What are tokenized fixed-income products?
Fixed-income products are investments which pay investors fixed interest or dividend payments until their maturity date. Bonds are the most common type of fixed-income product. They can be in the form of government bonds, corporate bonds, or even asset-backed bonds like mortgage-backed securities.
With the advent of blockchain technology, it is now possible to tokenise fixed income products. When a fixed income product is tokenised, legal and technological mechanisms allow a digital token to represent the ownership of fixed-income asset like bonds or treasury bills.
Table 1: Benefits of investing in tokenized fixed-income products
Diversification of investment portfolio
For Web3 investors, investing in tokenized fixed-income products can be a means to diversify into the traditional financial markets. In addition, it can function as a safe haven for profits that were taken in the volatile crypto markets, preserving capital from potential crypto crashes and earning stable cash flow at the same time.
For example, if we take reference from the US treasury yields, we can see that the current yield is at 3.66% – 4.82% with much lower volatility historically compared to other assets. This provides a stable yield if you choose to put your Web3 profits into these assets.
Source: Bloomberg, 15 March 2023
One might argue that stablecoin farms can provide higher yield or liquidity. However, with black swan events, we saw how stablecoins could depeg and ultimately lose its value. A case in point would be UST which was supposedly pegged 1:1 to USD through an algorithm, but is now trading at $0.0318.
While there exist crypto products with relatively higher yields, investors run the risk of the token depegging, platform getting hacked or project founders’ rug-pulling their users.
Therefore, using your crypto gains or parking a portion of your crypto portfolio into a tokenized fixed-income asset can be a logical consideration to mitigate the risks and volatility in the crypto space.
Source: DefiLlama, 15 March 2023
Opportunity for crypto natives to earn passive income
For most investors, having passive income is seen as a benefit because it can provide consistent cash flow.
There are many opportunities to earn passive income in Web3 through yield-farming, providing liquidity and staking. However, these methods usually pay investors in the platform’s native token, which might be inflationary and sometimes even cause the investor to lose money when the token depegs or loses value.
For example, when staking Ethereum either through a validator or liquid staking platform like Lido Finance, investors will receive a liquidity token, stETH, in exchange for depositing Ethereum into the platform. stETH tracks the price of Ethereum and aims to maintain a 1:1 peg ratio.
Yields Lido Finance is currently generating about 5% and investors are paid in stETH. The risk with this is when stETH depegs from the price of Ethereum, the stETH that investors hold will be worth much less if the token is unable able to maintain the peg.
In the case of yield farming, investors would deposit tokens into a DEX to provide liquidity and in return, they would receive native tokens of the exchange.
For example, if you provide ETH to Venus, in return for providing liquidity to Venus, you will receive $VENUS which is the exchange’s native token. Often, these native tokens will become inflationary, which diminishes the investor’s return. In some cases, the yields might even become negative.
Since tokenized fixed-income products are backed by bonds and treasuries, the chances of these assets losing value are lower. Token holders are paid in the dollar value of the token (in the case of US Treasury) instead of native tokens.
Increased potential for returns due to liquidity and accessibility
Traditionally, fixed-income assets require a large amount of capital to purchase. For example, bonds are typically sold in USD 200,000 lot sizes. However, tokenization allows for fractionalised units, which lowers the upfront capital required for investment. Fractional ownership lowers the entry barrier and increases accessibility for investors. Liquidity becomes better as well with more investors participating in the secondary market. As accessibility improves, it can also increase the demand and supply of these tokens.
Investors who are risk-averse can also gain some investment exposure without risking too much of their capital. If the investment performs well, investors can increase their ownership stake by adding more positions.
How to invest in tokenized fixed-income products
Investors have a few ways to begin investing in tokenized assets. They can select between using a decentralized exchange or a centralized exchange. For example, DigiFT is the first and only decentralized security token exchange that is currently in the Monetary Authority of Singapore FinTech Regulatory Sandbox. It recently launched a token backed by bank bonds with AMM liquidity pool and daily OTC redemption mechanism. Find out more here!
關於 DigiFT
DigiFT aims to provide regulated decentralized finance solutions on the Ethereum public blockchain. We are operating the first regulation-abiding decentralized digital asset exchange where asset owners can issue blockchain-based security tokens efficiently and cost-effectively. Investors can trade with continuous liquidity via an AMM mechanism and retain control over digital asset tokens in their own wallets. We are a global outfit backed by well-established venture partners. The founding team originates from international financial institutions and has deep blockchain technology knowledge.
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