RWA Revolution: Tokenized US Bonds Reshaping Finance and Crypto

CoinW Exchange
7 min readApr 8, 2024

TL;DR

  1. BlackRock’s tokenized fund BUIDL quickly rakes in $245 million within a week;
  2. Over the past year, the on-chain US bond market has grown ninefold, expected to reach $1 billion soon;
  3. Tokenization of US bonds has become a significant aspect of the RWA emergences, opening up possibilities for integraion between crypto and traditional finance;
  4. Popular RWA approaches include physical assets tokenization (e.g., RealT), lending (e.g., Maple), US bonds tokenization (e.g., Ondo), and stablecoins (USDT).
  5. The participation of traditional financial giants is viewed as a positive development, as it brings about stronger compliance measures and aligns with mainstream trends.

BlackRock’s tokenized fund BUIDL successfully rakes in $245 million within a week, ranking the second in the tokenized US bond market, following Franklin Templeton’s OnChain US Government Money Market Fund (FOBXX) with $360 million in deposits.

Before BlackRock’s entry into the RWA field, other financial giants such as HSBC, JPMorgan, and Citigroup were exploring the tokenization of government bonds to enhance financial efficiency and settlement speed. In general, the on-chain US bond market has significantly grown over the past year, increasing ninefold from $100 million at the beginning of 2023, with the tokenized US bond market expected to reach $1 billion soon.

In the crucial phase of this whale’s entry into the RWA market, Ondo Finance, a native RWA project, transferred $95 million to BUIDL to bolster blockchain-based fund operations, facilitating immediate settlement and uninterrupted trading.

Moving from the tangible to the virtual realm, the tokenization of US bonds has become a prevalent choice

In this wave of RWA development, the most prominent characteristic, as identified by CoinW Academy, is the widespread adoption of US bonds. Currently, the development includes US bonds, real estate, lending, and stablecoins. Stablecoins are a unique case as they predate the RWA emergences, whereas lending and real estate have gradually gained traction with the rise of the RWA emergences but have not yet reached mainstream status.

However, the tokenization of US bonds will ultimately emerge as a significant aspect of the RWA landscape, as evidenced by MakerDAO’s large-scale purchase under 5% US bond yield, potentially bridging the gap between the crypto and real worlds. Consequently, the digitization of US bonds, or tokenization, is progressing hand in hand.

In terms of total holdings, Tether, the issuer of USDT, holds the largest amount of tokenized US bonds. Tether ranks as the 22nd largest single holder of US bonds, surpassing the current total issuance volume of RWA US bonds. However, RWA US bonds offer a distinct advantage over USDT as they directly represent US bond assets without the need for indirect holding by Tether. Additionally, returns generated from RWA US bonds will also be distributed to on-chain holders.

CoinW Academy summarizes the four popular RWA approaches.

Tokenization of Physical Assets — RealT

RealT is a real estate investment company based in the US that specializes in tokenization. Rather than directly tokenizing properties, it tokenizes shares represented by Special Purpose Vehicles (SPVs) to fulfill compliance requirements and circumvent classification as securities. Subsequently, it establishes on-chain liquidity, enabling investors to participate in partial ownership, trade, or receive passive income.

Overall, RealT faces risks primarily related to property liquidity, particularly regarding the delivery and confirmation of real property rights. However, this factor also provides support for the tokens issued, as they are backed by real estate value. This support not only facilitates trading liquidity but also promotes enthusiasm for trading and enhances resilience against selling pressure. Additionally, real estate prices tend to be relatively stable over extended cycles, further bolstering value support.

Lending — Maple

The holy grail of DeFi may not be algorithmic stablecoins but rather undercollateralized lending, also known as credit-based lending. In current DeFi lending protocols, over-collateralization is typically used to ensure smooth liquidation in extreme market conditions. However, this approach reduces capital efficiency, making credit-based lending a preferable solution.

In traditional finance, the user credit system comprises official credit systems, user behavior analysis, prediction using big data by e-commerce and fintech groups. While this approach is not fundamentally innovative for Web3, on-chain undercollateralized lending has yet to gain mainstream adoption, primarily due to the anonymity of on-chain identities. Maple is expected to address this issue.

In Maple’s operation, participants are divided into three roles: institutional borrowers, lenders, and liquidity validators. Lenders provide funds available for lending, while institutions act as borrowers. Validators review the qualifications of borrowers, who must comply with KYC and AML requirements. Validators need to possess certain industry qualifications to ensure the efficiency and safety of lending.

This approach offers two main benefits: institutions, as borrowers, achieve higher liquidity utilization rates compared to dealing with many retail investors. Secondly, traditional AML and other checks are required, enabling quick tracking of fund flows and usage in case of compliance or liquidation needs.

Of course, this approach also reduces the anonymity and privacy of on-chain users. Whether future technologies can better balance privacy and efficiency has yet to be seen. However, the Maple model is undoubtedly feasible. For example, when FTX collapsed, Maple also passed the market test without incident, representing RWA development overcoming its first major hurdle.

Tokenization of US bonds — Ondo

Whether it’s the tokenization of physical assets or financial assets, they are essentially cast as securities or tokenized assets. Ondo Finance, as a fixed-income Real World Asset (RWA) provider, launched a product in August 2023 backed by short-term US Treasury bills and bank demand deposits, aiming to provide stablecoin accessibility and high-quality USD-denominated products to non-US individuals and institutional investors.

Ondo’s model not only enhances the liquidity of US bonds but also reduces entry barriers, allowing a broader range of investors to participate in traditional financial markets, prompting giants such as Goldman Sachs and BlackRock to join.

In addition, Ondo Finance generates profits by charging a 0.15% management fee annually. Fixed-income projects have overall low risks and guaranteed returns, but the returns are relatively limited, so this model is affected by fluctuations in US bond yields.

Overall, before Ondo, traditional financial institutions’ RWA practices mainly focused on the corporate or high-net-worth individual side, with less involvement with ordinary retail investors. Ondo’s practice also helps it move towards the secondary market.

Tokenization, the Second Path to Enter the Crypto World

Following the approval of Bitcoin spot ETFs, $60 billion has flowed into the market, with major ETFs collectively purchasing 500,000 bitcoins, becoming important players in the crypto market. Now, if US bond RWA becomes the mainstream choice, trillions of dollars in bond assets from the traditional financial market can be tokenized, bringing far more funds onto the chain than ETFs.

From the perspective of the Federal Reserve, the Fed does not reject tokenization but emphasizes effective regulation of RWAs and on-chain activities. According to a Fed report as of May 2023, the estimated market value of tokenized assets on public chains is $21.5 billion. Note that this is only for public chains, excluding practices on consortium chains, private chains, etc. However, relevant risks should also be noted. Although the total value of the tokenized market is still small compared to the crypto asset market and the traditional financial system, continued growth in tokenization may introduce vulnerabilities to the crypto asset market and may introduce financial stability risks to the traditional financial system. Tokenization may create connections between the digital asset ecosystem and the traditional financial system through redemption mechanisms, potentially spreading shocks or volatility between the two and encouraging higher leverage.

Therefore, the large-scale entry of traditional financial giants is actually a positive development because they have stronger compliance motivations and capabilities. The native crypto color of tokenization may decline, and mainstream components will be stronger.

In the East, Junhe assists GF International in launching a tokenized fund. Junhe successfully assisted GF in establishing and launching the first tokenized fund regulated by the Securities and Futures Commission of Hong Kong. In terms of specific operation, this is a fixed-income fund tokenized on a public chain, with GF International as the initiator and manager of the fund, and MetalabHK providing tokenization solutions.

In the West, Goldman Sachs and others have long been involved in tokenization and launched the GS DAP platform for handling tokenization. In November 2022, Goldman Sachs, along with Santander Bank and French BNP Paribas, processed a €100 million euro bond issued by the European Investment Bank, with a settlement cycle of 60 seconds instead of the traditional 5 days, showcasing the power of tokenization.

Overall, the tokenization process has begun, and this round’s main force is traditional financial giants, which is significantly different from the grassroots nature of native crypto. For example, the total scale of GF funds exceeds 1 trillion RMB, and BlackRock’s total assets under management exceed $100 trillion. Just allocating 1% of their assets under management to tokenization will significantly change the face of the crypto market.

Conclusion

Traditional financial giants like BlackRock contributed $60 billion in liquidity through ETFs, fundamentally changing Bitcoin’s fundamentals and driving prices to an all-time high. Large-scale entry into Ethereum’s RWA projects is bound to create another engine for the crypto bull market.

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