In a past life, I was a quantitative trader at a global HFT firm. Now, I’m just having fun on the internet and documenting things I find interesting :) None of this is financial advice.

As an active participant in DeFi markets, I’ve been closely following Canto since its launch last summer. The concept of enshrining core DeFi primitives (which have historically been monopolistic and rent-extracting) as Free Public Infrastructure (FPI) was and still is revolutionary. But Canto’s long term vision is far more ambitious: the protocolization of TradFi institutions. If executed well, this could take Canto from a novel incentives experiment to a decentralized hub for trillions of dollars in TVL (yes, you read that right). It all starts with tokenizing Real World Assets (RWAs).

RWAs have existed since the birth of crypto’s execution layer (Ethereum), but the only class of RWAs to have achieved product-market fit are stablecoins. Stablecoins, namely USDT and USDC, constitute over 11% of the total crypto market cap ($125B) and are the primary form of on-chain value storage and transfer.

Attempts to tokenize other RWAs such as equities and commodities haven’t gained traction because TradFi markets for these asset classes are extremely liquid and accessible. There exist NBBOs (National Best Bid and Offer) and unified electronic trading marketplaces with great UI/UX. Protocolization of these markets can provide an easier settlement process and more transparent custodying, but it’s not a 10x improvement over TradFi.

Thus far, the majority of crypto market participants fall into one of two buckets:

1. Investors seeking sources of consistent yield with low risk on principal

2. Speculators seeking large multiples on high-risk bets

We can see this in the types of DeFi products that have found product-market fit: stablecoins, lending markets, spot exchanges, and perpetual futures exchanges. The vast majority of these rely on stablecoins for trading and settlement.

While Tether (USDT issuer) and Circle (USDC issuer) have captured the majority of TVL and volume, they suffer from the following issues:

• Lack of transparency regarding the mix of assets serving as collateral

• Regulatory risks and scrutiny around a single centralized custodian

Both of these stablecoins have faced de-pegs on multiple occasions (e.g., Silicon Valley Bank collapse). Furthermore, there is limited legal recourse for users if an offshore custodian acts in bad faith or gets compromised. The common argument that both Tether and Circle are “Lindy” is irrelevant.

What the ecosystem needs is a stablecoin that is compliant with US regulations and backed transparently by the safest collateral on the planet.

To address the risks that single-custodian stablecoin issuers pose, Canto is modifying NOTE, its existing over-collateralized stablecoin, to be backed by on-chain T-Bills issued by KYC-compliant custodians such as Hashnote (backed by Cumberland) and FortunaFi. By partnering with multiple legitimate RWA issuers, Canto facilitates a perfectly competitive market on custody cost while minimizing regulatory crackdown risk. How?

Simply put, the issuer with the lowest fees and highest compliance level will win the majority of the TVL. With this, Canto tackles the biggest pain points for stablecoin holders today by creating a safe, compliant, and efficient store of value. But there’s more at play here.

Canto’s RWA framework will enable KYC traders to borrow capital from non-KYC traders to purchase treasuries with higher yields than their borrow rate. This is accomplished through a leveraged carry trade on US treasury yield minus NOTE yield. Here’s how it works:

1. KYC-compliant users (labeled as “carry traders”) mint T-Bill(s) on-chain through one of multiple governance-approved issuers (Hashnote, FortunaFi, etc.)

2. The carry traders post the on-chain T-Bill as collateral on the Canto Lending Market (CLM) to borrow cNOTE (collateralized NOTE)

3. The carry traders can then sell the cNOTE for USDT/USDC through the Canto DEX and lever up on the carry trade if they desire (by minting more on-chain T-Bills to borrow against using the funds they borrowed initially)

4. As liquidity flows into the ecosystem due to the attractive carry trade, the NOTE interest rate in the CLM will rise to the short-term T-Bill interest rate minus the cost of custody and compliance

5. Non-KYC traders (labeled “on-chain yield seekers”) can access this yield by buying NOTE using USDT/USDC and supplying it to the CLM

An easy way to think about this is that the KYC carry trader is essentially a market maker between the RWA issuer and the non-KYC yield seekers. Their edge comes from being onshore and KYC-compliant which allows them access better interest rates than non-KYC crypto traders.

Here’s an example of the leveraged carry trade Canto enables: an APR reminiscent of Anchor Protocol (remember that?) with minimal risk because the yield is backed by actual US treasuries and not Do Kwon. Liquidation only occurs if the NOTE interest rate exceeds the T-Bill interest rate (which is technically possible but highly unlikely as an arbitrage would exist).

The potential of RWAs extends far beyond US treasuries - the US fixed income market size is $42T, with high yield debt comprising around $2T. Corporate and municipal bonds, SMB financing, auto loans, and trade receivables are all in play. With DeFi rails, the rehypothecation possibilities are endless, and Canto is uniquely positioned to capture the opportunity. I, for one, am incredibly excited for what’s to come.

In a past life, I was a quantitative trader at a global HFT firm. Now, I’m just having fun on the internet and documenting things I find interesting :) None of this is financial advice.

As an active participant in DeFi markets, I’ve been closely following Canto since its launch last summer. The concept of enshrining core DeFi primitives (which have historically been monopolistic and rent-extracting) as Free Public Infrastructure (FPI) was and still is revolutionary. But Canto’s long term vision is far more ambitious: the protocolization of TradFi institutions. If executed well, this could take Canto from a novel incentives experiment to a decentralized hub for trillions of dollars in TVL (yes, you read that right). It all starts with tokenizing Real World Assets (RWAs).

RWAs have existed since the birth of crypto’s execution layer (Ethereum), but the only class of RWAs to have achieved product-market fit are stablecoins. Stablecoins, namely USDT and USDC, constitute over 11% of the total crypto market cap ($125B) and are the primary form of on-chain value storage and transfer.

Attempts to tokenize other RWAs such as equities and commodities haven’t gained traction because TradFi markets for these asset classes are extremely liquid and accessible. There exist NBBOs (National Best Bid and Offer) and unified electronic trading marketplaces with great UI/UX. Protocolization of these markets can provide an easier settlement process and more transparent custodying, but it’s not a 10x improvement over TradFi.

Thus far, the majority of crypto market participants fall into one of two buckets:

1. Investors seeking sources of consistent yield with low risk on principal

2. Speculators seeking large multiples on high-risk bets

We can see this in the types of DeFi products that have found product-market fit: stablecoins, lending markets, spot exchanges, and perpetual futures exchanges. The vast majority of these rely on stablecoins for trading and settlement.

While Tether (USDT issuer) and Circle (USDC issuer) have captured the majority of TVL and volume, they suffer from the following issues:

• Lack of transparency regarding the mix of assets serving as collateral

• Regulatory risks and scrutiny around a single centralized custodian

Both of these stablecoins have faced de-pegs on multiple occasions (e.g., Silicon Valley Bank collapse). Furthermore, there is limited legal recourse for users if an offshore custodian acts in bad faith or gets compromised. The common argument that both Tether and Circle are “Lindy” is irrelevant.

What the ecosystem needs is a stablecoin that is compliant with US regulations and backed transparently by the safest collateral on the planet.

To address the risks that single-custodian stablecoin issuers pose, Canto is modifying NOTE, its existing over-collateralized stablecoin, to be backed by on-chain T-Bills issued by KYC-compliant custodians such as Hashnote (backed by Cumberland) and FortunaFi. By partnering with multiple legitimate RWA issuers, Canto facilitates a perfectly competitive market on custody cost while minimizing regulatory crackdown risk. How?

Simply put, the issuer with the lowest fees and highest compliance level will win the majority of the TVL. With this, Canto tackles the biggest pain points for stablecoin holders today by creating a safe, compliant, and efficient store of value. But there’s more at play here.

Canto’s RWA framework will enable KYC traders to borrow capital from non-KYC traders to purchase treasuries with higher yields than their borrow rate. This is accomplished through a leveraged carry trade on US treasury yield minus NOTE yield. Here’s how it works:

1. KYC-compliant users (labeled as “carry traders”) mint T-Bill(s) on-chain through one of multiple governance-approved issuers (Hashnote, FortunaFi, etc.)

2. The carry traders post the on-chain T-Bill as collateral on the Canto Lending Market (CLM) to borrow cNOTE (collateralized NOTE)

3. The carry traders can then sell the cNOTE for USDT/USDC through the Canto DEX and lever up on the carry trade if they desire (by minting more on-chain T-Bills to borrow against using the funds they borrowed initially)

4. As liquidity flows into the ecosystem due to the attractive carry trade, the NOTE interest rate in the CLM will rise to the short-term T-Bill interest rate minus the cost of custody and compliance

5. Non-KYC traders (labeled “on-chain yield seekers”) can access this yield by buying NOTE using USDT/USDC and supplying it to the CLM

An easy way to think about this is that the KYC carry trader is essentially a market maker between the RWA issuer and the non-KYC yield seekers. Their edge comes from being onshore and KYC-compliant which allows them access better interest rates than non-KYC crypto traders.

Here’s an example of the leveraged carry trade Canto enables: an APR reminiscent of Anchor Protocol (remember that?) with minimal risk because the yield is backed by actual US treasuries and not Do Kwon. Liquidation only occurs if the NOTE interest rate exceeds the T-Bill interest rate (which is technically possible but highly unlikely as an arbitrage would exist).

The potential of RWAs extends far beyond US treasuries - the US fixed income market size is $42T, with high yield debt comprising around $2T. Corporate and municipal bonds, SMB financing, auto loans, and trade receivables are all in play. With DeFi rails, the rehypothecation possibilities are endless, and Canto is uniquely positioned to capture the opportunity. I, for one, am incredibly excited for what’s to come.