Dilemma: Why can it only be offered to qualified investors?
With the exception of a few projects that offer RWA offerings to retail investors under certain restrictions through compliance with specific local laws, issuance of special prospectuses, and registration of certain securities (see the RWA Innovation Module for details), most RWAs in the current market are only available to accredited investors. According to the regulations of different regions, investors are required to have a certain amount of proof of financial assets to be considered an accredited investor, such as Singapore requires personal financial assets of S$1 million (about US$730,000).
Most RWA products, including U.S. Treasuries-related products, are only available to accredited or institutional investors due to the high cost of compliant issuance to retail investors.
These costs come from the lack of correlation between the underlying asset and the final token.
The relevant securities laws impose strict requirements on the issuance of securities to retail investors, including the preparation and registration of a prospectus. In addition, the laws of most jurisdictions require that ownership of assets such as stocks and bonds needs to be recorded in a specific way (e.g., in a register maintained by the issuer). At present, the authorities do not accept tokens and blockchains as direct tools for ownership registration, which means that the ownership of tokens cannot directly represent the ownership of the underlying assets under these laws and regulations.
RWAs issued using an asset-backed model, such as RWA tokens with U.S. Treasuries as the underlying asset, need to have a "bridge" between the underlying asset and the expected RWA token. The RWA token is a new security, and this "bridge" can be established by treating the RWA token as its own separate security, but it also means that the RWA token needs to independently comply with all relevant securities laws, i.e. the issuer needs to additionally prepare and register a prospectus with the RWA token as a security, etc.
To understand this, we can look at the traditional model of issuing securities to retail users. Whether it is a stock or a bond, it needs to go through:
• In-house preparation stage, which determines the characteristics of the company's securities, selects and engages investment banks (underwriters) and other financial professionals, such as lawyers and accountants, to assist in the IPO process.
• Select an underwriter. The underwriters will assist the company in the preparation and execution of the bond offering.
• Due diligence, audit and rating (for bonds) to review internal controls and governance structures to ensure compliance;
• Prospectus, if it is intended for retail investors, must be approved by a regulatory authority to ensure that investors are adequately informed.
• Pricing, working with the underwriters to determine conditions such as valuation and issue price.
• Marketing, conducting roadshows, interacting with potential investors, explaining the company's business, etc.
• Issuance and listing, which need to meet the listing requirements and standards of the exchange.
• Post-transaction management, such as financial disclosures, announcements, etc.
As you can see, there are two reasons why RWAs are difficult to sell directly to retail investors due to the complex processes that need to be experienced in order to sell security assets to retail investors:
1. The cost is too high and the benefits are insufficient. The overall crypto market is too small to meet the needs of large-scale financing, making it too expensive and not profitable.
2. The infrastructure is not perfect. There is no compliant stock exchange to provide trading services for tokens, securities registrars do not support the registration of tokens as ownership for the time being, etc.
If they do not want to create such high costs and transaction friction, the issuer can only issue the product to accredited investors and institutional investors. If traditional capital market securities, such as U.S. Treasury bonds, are used as the underlying assets and issued using an asset-backed model, investors buy these issued bonds, not Treasury bonds, but corporate bonds issued by the SPV as the underlying assets, which actually have a very high counterparty risk, so that the original AA+ rated U.S. Treasury bonds become BBBs after passing the structure Investment grade corporate bonds. Other directly issued corporate bonds, which are also basically issued by some smaller companies, have not gone through a complete issuance process for retail investors, resulting in cost savings, resulting in only qualified investors.
RWA business innovation model: Combining RWA with DeFi
Since most security RWA assets are only available to accredited investors, the market space is very limited. Many RWA protocols explore innovative business models from the legal and business aspects to introduce RWA into DeFi, so that users can obtain the yield of US Treasury bonds in a permissionless way, or build an infrastructure similar to on-chain Yu'e Bao.
借贷模式:Ondo OUSG - Flux Finance Ondo Finance
Flux Finance, a lending protocol designed for its US Treasury token OUSG. Flux Finance has copied the code of the lending protocol Compound V2 and made a series of modifications to support assets with whitelist restrictions as collateral, and modified its interest rate curve and collateral ratio to accommodate the characteristics of OUSG. Currently, the only collateral on Flux Finance is OUSG, with a collateralization ratio of 92%.
The other end of the lending protocol is permissionless and can be participated in by any DeFi user. Users can deposit stablecoins into Flux Finance's lending pool and earn the yield on the borrowing rate. Currently, Flux Finance supports four stablecoins: Frax, USDC, USDT, and Dai, with a usage cap of 90%. OUSG holders collateralize OUSG to lend stablecoins from Flux Finance for liquidity. Flux Finance controls the borrowing interest rate to be lower than the OUSG income, and passes the income of holding OUSG to USDC holders through a permissionless way through the borrowing model, while the pool maintains 10% liquidity for users to withdraw at any time.
Token wrapping and lending model: MatrixDock - TProtocol
Recently, T Protocol announced a partnership with MatrixDock to provide a lending pool for MatrixDock in the lending protocol of T Protocol V2, and help MatrixDock transfer the yield of its US Treasury token STBT to DeFi applications.
TProtocol v1
Previously, TProtocol V1 realized the permissionless sale of its U.S. Treasury bond tokens through the secondary packaging of MatrixDock STBT, and TProtocol used the purchased STBT as collateral to issue the corresponding token wTBT, which changes with the amount of STBT held, but there is no whitelist limit, so as to better integrate with various DeFi applications and interact with different blockchains through cross-chain bridges. Its corresponding token, wTBT, currently has 3.7M in circulation.
T Protocol V1 wTBT token, source: Etherscan, data as of November 27, 2023
TProtocol v2
T Protocol V2 Product Flow Diagram
In September 2023, TProtocol and MatrixDock entered into a partnership to provide a lending pool for MatrixDock's STBT. MatrixDock STBT is a rebasing token, with a single STBT pegged to $1, and STBT's underlying assets are a basket of short-term U.S. Treasury and money market funds that provide income to holders, and its returns are reflected in a rebasing model, with the number of tokens updated daily according to the price of the underlying asset.
TProtocol will open a lending pool for related cooperative institutions in the future, and currently only supports MatrixDock STBT. Users put USDC into the lending pool and receive the corresponding amount of rUSTP tokens. Holders of MatrixDock STBT can lend USDC with STBT as collateral at a borrowing ratio (LTV) of 99%.
The yield offered to USDC users by the lending pool is floating and does not exceed the interest rate of STBT itself. The protocol is designed to pass on as many interest rates as possible to USDC users. The rUSTP tokens obtained by users depositing the corresponding amount of USDC are rebasing tokens, and each rUSTP is pegged to $1. The interest rate is reflected in the daily volume increase, and theoretically, the yield of rUSTP will follow the yield provided by STBT, depending on the design of the borrowing rate.
MatrixDock currently retains a certain amount of USDC in the lending pool, and if users need to redeem their USDC, they will be redeemed through these USDC first, and the excess amount, if the amount is small, will be sold directly on Curve through STBT. If the redemption volume is large, it will be realized through the redemption of STBT in MatrixDock, and T+3 is required to redeem according to the current design.
rUSTP can be converted to USTP, a stablecoin that does not contain yields. The remaining interest rate yields are not indicative of where it will go (probably TProtocol itself). Users can also exchange for iUSTP according to the internal exchange rate, which is a token that accumulates income, the number of tokens itself will not change, and the value will accumulate over time, which can be better integrated with various DeFi protocols.
The overall process is as follows:
T Protocol V2 Product Flow Diagram
TProtocol V2 takes the form of borrowing and lending to avoid the compliance issues that may arise from the direct introduction of securitized tokens, which is similar to Ondo Finance and Flux Finance. According to the TProtocol documentation, users will be able to deposit USDC into pools managed by different institutions in the future and receive yields from RWA assets, behind which is a plan for a stablecoin backed by RWA tokens.
RWA-based stablecoin: MatrixDock - USDV
The stablecoin project USDV (Verified USD) issues USDV, an RWA-based stablecoin with STBT as the underlying asset. Compared with centralized stablecoin issuers such as Circle and Tether, RWA-based stablecoins have more transparency in their underlying assets as on-chain assets, thus bringing a more stable credit foundation to stablecoins.
Generally, stablecoin issuers obtain US dollars and mint the corresponding amount of stablecoins, and use US dollars to purchase US Treasury bonds or high-rated bank bonds as one of their sources of income, while some stablecoin issuers such as Circle will distribute a certain percentage of the income to ecological partners. USDV adopts a similar idea, sharing the income of the underlying assets directly to ecological participants through smart contracts to promote the development of stablecoin ecosystems, such as minters, market makers, and liquidity providers.
Holders of STBT can become USDV minters after KYC verification, depositing STBT into the contract to mint new USDV. USDV is able to identify the minter of this part of the stablecoin on-chain through a special dyeing design, similar to Bitcoin's UTXO mechanism. The income generated by the dynamic adjustment of the corresponding amount of underlying asset STBT will be retained in the contract, in which 50% of the income will be distributed to the corresponding minters of these stablecoins, and the other 50% will be distributed to market operators and liquidity providers, and these USDV market participants can obtain the income or further incentivize the development of the ecosystem based on these benefits.
不记名票据：Backed Finance
Bearer instrument The above schemes are to transfer the proceeds to the DeFi protocol through packaging, lending, and transferring the proceeds to the DeFi protocol through another related party in a permissionless manner, retaining the compliance requirements of the original entity.
Before we look at how Backed Finance works, let's understand bearer and bearer notes:
- Registered instruments: Instruments circulating in the general market, especially securities assets, are registered instruments, and the issuer or the registration agency authorized by the issuer needs to register the holder of the notes for each transaction and transfer.
- Bearer instruments: Only when necessary, such as subscription/redemption/trading, the issuer or registration agency needs to know the identity of the holder of the note, and there is no need to record the holder of the note in real time during the circulation process.
Backed Finance issues "tracker certificates", which are derivatives that track the price of an underlying real-world asset. Each token represents a "tracking certificate" where the token holder has contractual rights to the value of the underlying asset.
Backed Finance registers the "Underlying Prospectus" of this "Tracking Certificate" with the Financial Market Authority in Liechtenstein. As Backed Finance is a company registered in Switzerland, Backed Finance can only be marketed to accredited investors under Swiss law. "Authorised Participants", i.e. licensed banks, securities firms and non-Swiss regulated financial institutions authorized to sell securities, may sell Backed Finance's products to retail clients after subscribing from Backed Finance. On the Backed Finance platform, the subscription of its tokens can only be made to qualified professional investors, but retail investors who have purchased Backed Finance-related products from elsewhere can also redeem them after Backed Finance has passed KYC.
In the prospectus, the tokens issued by Backed Finance are designed as bearer instruments, and there is only a blacklist mechanism in the design of the token contract, so after the issuance, you can transfer money without permission, or directly interact with various DeFi protocols. Authentication is only required for the subscription and redemption process with Backed Finance.
Transaction records of the Backed Finance token on Ethereum, which can be seen to have liquidity on Uniswap, source: Etherscan, data as of November 27, 2023
Judging from the subscription and redemption situation, there are only two subscription addresses for the Backed Finance short-term treasury bond ETF token bIB01, 0x43 and 0x5f, and there is no redemption. Both are offered to other investors through token transfers, so the above two addresses may be authorized dealers to transfer Backed tokens to DeFi protocols or users. Tokens sold through resellers may only be subject to KYC, bypassing the restrictions that end-users may encounter from qualified and institutional investors.
生息稳定币：Ondo USDY - Mantle Ondo Finance
The newly launched USDY is listed on the Layer 2 network Mantle as an interest-bearing stablecoin on the Mantle network. Users of the Mantle network will be able to buy USDY directly in the DEX. Backed Finance embeds RWA into DeFi through special European legal implementations, and Ondo Finance has opted for a different path.
USDY product structure diagram
USDY is issued by Ondo USDY LLC., a wholly owned subsidiary of Ondo Finance Inc., and is a bankruptcy segregated SPV. USDY tokens with short-term U.S. Treasuries and bank demand deposits as the underlying assets, registered through a US Reg S, can be sold to non-US retail users subject to certain restrictions. USDY is currently restricted to a 40 to 50-day lock-up period after the sale, which means that users can wait for the lock-up period to end after the subscription before they can earn on-chain tokens, and cannot sell them to US investors for one year.
Unlike other RWA token designs, USDY's whitelist design is special, anyone can add their own address to the whitelist by calling the contract, and the user experience is a transaction similar to authorization. The ability to send the transaction is provided directly on USDY's official website, and after checking the IP address, users can directly add their address to the whitelist after agreeing to the terms without KYC. In addition, in the USDY token contract, there is a legal document stored on IPFS, which may mean that users agree to the terms of the law while adding their address to the whitelist.
At present, USDY is the token that accumulates earnings and accumulates earnings over time. Subsequently, Ondo Finance released USDY and mUSD on Mantle, removing the whitelist and retaining only the blacklist function. mUSD is a stablecoin in the form of dynamic adjustment (rebase), with a unit price pegged to the US dollar, and the balance is adjusted according to the periodicity of returns. mUSD can be exchanged directly with USDY on the Ondo Finance platform at the current rate.
The above five models solve the problem of RWA assets requiring qualified investors at the compliance level through different perspectives such as technology, business, and law, and introduce RWA assets into DeFi to reach a wider public. For RWA projects, it can increase the sales volume of its own platform, and for DeFi, it can add more asset categories, which can have stable basic income and achieve more diversified financial products through the combination of assets.
Regardless of the model, however, there are a number of challenges:
1. AML Limitations. DeFi protocols can't prevent non-compliant assets, such as stablecoins from risky addresses, from entering their own protocols, while RWA protocols need to convert stablecoins into fiat currencies to buy real-world assets, often with scrutiny of the source of funds and strict KYC and AML requirements. Such mismatches can affect the review of funding sources by some DeFi protocols. As more RWAs enter the DeFi space, the compliance of DeFi funding sources will also increase.
2. Time mismatch. Markets for traditional financial assets are only open five working days a week, only a few hours a day, and are closed on holidays. The transaction of assets needs to go through banks, brokerages and other systems, and often requires a settlement time of T+1 or even longer. DeFi protocols, on the other hand, operate 24 hours a day. If there is a liquidity demand, such as market fluctuations during holidays, DeFi protocols need to liquidate assets, and RWA assets will require a longer processing process and time. Protocols for allocating RWA assets require sufficient consideration of liquidity.
3. Restrictions on Sales. Many of these RWA programs require investors to be residents of certain countries and regions, which may be due to tax (e.g., a complex tax system for U.S. residents), AML (sanctioned in some regions), or complex financial systems in certain countries and regions. There is a high probability that assets will be sold through DeFi protocols to residents of regions or countries that should not be sold, and since RWA assets are mostly defined as securities, they are subject to strict legal restrictions, resulting in the RWA project being sanctioned by the laws of that region or country.
4. Confirmation of asset rights. It is difficult to confirm what kind of entity the DeFi protocol uses to complete the KYC of the RWA protocol, what form of custody the assets are used after obtaining them, and the legal ownership of RWA assets purchased through the stablecoins deposited by users. Generally speaking, DeFi protocols open accounts with foundations or SPVs as the main body, and the assets deposited by users into the protocol are purchased through the RWA project. From an off-chain legal point of view, the ownership of the RWA asset belongs to the foundation or the SPV, and the ultimate beneficiary is the shareholder behind the foundation or SPV, not the user of the DeFi protocol. However, DeFi users are generally anonymous, or in the form of DAOs, and only have the right to claim the DeFi protocol implemented by code, but not the legal right to claim it. How to protect the rights and interests of users' assets is still a difficult problem.