Reserve Fund and plans to split its exposure between short-term Treasuries and repos going forward.