Introduction
The intersection of Real-World Assets (RWAs) and decentralized finance (DeFi) marks a pivotal shift in the financial landscape. Traditional security-type RWAs, often confined to qualified investors (due to the high cost of selling to retail while maintaining regulatory-compliance), have historically created a highly restricted market. However, the evolution of DeFi is challenging these constraints. Many RWA protocols are spearheading innovative business models, both from legal and operational perspectives to usher RWAs into the expansive realm of decentralized finance.
This article delves into the dynamic landscape where DeFi and RWAs converge. Through exploring protocols like Flux Finance, TProtocol, and Backed Finance, we unravel the potential and challenges associated with this paradigm shift. The journey begins by examining how these protocols break down barriers, opening new possibilities for market participants and paving the way for a more inclusive and accessible financial future.
Ondo OUSG – Flux Finance
Ondo Finance is a platform that offers tokenized ETFs to investors, including bond funds, U.S. Treasury bonds, and U.S. money market funds, among others. Its OUSG token, linked to the Ondo Short-Term US Treasury Bond Fund, can only be held in whitelisted addresses.
Ondo Finance developed Flux Finance, a decentralized lending protocol, forked from Compound V2, with the additional functionality to support both permissionless and permissioned tokens.
Flux Finance enforces permission on a per-asset basis. When using OUSG as collateral, borrowers need to adhere to OUSG’s permissions, limiting eligibility to only whitelisted addresses. This constraint ensures that OUSG can only be held in specific, authorized addresses. In contrast, lenders utilizing stablecoins face no such restrictions. They can freely provide their stablecoins to participate in stablecoin loans, allowing them to earn interest without encountering any such limitations.
Currently, Flux Finance accommodates four stablecoins—Frax, USDC, USDT, and Dai—subject to a utilization cap of 90%. Importantly, Flux Finance ensures that the borrowing interest rate remains below the yield on OUSG. This strategic approach guarantees that OUSG’s yield is transmitted to stablecoin providers, establishing a permissionless method to integrate US Treasury Bill yield into the DeFi space. For example, Pendle Finance, an interest swap protocol, adopts Flux Finance to let the DeFi users trade the interest rate.
MatrixDock – TProtocol
MatrixDock is a platform that invests in RWAs and offers digital asset financial products and services to qualified investors. Its primary product, STBT, provides holders with income from short-term U.S. Treasury bills.
TProtocol is a decentralized RWA lending protocol that facilitates the liquidity of RWA tokens in DeFi ecosystems through lending pools.
Recently, TProtocol announced a collaboration with MatrixDock, allowing TProtocol V2’s to provide a lending pool for MatrixDock. In this way, TProtocol will assist MatrixDock in transmitting the yields generated from its US Treasury Bill token, STBT, to DeFi applications and users.
TProtocol V1
In TProtocol V1, MatrixDock’s US Treasury Bill Token (STBT) was sold in a permissionless manner. TProtocol purchased STBT, using it as collateral to mint T-Bill Tokens (TBT), which mirrored the daily rebase of STBT. Crucially, TBT had no whitelist restrictions, enhancing integration with diverse DeFi applications and facilitating interaction across different blockchains through cross-chain bridges. Currently, 3.7 million WTBT tokens remain in circulation.
Figure 1: wTBT Token of TProtocol V1, Source: Etherscan, data as of October 2, 2023
TProtocol V2
In September 2023, TProtocol entered a partnership with MatrixDock to provide a lending pool for MatrixDock’s STBT. STBT is a rebasing token pegged to 1 USD, backed by a basket of short-term US Treasury Bonds and money market funds. The yield is reflected through a rebasing mechanism, adjusting the token quantity daily based on the underlying asset price.
Figure 2: TProtocol V2 Lending Flowchart
TProtocol plans to launch lending pools for institutional partners, starting with MatrixDock’s STBT. Users depositing USDC receive rUSTP tokens, with MatrixDock using STBT as collateral to borrow USDC. The variable interest rate won’t surpass STBT’s, maximizing interest for depositors. Each rUSTP is pegged to 1 USD and follows a rebasing mechanism, theoretically mirroring STBT’s yield.
Withdrawals prioritize using USDC for redemptions, and larger withdrawals involve a T+3 day process. rUSTP can be converted to USTP, an interest-free stablecoin, and users can also opt for iUSTP, an interest-bearing token compatible with various DeFi protocols. The overall process is as follows:
Figure 3: TProtocol V2 Product Flowchart
TProtocol V2 adopts a lending approach to avoid potential compliance issues associated with the direct introduction of security tokens, the structure is similar to that of Ondo Finance and Flux Finance. According to TProtocol documentation, users will be able to deposit USDC into pools managed by different institutions and earn income from RWA assets. This is part of a plan to create a stablecoin supported by RWA tokens.
Backed Finance – Bearer Instrument
Backed Finance operates as a platform that facilitates the tokenization of RWAs, such as stocks or ETFs, into freely transferable tokens. They issue tokens representing “tracker certificates” designed to mirror RWA prices. Token holders, with specified rights as per the contract, can track the value of underlying assets.
The “base prospectus” for these tokens is registered with Liechtenstein’s Financial Market Authority, as Backed Finance is Swiss-based and limited to promoting products to qualified investors under Swiss law. “Authorized Participants” (licensed banks, securities firms) can purchase and offer Backed Finance products to retail customers.
While token subscriptions on the platform are limited to qualified investors, retail investors can redeem tokens acquired elsewhere after KYC on the Backed Finance platform. These tokens, being bearer instruments with a blacklist mechanism, can be freely transferred or interact with DeFi protocols. Consequently, some Backed Finance products are traded on Uniswap, offering liquidity accessible to all.
Conclusion
As we conclude our exploration into the integration of RWAs into DeFi, the potential for a transformative shift in the financial landscape becomes evident. The symbiotic relationship between RWAs and DeFi promises increased market access and a diverse array of financial products, with benefits extending to both RWA projects and the broader DeFi ecosystem through stable income secured by strategic asset diversification.
However, challenges exist:
1. AML Restrictions: The openness of DeFi clashes with the stringent AML checks of RWA protocols, necessitating careful alignment of fund sources.
2. Timing Mismatch: DeFi’s 24/7 operation faces challenges syncing with the shorter market hours of traditional finance, especially during unexpected events where swift liquidity management is essential.
3. Sales Restrictions: DeFi’s borderless nature introduces the risk of inadvertent violations of jurisdiction-specific RWA project restrictions, carrying potential legal consequences.
4. Asset Ownership Issues: Unresolved questions about KYC procedures and asset ownership verification in DeFi raise concerns about safeguarding user asset rights.
Navigating these challenges is paramount for a harmonious RWA-DeFi integration, ensuring the realization of RWAs’ full potential within DeFi while adhering to legal and compliance standards. This juncture in decentralized finance marks a pivotal moment, calling for strategic solutions to ensure sustainability and inclusivity in the convergence of RWA and DeFi ecosystems. As the industry continues to evolve, addressing these challenges becomes not just a necessity but a roadmap for a robust and transformative future for DeFi.
DigiFT is the first and only regulatory-compliant exchange for on-chain RWA enrolled in the Monetary Authority of Singapore (MAS) FinTech Regulatory Sandbox. Ensuring transparency and regulatory compliance, transactions are all recorded on blockchain explorers and verifiable by all. Beyond our current milestones, DigiFT is also exploring ways to expand its footprint within the dynamic realm of DeFi and contribute to the whole DeFi ecosystem.
About DigiFT
DigiFT is the first and only regulatory-compliant exchange for on-chain real-world assets enrolled in the Monetary Authority of Singapore (MAS) FinTech Regulatory Sandbox.
Built on the Ethereum blockchain, DigiFT provides regulatory-compliant services for primary market origination and distribution as well as secondary market trading of asset-backed tokens. The assets backing these tokens include digital assets and real-world assets like bonds, equities, and units in collective investment schemes. DigiFT’s exchange provides liquidity through various channels, including the Automatic Market Maker (AMM) trading mechanism.
DigiFT’s founding team is a globally diverse group of executives with prior experience in the finance and fintech sectors at companies such as Citi, Bank of America, and Morgan Stanley. They also possess extensive knowledge of blockchain technology and a track record of successfully developing digital asset exchanges and products in the past.
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Disclaimer:
This article and its contents are prepared solely for informational purposes only and do not replace independent professional judgement. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. The content of this presentation is proprietary and no part of it may be reproduced or redistributed without the prior written consent of DigiFT Tech (Singapore) Pte. Ltd. (“the Company”). This article contains public information as of the specified date, and may be stale thereafter. No representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the article and the information contained herein and no reliance should be placed on it. None of the Company, its advisers, connected persons or any other person accepts any liability whatsoever for any loss howsoever arising, directly or indirectly, from this article or its contents. All information, opinions and estimates contained herein are given as of the date hereof and are subject to change without notice. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment.
