Felix Jauvin

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<hr class="wp-block-separator has-alpha-channel-opacity"/>



A couple of years ago, the quarterly refunding announcements (QRA) from the Treasury Borrowing Advisory Committee (TBAC) were dry and boring meetings that only dorks like myself paid attention to. The TBAC advises the Treasury on debt issuance strategy for the upcoming quarter.&nbsp;



Ever since rates came off zero and fiscal deficits exploded, however, market participants have started to pay close attention to how the government is funding itself. Supply and demand are drivers of US Treasury yields. Therefore, if more supply is coming onto the long end of the yield curve, that will have a tangible impact on market prices.&nbsp;



This week, we received the last QRA before the election. With the caveat that anything from January 2025 onwards assumes a continuation of the same administration, let’s dig into what we learned from the report!



<h2 class="wp-block-heading">The quantity of debt to be issued</h2>



The first half of the QRA came on Monday when we received an update on the amount of debt the Treasury plans to issue for the upcoming quarter.



The Treasury anticipates the following:&nbsp;



For October – December 2024:



<ul class="wp-block-list">
<li>Targeting a Treasury General Account (TGA) drawdown from the current $886 billion to $700 billion.</li>



<li>During this time, Treasury plans to issue $546 billion in net issuance.</li>
</ul>



For January – March 2025:



<ul class="wp-block-list">
<li>Targeting a TGA balance of $850 billion, up from the previous quarter that anticipates $700 billion.</li>



<li>Net borrowing of $823 billion. </li>
</ul>



The numbers reflect a significant increase in debt issuance planned for the next couple of quarters — an increase of $277 billion. That said, the decrease in the TGA balance explains $150 billion of that marginal requirement.&nbsp;&nbsp;



<h2 class="wp-block-heading">The composition of debt to be issued</h2>



The real juice of the QRA comes from getting a pulse on what the maturity profile of the debt issuance will be (essentially, how much of each maturity will make up the total borrowing amounts).



We can see the composition of debt for the next two quarters below:



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXd8joSk3ubk3dsaOzf5K0REVsC6b5qQW5wD3bOTCW4-TTAHWWaSHrH0WISTzYf7zhcJo9GMxnYsEAevzGQ_i7LEcYnC-ZyryVcXGC0VkPb7sIoJh-3utPtgoLPT2AIBK-Qmj8Goo6YBre84WZKloJO_meDK?key=Nc1g8IyQIc_HvGRuD4Hyp4ca" alt=""/></figure>



A few key insights here:



<ul class="wp-block-list">
<li>Treasury Secretary Janet Yellen has provided guidance that there are no plans for any change in long-duration issuance composition in the coming quarters. Effectively, the dollar amount of issuance for anything longer than one-year of duration is set to remain constant. </li>



<li>This means if borrowing needs increase, it is up to issuance of less than a year (T-bills) to take up the mantle of issuance. </li>



<li>Because of the incoming TGA drawdown to $700 billion, then reversal to $850 billion, a substantial increase in bill issuance will be required to fund the Treasury.</li>
</ul>



When we look at the proportion of total net issuance in recent quarters that is T-bills, we get the following:



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXdDmnAuHwEd5cs3ehB41MzhKFcDOxzEw1QsyAZSm8p9GhSAxBF7U1SociLGndlfDVGREhSUb4CwVSygje6Niur8uizYzg-w3swp1lnJLUNdOXOsDAsFOUeboAP4MN7xyM4GTW4xtu1YrTBwBAyYcLIRo3dX?key=Nc1g8IyQIc_HvGRuD4Hyp4ca" alt=""/></figure>



Of note, the Treasury is forecasting an increase of proportion from 13% to 45%. This is notable, as historically the Treasury targets a long-term average of 15% to 20% of total debt being T-bills. Admittedly, this 45% weighting is likely an outlier that will be reversed in Q2 2025 when tax receipts come in and dampen the requirement for bills to take up the issuance mantle.



That said, with total Treasury debt outstanding already above the upper limit of their target range at 22%, one must wonder how long this game of avoiding surprising markets with duration can last:



<figure class="wp-block-image"><img decoding="async" src="https://lh7-rt.googleusercontent.com/docsz/AD_4nXeMeLBGPAswzEdANZ-V5wQvdEMtG0AXysU_STMUfOSKWEBGAIfTGvsBuNWpGohMDkRS-KpEDS-sa9M_7cnDH_KR4U_2oCbVcXwZ4wTize3pWxOe1gUodZDDOKe6M0j-lG6jGGzjhKvTL9ufQOccScTT4fw_?key=Nc1g8IyQIc_HvGRuD4Hyp4ca" alt=""/></figure>



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Breaking down the recent TBAC borrowing recommendations

Casey Wagner

This is a segment from the Forward Guidance newsletter. To read full editions, <a href="https://blockworks.co/newsletter/forwardguidance">subscribe</a>.



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There is something going on in bond markets.  



Yields on 10-year Treasurys rose even higher Wednesday, briefly hitting 4.25%. Two-year yields are also on the rise, reaching 4.07% Wednesday afternoon. (Remember, bond prices and yields are inversely related.)&nbsp;



What gives? A few things. Probably.&nbsp;



The first is the election. Polls are still saying the race between Trump and Harris is more or less a coin toss, even as betting markets continue to <a href="https://blockworks.co/news/forward-guidance-newsletter-polymarket-election-manipulation">favor Trump</a>. One theory is that bond markets are anticipating a <a href="https://blockworks.co/news/on-the-margin-newsletter-republican-sweep-markets">Republican sweep</a> and are reacting as such. There’s <a href="https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024">fear</a> that Trump’s plans (higher tariffs, tax cuts, a crackdown on immigration) could send the deficit higher, so it makes sense that Treasurys are tanking.



I’d personally give this theory some weight. But I think the main thing dragging down bond markets are fundamentals.&nbsp;



As we also covered yesterday, economic data is strong. Maybe even too strong, or at least strong enough that analysts are questioning whether the Fed <a href="https://blockworks.co/news/forward-guidance-newsletter-economy-doing-fine">went too far</a> in September. We know committee members said they see rates ending the year another half-point lower, but the market has its doubts. Higher interest rates means higher Treasury yields.&nbsp;



And then there’s the national debt. The federal deficit hit $1.8 trillion earlier this month. More debt = more bonds. Higher supply = lower demand. You get the idea. To be clear, I do think concerns about rising national debt are impacting bonds, but I think it’s a concern that goes beyond a potential second Trump presidency.&nbsp;



As always, this isn’t investment advice, but I think the flash sale on bonds might go on for a bit longer.



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Bond market selloff continues. What gives?

Katherine Ross

Earlier this week, BlackRock’s BUIDL crossed $500 million — a milestone never before reached by a tokenized money market fund.



Tokenized funds have really taken off in the last few years, Securitize CEO Carlos Domingo told Blockworks. BlackRock and Securitize launched BUIDL earlier this year.&nbsp;



However, only some investors can access the fund. Qualified investors with more than $5 million in assets can subscribe through Securitize.&nbsp;



So what has led to this growth?



The rise of <a href="https://blockworks.co/tag/stablecoins">stablecoins</a> is definitely a factor, because it made folks think about what else could be tokenized, Domingo said.&nbsp;



Read more: <a href="https://blockworks.co/news/blackrock-tokenized-fund-trading-circle-usdc">Circle debuts way to trade BlackRock tokenized fund shares for USDC</a>



Right now the total value of the tokenized treasurys market, which includes BUIDL, sits at $1.8 billion. Domingo wouldn’t be surprised to see that market cap top $2 billion soon.



While the market is obviously far smaller than the $160 billion stablecoin market, “it’s definitely growing way faster than stablecoins.”



“Keep in mind, stablecoins are easier to purchase and use because they’re permissionless, while tokenized treasurys are securities. So they have some restrictions in terms of who can purchase them, how you can transfer them, etc. So they&#8217;re never going to be — in my opinion — as big as stablecoins…but I think they can easily become 10% to 20% of the market of stablecoins,” he said.



While the rest of the industry was no doubt buoyed by the <a href="https://blockworks.co/news/sec-approves-bitcoin-etf">launch of the bitcoin ETFs</a> earlier this year, Domingo thinks the two have operated in “parallel paths.”



“The way I see it is: You&#8217;re taking a Web3 asset, which is bitcoin, and you put it on the [traditional finance] world through an ETF. Rather, I think <a href="https://blockworks.co/tag/tokenization">tokenization</a> is the opposite. You&#8217;re taking a [traditional finance] asset and you put it on the crypto — on the Web3 space — through tokenization. So they are like two distinct things that are very valuable but have nothing to do with each other,” he said.



Domingo discussed the conversations he’s been having with others in the space, noting that they’ve intensified since the launch of BUIDL.



“Every single asset manager out there is thinking about how they can participate,” he told me. Which is perhaps not surprising, given the appetite for BUIDL.&nbsp;



But that success isn’t only reserved for <a href="https://blockworks.co/tag/blackrock">BlackRock</a>.&nbsp;



According to rwa.xyz, Franklin Templeton’s fund, FOBXX, which was launched in April of last year, has topped $400 million — a 16% increase over the past 30 days. BUIDL, to put it in perspective, saw a nearly 9% jump in the same time period.&nbsp;



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/docsz/AD_4nXcDFMqRZORBtRX5BAqPx1XvfcDYwp21c5aYZy8eLDrCkjJ9Pz263sYscy39NBXo2x2Q5VnGy7yvV7SG56uIYQT7XzQW4wh7miTyPjm-IYkBnFEPp51a2U2WfV0bgXxidX5YWq0TP4fdDAg8ZMfpSYCsIW27?key=tklvqD1YyF_5iEbarPfU4A" alt=""/><figcaption class="wp-element-caption">A look at the biggest funds in the space. Credit: Securitize.</figcaption></figure>



But Domingo thinks that BUIDL’s next $500 million could come even quicker — the fund just launched four months ago. Part of that may be because of some “new features,” he teased. Some will be unveiled in just a few weeks.&nbsp;



There’s also the fact that, because of the nature of the fund, there can be a bit of a delay when trying to subscribe to it.&nbsp;



He added, “In terms of onboarding entities, which — because these are institutions — takes time…for them to be able to invest in BUIDL. But we have a very big pipeline of entities being onboarded [so] that once they&#8217;re on board, they will invest, right?”



The success of BUIDL has led to discussions between BlackRock and Securitize about future projects. Domingo said that both firms are very aware that they’re only four months into BUIDL, so nothing else is coming at this point.&nbsp;



Read more: <a href="https://blockworks.co/news/tradfi-blockchain-trials-mass-adoption">How the latest TradFi blockchain trial could mark the ‘five-yard-line’ for mass adoption</a>



“So things take a longer time than [it would] take if we were working with a startup, which is fine because also you get the credibility of BlackRock…I think that in the next few months, we&#8217;re going to focus more on growing BUIDL in terms of the utility of the token, the functionality and the integration with all the parts of the ecosystem, rather than launching a new project,” he said.&nbsp;



But despite the desire to grow while working with a “small company” (Domingo says Securitize has 150 employees currently), he said that his firm isn’t looking to raise further funds any time soon. In May, ICYMI, BlackRock led a <a href="https://blockworks.co/news/blackrock-tokenization-investment">nearly $50 million round</a> for the firm.&nbsp;



“We need to execute on what we have. We have plenty of money. We were not raising money when BlackRock came. We already had money in the bank. So it&#8217;s not that we needed the money…I think that raising money [has] been a massive distraction to me, particularly, because you talk to a lot of people, and at this point in time, I don&#8217;t want to raise more money,” Domingo said.



A shorter version of this article first appeared in <a href="https://blockworks.co/news/empire-newsletter-blackrock-buidl-milestone">Thursday’s Empire Newsletter</a>. Sign up <a href="https://blockworks.co/newsletter/empire">here</a> to never miss an issue.



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Tokenized treasurys are ‘growing way faster than stablecoins:’ Securitize CEO

Macauley Peterson

MakerDAO, issuer of the DAI stablecoin, has seen a notable shift in the composition of its balance sheet as a result of the combination of macroeconomic events and surging crypto markets.



The latest data from the DAO’s Digital Asset-Liability Committee (ALCO) shows that crypto-backed loans — that is, DAI issued against crypto collateral like ether — once again represent more than 50% of total assets, for the first time since May 2022.



For most of 2023, Maker’s public credit portfolio — think US T-bills — dominated the protocol’s revenue, as Federal Reserve rate hikes pushed interest rates on short term Treasurys above 5%.



But as yields fell in the fourth quarter of the year and demand for DAI borrowing picked up, the DAO, through its Special Purpose Vehicle (SPV) intermediaries began to sell off T-bills, according to Sebastian Derivaux at Steakhouse Financial, which advises the DAO.



“The reason we are decreasing T-bill exposure to replenish the [Peg Stability <a href="https://manual.makerdao.com/module-index/module-psm">Module</a>] and the reason why the PSM is shrinking lately is because we are in a bull market,” Derivaux told Blockworks. “And so as you can see, the crypto bank loans are going up a lot because people want to be speculating, and every time someone takes a loan [from] <a href="https://blockworks.co/tag/makerdao">MakerDAO</a> to get leverage, it decreases the PSM by the same amount, more or less.”



Read more: <a href="https://blockworks.co/news/makerdao-may-expand-with-blocktower-centrifuge">MakerDAO may expand non-crypto asset portfolio with BlockTower, Centrifuge</a>



The ALCO flagged one item of mild concern related to the availability of <a href="https://blockworks.co/tag/stablecoins">stablecoins</a> in Maker’s PSM in the minutes from its most recent meeting, <a href="https://forum.makerdao.com/t/digital-alco-meeting-summary-january-23rd-2024/23502">published</a> Wednesday.



“Daily liquidity has been consistently a bit short over the past few months,” the committee wrote. “​​The Digital ALCO recommends a medium-term priority to shift liquidity back a bit.”



The DAO has a target to have at least 18% to 22% of stablecoins available for the PSM, according to Derivaux.



“So sometimes it goes a bit down and then something is done to replenish the PSM,” he said.&nbsp;



Lately, the ratio of stablecoins to total assets has been running closer to 10%-12% according to <a href="https://app.blockworksresearch.com/analytics?category=MakerDAO">Blockworks Research data</a>.



<figure class="wp-block-image"><img decoding="async" src="https://lh7-us.googleusercontent.com/oLF3hX7C6JGtuxguNtUL_R51bpp4Cf84V1uxQ9H4Ogg6mjPhUzWvtPb6lzkCxOcaQgGaLf88wxQ4Cx0PhRqf3ir35-CUAe1cdSXzVyma91iKIy7g_9zXLnA76CLj_gqttcLh9rn9Ao6VrFRYajz7sVk" alt=""/></figure>



ALCO discussed diversifying the protocol&#8217;s balance sheet further, specifically examining the suitability of Collateralized Loan Obligations (CLOs) and other asset classes as potential additions to seek higher yield than T-bills.



The committee acknowledged that it may be necessary to extend the duration of investments slightly, while being mindful of the risk associated with a potential return to a low interest rate macro environment down the road. CLOs typically have variable rates.



Read more: <a href="https://blockworks.co/news/maker-dao-coinbase-dai">MakerDAO moves $250M from Coinbase to rebuild DAI collateral</a>



For assets paying higher than T-bills, the committee considered senior tranches of Asset Backed Securities (ABS), especially those underpinned by floating assets like credit card receivables as well as short-term ETF bond funds.&nbsp;



These may juice returns while leaking risk low, but with tradeoffs, as well as potential challenges integrating these assets into Maker’s algorithmic Asset-Liability Management (<a href="https://forum.makerdao.com/tag/alm">ALM</a>) scheme.



The ALCO recently added traditional finance heavyweight Moorad <a href="https://www.linkedin.com/in/moorad-choudhry1">Choudhry</a> as an independent advisor.



Steakhouse has based elements of its ALM research and proposals on Choudhry&#8217;s work in academia as a professor in the Department of Economics at London Metropolitan University and author of textbooks and references on finance.



While the ALCO concluded that holding additional asset types could help grow the balance sheet by increasing the Dai Savings Rate (DSR) —&nbsp;which is currently at 5% — it emphasized the need for careful consideration of capital adequacy, liquidity, price transparency and risk management integration.



Read more: <a href="https://blockworks.co/news/dai-savings-rate-us">DAI Savings Rate is at 8%, just not for Americans</a>



A high percentage of the DAI that has been minted is not being staked for the 5% yield. Derivaux said that as much as 70% is just sitting in Externally Owned Accounts (<a href="https://ethereum.org/developers/docs/accounts">EOAs</a>) on <a href="https://blockworks.co/tag/ethereum">Ethereum</a> or <a href="https://blockworks.co/tag/layer-2-2">layer-2</a> chains.&nbsp;



“That&#8217;s quite shocking because sDAI — maybe it&#8217;s not known by people — but it&#8217;s completely riskless,” he said, referring to the risk relative to holding unstaked DAI, which yields nothing.



The 5% rate should be sustainable, Derivaux said, as the balance sheet composition shifts. Demand for leverage should make collateral backed loans more profitable for the protocol.



“Obviously the less stablecoins we have [on the balance sheet], the more revenue MakerDAO is generating and the more profit it is generating,” he noted.



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MakerDAO balance sheet now majority crypto-backed loans

Darren Kleine

“Are we back?”



It’s a question many have asked amidst the bitcoin buying frenzy of the past couple weeks.



All the excitement in buying activity seems to trace back to news regarding a potential spot bitcoin ETF approval, Blockworks co-founder Ippolito says.



“Are we back? Are we not back? Whatever,” Framework Ventures co-founder Vance Spencer answers. “There&#8217;s just been a lot of real work that&#8217;s been done in crypto over the past 18 months since the Luna collapse.”



Speaking on the Bell Curve podcast (<a href="https://open.spotify.com/episode/4TuAobCWyHJHEVPlgg9NL9?si=qu8EnZDUShiJCE7DJpDRtg">Spotify</a>/<a href="https://podcasts.apple.com/us/podcast/recapitalizing-the-degens-and-identifying-cycle/id1641356619?i=1000632820665">Apple</a>), Spencer points out a number of positive advancements in the crypto industry: “You have <a href="https://blockworks.co/news/on-chain-investors-us-treasury">[Treasury bills] coming on-chain</a>,” he says, adding, “I think <a href="https://blockworks.co/news/synthetix-web3-tools-kain-warwick-lightspeed-engagement">Synthetix might hit a billion of volume today</a>.”



Spencer goes on to list recent improvements to <a href="https://blockworks.co/news/dydx-ethereum-open-source">DeFi services like derivatives exchange dYdX</a>, market share gains for the Lido’s ether staking service and the imminent release of blockchain-based games by “the end of the year.”



Read more: <a href="https://blockworks.co/news/lido-centralization-debate-ethereum">Did Lido fly too close to the sun? Inside the centralization debate</a>



On top of all that, Spencer adds, “the institutions have finally adopted this, with <a href="https://blockworks.co/news/blackrock-spot-bitcoin-etf-rumors">Larry Fink on Fox News</a> shilling bitcoin.” Spencer suggests that with all the groundwork that builders are laying, “you’re probably looking at a bull market” in the next couple of years.&nbsp;



<h2 class="wp-block-heading">A shift to tailwinds</h2>



Crypto is decoupling from other markets, Spencer says, “exactly at the time you would hope it would” — a time of geopolitical uncertainty, growing debt loads and high budget deficits. “The narratives couldn&#8217;t be much better for crypto,” he says.



Spencer mentions the likely directional shift in real rates as another positive for crypto valuation. “It&#8217;s not about whether you&#8217;re at zero rates or 5%. It&#8217;s about, what&#8217;s the direction of travel and what&#8217;s the rate of change?”



It’s finally time to be optimistic about crypto market conditions, according to Spencer. Looking back at eight drops of around 30% during volatile trading periods in 2021, Spencer says each market pullback “was a pretty incredible opportunity.”



“So that&#8217;s at least where our head is at,” he says. “It’s just continuing to accumulate high quality assets.”&nbsp;&nbsp;&nbsp;&nbsp;



Blockworks co-founder Michael Ippolito says he has seen a shift from “headwinds” to “tailwinds” in the industry’s outlook.&nbsp;



Now, he says, the <a href="https://blockworks.co/news/blok-bitcoin-halving-spot-etf">bitcoin halving is in “spitting distance”</a> and potential spot bitcoin ETF approvals have created a positive buzz. Real rates, he adds, are “probably going to move in the opposite direction, which is good for bitcoin, good for crypto.”&nbsp;



<h2 class="wp-block-heading">For the first time in years…</h2>



Spencer recounts a recent anecdote that reminded him of past bull market euphoria. Strolling through West Village, he overheard a phone conversation of someone hurriedly helping a friend onboard to Coinbase on the day that “bitcoin popped.”



“There&#8217;s like this frantic scramble [to] get the app downloaded and get on Coinbase,” he says. “I thought that was pretty funny. I just haven&#8217;t heard that in, I guess it&#8217;s been almost two years.”&nbsp;



“The price action last week was pretty violent,” Ippolito says. One bitcoin trading candle printed nearly 3,000 dollars, he says, “in a very short period of time.”



“That&#8217;s the first time I&#8217;ve seen something like that happen…in years,” he says.



Read more: <a href="https://blockworks.co/news/spot-bitcoin-etf-possibilities">Blockworks podcast guests ruminate on bitcoin ETF buzz</a>



Spencer recalls a recent dinner event with a Wall Street trader, where the two got into a discussion about investment in long bonds. “I was like, how much would I make, you know, if I did that?”



The trader replied, “if rates go from 5% to 3% or to 2%, you&#8217;re gonna make 30%.”



“I was like, that is just not interesting at all.”



“And sure, you might be able to make 5% in [Treasury bills],” he says, “but we put that move in, in a day for bitcoin,” he says.&nbsp;



<h2 class="wp-block-heading">Price moves first</h2>



Ippolito cites an <a href="https://a16z.com/the-crypto-price-innovation-cycle/">article</a> by Chris Dixon and Eddy Lazzarin, which describes a counter-intuitive take on the more conventional “fundamentals drive price” adage. The article suggests that in crypto markets, price moves first, spurred by low liquidity, speculative behavior or other unknown factors that initiate an upward trajectory.



“The price gets people to make the calls that you were describing in the West Village,” Ippolito says, “like, ‘Hey, <a href="https://blockworks.co/news/coinbase-sec-motion-securities">get me on Coinbase</a>.’ Like, ‘this bitcoin thing is moving. I’ve got to get in.’”



“That price move begets more buying,” he says. “Then the media starts covering it for the first time in a positive light.”



<iframe loading="lazy" frameborder="0" height="200" scrolling="no" src="https://playlist.megaphone.fm/?e=BWG6329274485" width="100%"></iframe>







“That begets actual fundamentals — which is devs coming in, people building products and then the VC funding cycle typically restarts — and then you&#8217;re off to the races.”



“It&#8217;s hard to predict how and when that kicks in,” he says, “but I feel like that&#8217;s the thing that has to kick in now.”



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Is crypto’s bull market back?

Jack Kubinec

With Federal Reserve interest rates at their highest level in 22 years, FRAX announced the launch of sFRAX — a staking vault meant to tap the corresponding hike in Treasury yields.



FRAX is in the process of deploying a raft of “Frax v3” products, and today is launching sFRAX, or “staked FRAX,” alongside a bond product that converts to FRAX’s stablecoin on maturity. Frax founder Sam Kazemian told Blockworks that starting Monday, users will be able to deposit sFRAX and receive 10% yield — which would then shrink to around 5.4%, the Fed’s current IORB rate.



Kazemian said once Federal Reserve interest rates started rising, he realized most stablecoins on the market were only built for low-rate environments — and Frax (<a href="http://blockworks.co/price/frax">FRAX</a>) needed to track interest rates to stay relevant.



“Otherwise, no one will treat your <a href="https://blockworks.co/tag/stablecoins">stablecoin</a> as real dollars. They&#8217;ll just think of them as play money, and then they&#8217;ll sell them for real dollars, or real stablecoins or real T-bill projects,” Kazemian said.&nbsp;



sFRAX is partly the fruit of FRAX’s August <a href="https://gov.frax.finance/t/fip-277-onboard-finrespbc-as-frax-v3s-offchain-rwa-partner/2492">partnership</a> with FinresPBC, which connected FRAX with Kansas City-based Lead Bank to open a brokerage account and begin purchasing Treasury bills.



Frax’s sFrax seems similar in motivation to <a href="https://blockworks.co/news/dai-savings-rate-us">MakerDAO’s DAI Savings Rate</a> (DSR), a bear market success story that has helped Maker increase its <a href="https://defillama.com/protocol/makerdao?revenue=true&amp;groupBy=monthly">revenue</a> for five straight months by giving DAI holders exposure to Treasury yields, per DeFiLlama.&nbsp;



But Kazemian thinks Frax’s design is ultimately more sustainable than Maker’s.



DSR rates are akin to a “marketing spend to increase the profits of the DAO,” Kazemian told Blockworks, arguing that Maker’s rates don’t track with the Fed’s. Kazemian said FRAX is perfecting the Treasury-exposed stablecoin.



“It&#8217;s not like, ‘hey, let&#8217;s just dump a bunch of yield into it and compete with DAI.’ Our view is we want to complete this design,” Kazemian said. “In order to complete a dollar-pegged stable coin, you need a way to bring the <a href="https://blockworks.co/tag/federal-reserve">Fed</a> yield on-chain.”



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FRAX taps Treasury yields with new staking vault

Ben Strack

A clutch of ether futures ETFs have traded on the market for nearly a full week. Yet none have seen inflows anywhere near what their bitcoin futures predecessor reeled in.&nbsp;



The six ether futures ETFs launched by ProShares, VanEck and Bitwise on Monday held less than $20 million in combined assets after four days of trading.&nbsp;



The funds’ lack of growth is stark when compared to demand for the first bitcoin futures ETF. The ProShares Bitcoin Strategy ETF (BITO) grew to $1 billion in assets in its first few days on the market in October 2021.&nbsp;&nbsp;&nbsp;



The <a href="https://blockworks.co/tag/vaneck">VanEck</a> Ethereum Strategy ETF (EFUT) appears to be leading the asset race with $8 million. The ProShares Ether Strategy ETF (EETH) had roughly $6 million, while Bitwise’s pure ethers futures fund — its Bitwise Ethereum Strategy ETF (AETH) had not yet reached $1 million in assets.&nbsp;



Fund group <a href="https://blockworks.co/tag/valkyrie">Valkyrie</a> changed the name and investment strategy of its bitcoin futures fund on Tuesday. Now dubbed the Valkyrie Bitcoin and Ether Strategy ETF (BTF), that fund has seen zero net inflows this week, according to ETF.com.&nbsp;&nbsp;



The macroeconomic environment — including a federal funds rate that is currently at 5.33% — has contributed to an overall lower appetite in risk assets. Ether’s (<a href="https://blockworks.co/price/eth">ETH</a>) price was at about $1,630 at 10:30 am ET on Friday — down roughly 2% from seven days ago.&nbsp;&nbsp;



“With the [Treasury] bill yield soaring above the ETH staking yield amidst lackluster on-chain activity, EFUT’s number one position among ETH futures ETFs has been achieved at a relatively low AUM level so far,” said Matthew Sigel, VanEck’s head of digital assets research.&nbsp;&nbsp;



Industry watchers had kept an eye on Monday volumes in the six new ether futures ETFs, which totaled roughly $2 million in aggregate. BITO saw $1 billion in volume on its first day.



Simeon Hyman, global investment strategist at ProShares, told Blockworks it was unfair to compare EETH to BITO’s “historic” debut.&nbsp;



Others noted that BITO launched during a bull market and offers exposure to an asset with a market capitalization more than double that of ETH.



Read more: <a href="https://blockworks.co/news/ether-futures-etfs-trading-volume-vaneck-proshares-bitwise">The race begins: How ETH futures ETFs fared on day 1</a>



Bloomberg Intelligence analysts Mike McGlone and James Seyffart said in a Sept. 29 research note that while ETH futures ETFs are likely to be a popular tool for traders, they may be “largely ignored” by financial advisers.&nbsp;&nbsp;



Because the ETFs track front-month ether futures, they are likely to offer “high sensitivity” to the asset over the short, and perhaps medium term, the analysts argued. Their ability to track spot prices is expected to break down over time due to the costs of keeping front-month exposure.&nbsp;



“Advisers, familiar with roll costs due to experience with commodity funds, will probably opt to get Ethereum exposure directly, wait for spot ETFs or choose thematic equity-based crypto and blockchain ETFs,” McGlone and Seyffart wrote.



Fund issuers that weighed launching ether futures ETFs likely also had marketing in mind, as some fund groups <a href="https://blockworks.co/news/ark-invest-etf-battle">look to ultimately build extensive crypto ETF suites</a>.&nbsp;



VanEck’s X account has shared videos around the launch of EFUT in a bid to educate investors about the fund’s underlying asset.&nbsp;&nbsp;



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">NOW TRADING: The VanEck Ethereum Strategy ETF, <a href="https://twitter.com/search?q=%24EFUT&amp;src=ctag&amp;ref_src=twsrc%5Etfw">$EFUT</a>. The transformation happens when enough of us are ready. <a href="https://twitter.com/hashtag/EnterTheEther?src=hash&amp;ref_src=twsrc%5Etfw">#EnterTheEther</a>. <a href="https://t.co/cb2KMG3wfW">pic.twitter.com/cb2KMG3wfW</a>&mdash; VanEck (@vaneck_us) <a href="https://twitter.com/vaneck_us/status/1708836614355476579?ref_src=twsrc%5Etfw">October 2, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Nate Geraci, president of The ETF Store, pointed to a more recent VanEck post that urged followers to check out the company’s other offerings. 



“This is why you launch ether futures ETF even [though] you know spot ETFs will likely be approved in not-too-distant future,” Geraci said in a Thursday X <a href="https://twitter.com/NateGeraci/status/1709743656263966935">post</a>. “Marketing expense. Plus demonstrate firm is forward-thinking around crypto.”



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Underwhelming: week-one demand stays soft for ETH futures ETFs 

Bessie Liu

Backed Finance, a Swiss-based company that is looking to bring real-world assets on-chain, has issued blB01, a tokenized short-term US treasury bond ETF on Base, Coinbase’s layer-2 network.



The company claims this will be the first tokenized security to be available on Base and will be issued in compliance with Switzerland’s Distributed Ledger Technology (DLT) Act.&nbsp;



Under the DLT Act, all tokens must be fully collateralized and transferable across wallets, Backed Finance noted in a press release reviewed by Blockworks.&nbsp;



This means that for every token that is circulated, an equivalent number of the underlying asset is held by third-party custodians, Adam Levi, co-founder of Backed told Blockworks.&nbsp;



“In the case of <a href="https://basescan.org/tx/0x95c8f1643340e4cede1e30386f2d5e8245f968408d9f00f015a7bed2c6012c91">bIB01</a>, the underlying asset is the iShares Treasury Bond 0-1yr UCITS ETF (IB01), which tracks the investment results of an index composed of US Dollar denominated government bonds issued by the US Treasury, with remaining maturities between zero and one year,” Levi said.&nbsp;



Levi adds that Backed is not affiliated with <a href="https://blockworks.co/tag/blackrock">BlackRock</a> and its token is not an iShares product.&nbsp;



Only qualified investors and licensed retailers that have been <a href="https://blockworks.co/tag/kyc">KYC</a>’d by Backed and received anti-money laundering qualifications can purchase tokenized securities from Backed.&nbsp;



None of Backed’s financial assets are registered as US securities, and the company notes that it does not have any intentions to change this fact. This means that Backed’s tokens will only be available to persons outside of the United States.&nbsp;



Read more: <a href="https://blockworks.co/news/gensler-testimony-pokemon-bitcoin">Gensler: Bitcoin is not a security, but tokenized Pokemon cards may be</a>



The Backed team currently has nine tokenized products including tokenized equities and fixed income.  According to <a href="https://defillama.com/protocol/backedfi">data</a> from DeFiLlama, the project currently boasts over $46 million in total value locked (TVL). 



“We plan to bring more on-chain dependent on client demand — we have seen significant interest as our tokenization solution allows our clients to access these products without needing to interact with [traditional finance] directly themselves. If there is demand, we are happy to tokenize any security that is requested,” Levi said.



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Tokenized short-term US Treasury ETF coming to Base

A new tokenized fund on decentralized marketplace Archblock allows USDC holders and on-chain investors outside the US to access the yields of short-term US Treasury bills.



The fund’s target yield is 5%, a figure slightly below the 5.33% effective federal funds rate — a volume-weighted median of overnight federal funds transactions.



Fund group Adapt3r Digital, <a href="https://blockworks.co/news/defi-credit-protocol-pushes-to-onboard-community-banks">which Archblock partnered with last year</a>, ensures every transaction and fund allocation is recorded on the Ethereum blockchain.&nbsp;



The portfolio comprises short-dated US Treasury securities with a weighted-average maturity range of three to six months, a USDC reserve capped at roughly 5% and cash, according to Adapt3r Digital Chief Investment Officer Marcus Leanos.



“Given the anticipation of sustained elevated levels of the federal funds rate, short-term Treasury bills remain an attractive avenue for Web3 investors who are seeking exposure to this asset class,” Leanos told Blockworks.



Archblock is built on the financial infrastructure by DeFi credit protocol TrueFi, which has facilitated roughly $1.8 billion in originated loans on-chain since its inception in November 2020. Asset managers, such as Adapt3r Digital, build their portfolios on Archblock’s smart contracts, which automate fund operations like disbursements, redemptions and reporting.&nbsp;



The fund aims to process all redemption requests within one trading day.&nbsp;It has a management fee of 0.3% and a protocol fee 0.2%.



On-chain assets are safeguarded by multi-signature requirements, as multiple private keys are needed for transaction authorization.&nbsp;



An institutional custodian and a FINRA-regulated broker-dealer — both of which a spokesperson for Archblock declined to name — hold the off-chain assets in custody.&nbsp;



<h2 class="wp-block-heading">Competing offerings amid tokenization push</h2>



Among the fund’s biggest competitors are other DeFi yield opportunities, such as algorithmic yield on protocols Compound and Aave, according to Leanos.&nbsp;&nbsp;&nbsp;&nbsp;



“As compared to the risk-adjusted returns US Treasury bills offer, algorithmic investment opportunities are typically more risky because the respective protocols lend funds to collateralized borrowers,” he said.



More direct competition is <a href="https://blockworks.co/news/ondo-launches-on-chain-treasurys-bonds">Ondo Finance’s tokenized US Treasurys and bond offerings</a> launched in January. The firm’s US Government Bond Fund (OUSG), for example, was set to initially invest exclusively in short-term US Treasurys via the Blackrock’s US Treasuries ETF (SHV). Ondo Finance charges fees for the product that total 0.45%.



Ondo Finance said in a <a href="https://blog.ondo.finance/announcing-tokenized-us-treasuries-and-bonds/">blog</a> at the time that its goal was “making traditional capital markets more accessible to investors who collectively hold more than $100 billion of non-yield-bearing stablecoins.”



Other competing products, albeit more indirect, include off-chain traditional ETFs and mutual funds that invest in Treasurys, such as SHV.&nbsp;



“The off-chain competition requires access to US bank and brokerage accounts and does not operate on a 24/7 basis like the on-chain opportunities,” Leanos noted.



Tokenization has become more of a mainstream topic in recent years as traditional players tout its benefits.



BlackRock CEO Larry Fink said in a <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-annual-chairmans-letter">letter</a> to investors in March that <a href="https://blockworks.co/news/blackrock-ceo-us-lagging-innovation-tokenization">the tokenization of assets</a> could help in “driving efficiencies in capital markets, shortening value chains, and improving cost and access for investors.”



Firms like WisdomTree and Franklin Templeton have also expressed interest in pushing deeper into the tokenization space, and acted.



WisdomTree — a firm with $97.5 billion in assets under management — <a href="https://blockworks.co/news/wisdomtree-set-to-launch-fund-with-real-world-focus">gained regulatory approval</a> for its Short-Term Treasury Digital Fund (WTSYX) last year. The fund digitizes its fund share ownership record on the Ethereum or Stellar blockchains.



The WisdomTree fund is one of nine digital funds available on its <a href="https://blockworks.co/news/blockchain-wisdomtree-app">“blockchain-enabled” consumer app that went live</a> last month.&nbsp;



$1.45 trillion asset manager Franklin Templeton launched its OnChain U.S. Government Money Fund in 2021.&nbsp;



Read more: <a href="https://blockworks.co/news/stablecoin-with-yield-franklin-templeton">A stablecoin with yield? Tokenized fund perhaps just the start for fund giant</a>



One share of the fund, which seeks to maintain a $1 share price, is represented by one BENJI token. Holders of the token can access the fund in digital wallets through the Benji Investments app.



“If a money fund continues to offer attractive yield, we would expect investors to continue to find it as, at a minimum, a complementary product as they use currency stablecoins, which do not offer income,” Roger Bayston, head of digital assets at Franklin Templeton, told Blockworks in June.



Updated Aug. 15, 2023 at 10:35 am ET: Added information about the fund’s fees.



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New fund gives on-chain investors another way to access US Treasury yields

Sebastian Sinclair

<div id="highlights-block_63490c4ef45e1" class="highlights">
 <ul>
 <li>As of Thursday, the stablecoin issuer’s holdings no longer include commercial paper, firm says</li>
 <li>Backing has reportedly shifted to more secure US Treasury Bills, short-term government-issued debt</li>
 </ul>
 
</div>



Tether reports it has eliminated commercial paper from its stablecoin reserves, ending a years-long relationship with the investment vehicle that had partially backed its crypto.



The <a href="https://tether.to/en/tether-slashes-commercial-paper-to-zero/" target="_blank" rel="noreferrer noopener">issuer said</a> Thursday it has replaced the paper with US Treasury Bills — short-term government-issued debt securities — as part of ongoing efforts to increase transparency.



Tether also said the move would help shore up trust in its stablecoin (USDT) while demonstrating its commitment to backing its tokens with more secure assets.



Controversy over the use of its commercial paper, as well as the certainty of assets backing USDT, has dogged the issuer ever since its inception almost a decade ago.



As the world’s largest stablecoin by market capitalization ($68.4 billion), USDT consists of various reserve holdings that back the coin’s one-to-one US dollar-pegged value.&nbsp;



Those include cash and equivalents, loans, corporate bonds and digital assets, among others. A <a href="https://cms.blockworks.co/tethers-settlement-with-the-nyag-a-positive-for-industry/" target="_blank" rel="noreferrer noopener">2021 legal settlement</a> with the New York Attorney General’s Office has required Tether to issue quarterly attestations, which are now handled by newly hired accounting firm BDO Italia, to verify its holdings.



Tether said it intends to release those attestations on a monthly basis as it moves to appease critics and bolster an air of legitimacy over its operations.



<h3 class="wp-block-heading">Tether transparency has been a long time coming</h3>



Since at least 2017 no one knew for certain what exactly backed USDT.&nbsp;



The issue repeatedly drew fire from industry participants, law enforcement agencies, government and legal professionals over the veracity of the issuer’s claims.



As part of its efforts to silence those critics, Tether has sought to reduce its dependency on commercial paper in earnest this year, trimming it from $20 billion in Q2 to $8.5 billion by Q3.&nbsp;



According to an attestation filed by BDO in August, Tether’s holdings include $28.85 billion in US Treasury Bills, $6.81 billion in money market funds, $5.41 billion in bank deposits, $3 billion in reverse purchase agreements and $397 million in non-US Treasury Bills.



A further $3.48 billion are in corporate bonds and precious metals, while $5.55 billion are tied up in “further investments.” Roughly $4.5 billion are also in secured loans.&nbsp;



With the shift from $8.4 billion in commercial paper — witnessed in August — to US Treasury Bills, Tether’s total holdings stand at roughly $66.4 billion.



Tether has never provided a detailed breakdown of its commercial paper and professional traders have struggled to find any sign of its participation in the market for such debt securities, <a href="https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether" target="_blank" rel="noreferrer noopener">according to Bloomberg</a>.



In 2021 Tether agreed to pay a $41 million fine <a href="https://cms.blockworks.co/tether-settles-with-cftc-for-42-5m/" target="_blank" rel="noreferrer noopener">in a settlement with the CFTC</a> for “making untrue or misleading statements and omissions” about the backing of its stablecoin tokens.



The company Tether has also <a href="https://cms.blockworks.co/tether-pushes-back-timeline-on-audit-report/" target="_blank" rel="noreferrer noopener">repeatedly promised</a> a full audit of its stablecoin reserves for over five years, but failed to deliver — instead proffering attestations, which rely on information provided by its management regarding its balance sheet at a snapshot in time.



That may be changing, finally.



Last month, a US judge ordered the issuer to prove the holdings backing its stablecoin as part of a market manipulation <a href="https://casetext.com/case/in-re-tether-bitfinex-crypto-asset-litig" target="_blank" rel="noreferrer noopener">lawsuit</a> alleging USDT artificially inflated crypto prices from 2014 through to 2018.



Tether will now be required to produce documents to establish its USDT reserves, including account statements of banks and other institutions.



A Tether spokesperson declined to give any timeline for the audit completion, noting that &#8220;obtaining assurance services have been a challenge in the digital token ecosystem.&#8221;



&#8220;Audits are in process and will be completed in due course,&#8221; the spokesperson told Blockworks.



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Tether Says USDT Stablecoin Now Backed by T-Bills

Jocelyn Yang

<div id="highlights-block_62b19d97ac78c" class="highlights">
 <ul>
 <li>USD Coin interest rates are lower than four-week Treasury bills amid the crisis</li>
 <li>Despite a bear market, analysts think going forward the rates of DeFi will come closer to being in-line with, if not above, traditional markets</li>
 </ul>
 
</div>



The DeFi space has seen a sharp drop off as the market continued to be battered following <a href="https://cms.blockworks.co/celsius-withdrawal-halt-reveals-run-risks-on-other-crypto-banks/" target="_blank" rel="noreferrer noopener">Celsius</a>&#8216; liquidity crisis and the butterfly effect going on this week. The ability to generate low-risk yield in DeFi (decentralized finance) has fallen, followed by an outflow of liquidity, hitting stablecoins&#8217; interest rates in the lending market. 



USD Coin (USDC) interest rates on money market protocol <a href="https://app.aave.com/markets/" target="_blank" rel="noreferrer noopener">Aave</a> stand at 0.76% and on <a href="https://compound.finance/markets" target="_blank" rel="noreferrer noopener">Compound</a> at 0.24% as of Tuesday at 6:00 am ET — both lower than the latest 1.18% yield on <a href="https://ycharts.com/indicators/4_week_treasury_bill_rate#:~:text=4%20Week%20Treasury%20Bill%20Rate%20is%20at%201.16%25%2C%20compared%20to,long%20term%20average%20of%201.15%25." target="_blank" rel="noreferrer noopener">four-week Treasury bill</a> — reversing the scene from the bull market. 



“Some people called it a utopian virtuous cycle. Others just called it greed,” analyst Ben Giovo <a href="https://newsletter.banklesshq.com/p/is-defi-ded" target="_blank" rel="noreferrer noopener">wrote</a> in Bankless’ newsletter. “The thing is: reflexivity cuts both ways.”



On-chain activity fell as prices dropped, which made deploying capital in DeFi less attractive as returns are lower, he explained in the post. 



In May, the top four stablecoins market capitalization <a href="https://cms.blockworks.co/top-stablecoins-shed-7b-in-may-as-traders-redeem-tokens-en-masse/" target="_blank" rel="noreferrer noopener">fell by nearly $7 billion</a> as investors looked to redeem their tokens for cash. After all, why take the risk of holding stablecoins at all, if there’s nowhere to generate a safe yield in excess of the traditionally risk-free rate?



Yet, Giovo wasn’t overly concerned, arguing that “DeFi lenders are intersecting with meatspace businesses to get this jack out of its box.”



Dustin Teander, research analyst at Messari, agreed, thinking the lower deposit rates compared to traditional markets are due to a smaller serviceable market rather than a structural shortcoming of the protocols. 



“At its present state, the business of DeFi lending is largely limited to funding shorter-term, speculative trading leverage,” he told Blockworks. During a bull market, borrowers were willing to pay up for leverage. But now, <a href="https://cms.blockworks.co/crashing-prices-expose-bitcoin-mining-industrys-addiction-to-leverage/" target="_blank" rel="noreferrer noopener">deleveraging is de rigueur</a>.



<blockquote class="wp-block-quote is-layout-flow wp-block-quote-is-layout-flow">“As we have seen prices decline, the demand for leverage and borrowing has significantly pulled back, ultimately lowering deposit rates in the process.”</blockquote>



Teander believes that going forward, the rates of DeFi will “come closer to being in-line, if not above, traditional markets&#8221; along with the expansion of serviceable markets. He highlighted protocols have already built lending businesses that are more integrated with traditional markets, such as MakerDAO’s real-world asset lending and <a href="https://cms.blockworks.co/aave-arc-to-provide-30-financial-institutions-access-to-private-pools-of-defi-liquidity/" target="_blank" rel="noreferrer noopener">Aave’s Arc</a> protocol. 



“Over time, this will open the door for DeFi deposit rates to decouple away from being purely driven by speculative trading demand and move to be more commerce-driven as seen in traditional markets,” he said.



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Is There a Silver Lining in DeFi Yield Inversion?

<div id="highlights-block_629e2b68515da" class="highlights">
 <ul>
 <li>Nearly half of survey respondents think tech stocks and cryptos remain the most vulnerable to the Fed’s quantitative tightening</li>
 <li>About two-thirds of survey respondents say the four-decade bull run in Treasurys has come to an end</li>
 </ul>
 
</div>



As the US Federal Reserve has begun <a href="https://cms.blockworks.co/bitcoin-and-ether-plunge-as-fed-moves-to-shrink-balance-sheet-by-95b-a-month/" target="_blank" rel="noreferrer noopener">reducing</a> the holdings on its nearly $9 trillion balance sheet, tech stocks and cryptocurrencies will be hit hard, according to an MLIV Pulse survey <a href="https://www.bloomberg.com/news/articles/2022-06-05/tech-and-crypto-in-peril-as-fed-ends-liquidity-binge-mliv-pulse?utm_source=google&amp;utm_medium=bd&amp;cmpId=google" target="_blank" rel="noreferrer noopener">reported</a> by Bloomberg.



About 47% of respondents indicated tech stocks and cryptos are the most vulnerable to quantitative tightening, while only 7% picked mortgage-backed securities — which investors consider less vulnerable to the Fed’s new course of action. 



The survey, running May 31 through June 3, included 687 responses — ranging from ​​retail investors to market strategists.



The survey found traders active in the market during the 2008 financial crisis are concerned with the impact of the Fed’s balance sheet drawdown on junk bonds, and 72% are more likely to think the four-decade bull run in Treasurys is over — whereas new traders are focused on its impact on tech stocks and cryptos, and only 55% believe Treasurys are headed for a bear.



But Jack Farley, macro analyst and host of Blockworks’ <a href="https://cms.blockworks.co/podcasts/forwardguidance/" target="_blank" rel="noreferrer noopener">Forward Guidance</a> podcast, isn&#8217;t convinced quantitative tightening is bad news for crypto.



“I don’t think history supports the view that reduction of the Fed’s balance sheet is necessarily bad for crypto,” Farley told Blockworks in April. “The last (and only) instance of quantitative tightening by the Fed began in October 2017, and bitcoin went up 340% from then until its peak in December 2017.”



About 61% of respondents said the level at which the terminal fed funds rate peaks is more important than the amount by which the balance sheet shrinks, the survey also found. 



In March, the Fed <a href="https://cms.blockworks.co/fed-raises-interest-rates-a-quarter-percentage-point/" target="_blank" rel="noreferrer noopener">raised</a> interest rates a quarter percentage point and said more rate hikes may happen in the near future. The American Bankers Association’s Economic Advisory Committee <a href="https://www.americanbanker.com/news/rates-go-up-stocks-go-down-why-banks-didnt-benefit-from-interest-hikes" target="_blank" rel="noreferrer noopener">believed</a> the Fed’s current rate hike agenda can help curb inflation from above 8% to near the Fed’s objective of 2% over this year and next. 



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