Notes 4/28: Tokenized Treasuries

A common refrain when crypto began imploding last year was that decentralized finance (DeFi) had emerged as a winner from the crisis because it was working as planned. But that hasn’t stopped investors from pulling out their money from DeFi tokens.

Based on data from Defillama, the total value locked – an erroneous sum of prices for DeFi tokens trading in crypto markets – is $49.27 billion currently. That’s down from a peak of $178.1 billion in November 2021.  

Unregulated DeFi tokens once netted high profile promoters and promised fantastic yields. In the current crypto winter of crashing valuations, those yields are no longer available. And so, investing firms operating in DeFi are falling back on a trusty and regulated source: Treasury securities.

Buying Treasury Bonds for DeFi

According to the Wall Street Journal, DeFi companies are offering tokenized versions of Treasury securities and funds that hold government securities to customers at monthly yields of 3.4% to 4.65%.

Just what are tokenized treasury securities? Well, they are treasuries that reside on blockchains that are supposed to streamline the investment process. One would think that a sprinkling of that magic dust called blockchain would imbue the securities with the halo of efficiency and profits.

Not so.

Maple finance, one of the firms offering treasuries on the blockchain, will take your money, denoted in USDC – a stablecoin that crashed from its peg earlier this year, and hand it to Room40 Capital, a hedge fund that will then purchase those securities. According to its website, Room40 Capital aims to “deliver uncorrelated risk-adjusted returns in crypto markets.” Too bad their partnership with Maple amplifies correlation with mainstream markets.

The entire arrangement also lays waste to the blockchain theory of disintermediation. Maple finance is, in this case, the blockchain avatar of a broker that works with a hedge fund for yields.

There is also the question of yields. On its website, Ondo Finance, the other firm quoted in the WSJ piece, offers yields of 4.65% on a tokenized version of the iShares Short Treasury Bond ETF. What they don’t specify is that these are SEC yields or 30-day returns. A perusal of the bond’s fact sheet shows that the fund has advertised an SEC yield of 4.58%. How will Ondo Finance offer yields over and above those offered by the fund itself even after deducting its fees?      

What About Costs?

Who will buy into this grift?

Apparently, traders with stablecoins and customers that are not based in the United States but eager to get a slice of Treasury action. Holding stablecoins is risky business because they are unregulated and can lose their peg in a second. Putting those already risk-laden assets to work in unproven blockchain-based intermediaries is equally, if not more, dangerous.

An example: Ondo Finance’s terms of service disclaims itself of responsibility for “control over, or liability for, the delivery, quality, safety, legality, or any other aspect of any Digital Assets that you may transfer to or from a third party.”

If someone is foolish enough to buy into this spiel, then they had better watch out for the costs. Again, Ondo’s terms of service state that it is not responsible for gas fees incurred in moving securities across blockchains for the transaction. Ethereum is infamous for expensive and volatile gas fees that spike when a popular application is launched.

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