Kyle Reidhead
Over 25k subscribers
GM PRO DOers!
RWAs + Onchain = 🫶
A match made in heaven.
As we enter the next bull market, we continue to ask ourselves: “what onchain use cases will find product market fit?”
Real World Assets are one of those things for me (along with gaming, social-fi, DeFi, and many other things).
It feels like we’ve reached an inflection point where the tech is ready, and the benefits of moving them onchain are becoming very clear.
It’s literally a win/win for everyone (companies, consumers, and governments).
Once you understand it, you can see how big the opportunity is and also how inevitable this is.
When I say RWAs, there are 3 categories I’m referring to:
Fiat-backed stablecoins: we don’t usually think of these as RWAs, but that’s exactly what they are.
Financial Assets: Equities, treasuries, gold, real estate and more.
Collectibles: Pokemon cards, wine, shoes, and so much more.
Today, I’m going to focus mainly on category #2 and how it’s going to completely revolutionize #1 and likely lead to a rush of new users moving onchain. 🌊
For a refresher on stablecoins, check out our past PRO report on stablecoins here.
If you’d like a deep dive into collectibles, check out our new podcast with Courtyard launching next Wednesday.
For now, let’s dive into real world financial assets moving onchain, with a focus on a new primitive that is quickly migrating from the traditional world to the onchain world and unlocking new potential for US Dollars and the crypto ecosystem at large.
Check this out… Last week, on Oct 24th, I shared this post in the pro-discussion Discord channel (exclusive to PRO members).
At the time, $SOL was at $30. Today, it is at $43, with a peak at $47. 🤯
Goes to show the importance of making the most of your Web3 Academy PRO membership.
If you’re not yet actively participating in our Discord, you should! I often share timely viewpoints from markets that you can capitalize on.
Vamos. ⏬
Let’s start this off with a bit of context. Below is the growth chart of financial assets like equities, treasuries, bonds, and more moving onchain.
It’s gone from $0 to $2.2 billion in the last 3 years. 🚀
Not bad, but pretty small when we compare it to the size of these assets in the traditional finance world…
$529 trillion worth of assets to be migrated onchain over the coming decades… Wow! 🤯
But forget about decades, let’s look at what’s happening right now.
In 2023, the main real world asset seeing growth onchain is US Treasuries, which have gone from <$200 Million to almost $700 Million in the last 10 months.
For those that don’t understand what US treasuries are, basically they are a financial product that enables anyone to loan US dollars to the US government and, in return, receive a “risk-free rate”; A guaranteed yield based on whatever interest rates are at that moment.
Generally, this isn't a very exciting yield for most people, considering interest rates in the USA have been very low for a long time.
However, currently interest rates are >5%, which is rather enticing to the average person or company holding onto US dollars.
After all, why would you leave your dollars in a bank, making $0, when you can leave it in treasuries and earn 5% with no lock up period or risk. It’s a no-brainer!
The one caveat to all this is that this yield is only available to US citizens and companies.
The rest of us wanting to hold dollars and grab a nice 5% yield simply can't do it.
It’s not that the US doesn’t want those outside of the US to lend them money, it’s just that the tradFi rails don’t really work for this to be a global product.
That’s where crypto rails come in. The onchain life is the best life, and that’s true for US treasuries too.
Before we dive deeper into this, let’s take a step back and see what’s happening as a result of these high yields on US dollars.
First, remember the US banking crisis that occurred (and is still occurring) back in March of 2023? That happened because of this.
👉 US citizens and companies realized that their dollars were better off in treasuries than in their bank accounts, so everyone withdrew their money from the banks, and left many banks insolvent.
Interestingly, we are also seeing this same scenario happen in stablecoins…
The big drop in May of 2022 was the collapse of Terra Luna, and then of course the exodus of crypto occurred for the rest of the year.
But surprisingly, we are continuing to see a decrease in the stablecoin market cap. But why would that be?
If we break down the two largest stablecoins, USDT and USDC, we can see that USDT has seen a resurgence in market cap in 2023, yet USDC has continued to decline…
What’s interesting about this is that USDC is the stablecoin most used by Americans, while USDT is mostly used by Asia and South America. Let’s remember, those in Asia and South America are unable to access US treasuries and get 5% yield on their US Dollars, so they are simply happy to hold US dollars (to stay out of their inflating currencies).
Americans on the other hand can access the 5% yield, so why would they hold USDC when they can’t get that risk-free yield onchain?
They wouldn't, which is why Americans are also leaving USDC and moving to treasuries.
Also plotted on the chart above in gray is the rise in interest rates, which is correlating well with the decline in USDC market cap.
Interestingly, Circle is seeing an exodus in USDC for the same reasons that people left their banks.
Banks take your money, put it in treasuries (or other investments) and then give you nothing in return.
Circle and Tether are doing the same. They take our US dollars, give us a tokenized version of it onchain, and then put the dollars in treasuries and earn a nice 5% yield on it, while giving us nothing in return.
Check out these revenues from Tether and Circle in 2023. Circle is bringing in over $100 million every month and Tether close to $700 million!
It’s estimated that Tether is generating the most revenue/employees (they only have about 50) than any other company in the entire world right now! That’s insane.
But this is where the opportunity lies, bringing the risk-free rate from US treasuries onchain. If we can do this in a secure and regulated way, then everyone wins.
People around the world could hold US dollars and earn a risk-free yield.
The US government increases their TAM (total addressable market) of their treasuries to the world.
Companies enabling this service would have a way to generate revenue from the yield.
As the famous saying by Jeff Bezos goes: “Your margin is my opportunity”.
Anyone who can find a way to give people a stablecoin yet share in that 5% yield with them will surely attract USDT or USDC holders and maybe even many non-stablecoin holders too, especially the 7.6 billion people in the world who can’t access yields on their US dollars!
Well, that is exactly what a few teams in the space have been working on. Enter, the yield-bearing stablecoin.
A new primitive that I believe could be a massive catalyst to onboard the world onchain and revolutionize stablecoins and DeFi.
The idea is fairly simple and is already being worked on by more than 10 different teams in the crypto space today.
I’ll explain it simply here, but if you’d like to understand the inner workings of this new primitive, check out this podcast with the founder of Mountain Protocol here.
Here’s how it works in simple terms:
The company takes dollars from consumers and mints a tokenized dollar (ERC-20) for the consumer (backed $1 to $1 – like Circle or Tether does).
The company then takes those dollars and purchases US treasuries held in a regulated and insured bank ($1 to $1).
The yield that is generated from those treasuries (aka the “risk-free rate” because it’s backed by the government) is then tokenized and pushed out to the token holders.
Likely the company will skim a couple fractions of a % on top to facilitate all of this (this will vary by company and will likely get pushed lower and lower as more competition picks up).
From a user standpoint, here’s what it looks like:
Consumers purchase the yield-bearing stablecoin on Uniswap or direct from the company (just like you do with USDC or USDT).
That yield-bearing stablecoin automatically generates yield in your wallet (just like how rETH or stETH works when you stake ETH).
Here’s what’s really cool about this…
To generate yield on stablecoins right now you need to use DeFi products like Curve, AAVE or something else.
When you use these protocols, not only are your stablecoins generally locked up in these protocols (meaning they can’t be used), but you also have the smart contract risk of the protocol itself, which can be hacked.
With yield-bearing stablecoins, you keep your tokens in your wallet and you never need to use a protocol. There is no added smart contract risk to something like USDC or USDT.
To take it a step further, once these yield-bearing stablecoins are more integrated into our ecosystem like USDC or USDT is, you could even use them to pay for goods and service like NFTs on Opensea or coffee at Starbucks (with something like Solana Pay).
Think about how big this could be…
Imagine a world where every dollar, euro or currency you own onchain is also generating yield from its particular government. Pretty cool right?
Well that’s exactly how this will play out once they become more readily available.
It’s very similar to how Ethereum works today.
You can own $ETH, but it doesn’t really make sense when you can own $rETH or $stETH and earn an extra 3-6% depending on the current yield.
If you can get a yield on the asset, while still holding onto it and using it throughout the ecosystem, why would you ever hold the non-yielding version of it?
You wouldn’t, and that’s exactly why we are seeing millions of ETH being staked every month while very little is being unstaked.
The same would likely be true for yield-bearing stablecoins.
At any given time only about 20% of stablecoins are put to use in DeFi protocols to earn yield, but again, this comes with the issues of smart contract risk, know-how and the time and effort to actually implement it.
With a yield-bearing stablecoin, it’s as simple as swapping out any other asset for that particular token on Uniswap or your favorite exchange.
Heck, maybe someday you could purchase them in PayPal, Revolut or Robinhood like you can USDC.
The moment these yield-bearing stablecoins gain traction, it’s very likely that both Tether and Circle will see a mass exodus out of their stablecoins.
Both companies will be forced to eat into their own revenues and begin sharing the yield with their holders, if not, they risk going out of business.
It’s important to note that onchain treasuries have been attempted in the early days of Ethereum. However, the technology, regulation and the banking set up from the past didn’t allow it to work.
Today, the protocols and teams working on this have seemingly figured out not only how to make this work, but also how to scale it.
Mountain Protocol, a team backed by Coinbase, is already live with a token called USDM, giving holders a 5% yield (currently) on their dollars.
The yield on the stablecoin varies as interest rates move up and down in the USA and the yield is fully backed by the US government.
As exciting as this sounds, there’s still a lot of work to do for this to go mainstream.
It’s still early days and protocols like Mountain have only recently launched their stablecoin and are still on a one by one basis to actually mint your tokens, working with mainly companies and those with more capital to start. Most aren’t even available on Uniswap yet.
Additionally, the tokens themselves need to integrate into more existing tools within our ecosystem, whether that be DeFi protocols like Curve or payment tools like Solana Pay.
And finally, it’s still unknown what US regulators will do or think about these products as they gain momentum.
Companies like Mountain protocol are fully regulated and fall within the rules of the SEC and other US regulators, but you simply never know how they will react or what can happen with the US financial system.
In theory, yield-bearing stablecoins are an incredible innovation that pushes the US dollar and US treasuries globally, increasing the TAM for the US government.
You would think this is everything that US regulators and governments would want, but the question is do they really understand it and will they enable it.
If they do embrace this technology and allow companies like Mountain Protocol to expand their efforts, then it’s only a matter of time until yield-bearing stablecoins becomes the norm across crypto and then quickly spreads to onboard millions of non-crypto people from around the world, onchain.
I already thought that stablecoins were crypto's killer app and could be the use case that onboards the most people onchain. Well, this is only amplified when you attach a yield to it with no additional effort from the consumer.
I’m really excited for the potential that US treasuries onchain brings to our ecosystem and I think we’ll see many other innovative forms of real world financial assets moving onchain soon too.
Lastly, please be careful about using any of these yield-bearing stablecoins. There will be non-regulated, scam companies marketing that they have a yield-bearing stablecoin that will either steal your funds or hack your wallets when you interact with them.
There is also a chance that some of these companies that may have good actors will fail, potentially bringing the token down with it.
This is very new and on the cutting edge so it’s not something that is currently risk-free, but hopefully will get there in time.
I’m looking forward to those days!
P.S. You may notice some parallels between yield-bearing stablecoins and staked ETH. They both represent a yield-bearing currency for an ecosystem.
The big difference is that ETH’s yield comes from revenues generated from ecosystem activity whereas the USD yield comes from debt and printing money.
This is why digital currencies for blockchains with sustainable revenues are the future of currencies, whenever fiat currencies finally inflate away!
Thanks for reading. And remember, you're strong, you’re powerful, you’re alpha! ❤️
Kyle Reidhead
Founder of Web3 Academy and Impact3
Find him on Twitter
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Disclaimer: This article is for informational purposes only and not financial advice. Conduct your own research and consult a financial advisor before making investment decisions or taking any action based on the content.