The Sustainability of RWA-backed Stablecoins

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Tangible's USDR's depeg has sounded the alarm on the Sustainability of RWA-backed stablecoins. Are sDAI and sFRAX also on Shaky Ground? I Delved Deep into the 3 Most Prominent ones. The Urgent Findings You Must Know 👇

Now, let's discuss the intriguing case of USDR. Initially, it sought to back a liquid stablecoin with illiquid assets, particularly real estate. The idea was enticing: offer a stablecoin yield backed by consistent real estate returns. But things didn't go as planned...

The issue? Illiquid assets. Real estate can't be easily liquidated. When the DAI available for redemptions went to zero, it led to panic selling to other stables. evenbtually this led to USDR depegging.

It revealed a core challenge: How do you effectively back a liquid digital asset with yields from illiquid physical assets? The risk model just wasn't sustainable.

In response to the depeg, Tangible DAO decided to shift its focus from solely backing its coin with real estate to creating tokenized baskets of real estate. With their immediate focus on making the victims of the depeg whole, it remains to be seen if they can bounce back.

@MakerDAO is a collateralized debt position (CDP) protocol through which users can borrow the native stablecoin $DAI against collateral whitelisted by the MKR token holders.

Collateral includes ETH, stablecoins, and RWA. Maker's exploration into RWA has proved to be successful so far, with the revenue they have generated being one of the reasons for the increase in the DAI savings rate.

The DAI Savings Rate (DSR) is the interest rate set by MakerDAO's governance, which provides a low-risk, passive income opportunity for sDAI holders. Locking DAI in the DSR contract gives sDAI. The interest paid out is sourced from the revenue Maker DAO generates.

Now, let's look at the biggest RWAs backing DAI. • BlockTower Andromeda U.S. Treasuries are evenly distributed across maturities ranging from zero to six months. DAI debt is collateralized 1:1 with U.S. Treasuries.

• Monetalis Clydesdale Different blends of short-term bonds from ultra-short (<1 year) to short (1-3 years) maturities. Mainly invested in U.S. Treasuries but some exposure to corporate bonds.

• Coinbase Custody USDC held with Coinbase Custody. Each USDC is backed by 1 dollar worth of cash and short-dated U.S treasuries. USDC is redeemable for dollars.

In conclusion, DAI is a stablecoin backed by highly liquid assets, including U.S. T-Bills and ETH. These assets ensure DAI's solvency, quick redemptions, and stability, thereby reinforcing its safety.

Frax Finance in their V3 has recently introduced their RWA strategy with sFRAX. In partnership with FinresPBC, it provides stakers with exposure to yields from on-chain assets like T-Bills, reverse repos, and USD deposited at federal banks.

Frax uses an IORB oracle to monitor the Federal Reserve's Interest on Reserve Balances (IORB) rate and relay this rate to their smart contracts. The AMO then transforms the treasury into these RWAs through their partner, FinresPBC.

The objective is to align the staking rate for sFRAX as closely with the IORB rate as possible. The yield is transferred back to the DAO every week and is then distributed to stakers. Several key features separate Frax from other stablecoins:

• When the collateral ratio of Frax reaches 100%, the price would be pegged to $1 via Chainlink oracles. • Frax cannot be redeemed for other assets. • Frax smart contracts would be fully on-chain and decisions would be implemented through the Gov module.

Frax is taking it up a notch, and provided the AMO works well, which it has been doing so far, then sFRAX should be sustainable in the long run. The demand for sFRAX has been evident thus far. Getting rates close to the IORB on-chain is a major demand driver for sFRAX

@MountainUSDM launched last month. Their stablecoin USDM is backed by T-bills held in USDM reserves. USDM Reserves, which consist of short-term T-bills <3 months, are held in the name of the Company with regulated financial institutions in bankruptcy-remote accounts.

Mountain Protocol is a registered company, and users with an approved account can buy/redeem USDM directly from the protocol at the price of $1.

PROS • Advanced security features including 2FA, suspicious activity tracking. • Although USDM can be purchased with USDC, the company does not keep USDC in its reserves hence they are not exposed to any risks in $USDC including depegs.

• Built for enterprises. • Although Mountain Protocol promotes self-custody, users can also choose to give the protocol custody of the asset.

CONS • High trust assumptions for the Mountain Company to redeem assets even when the price might be different on-chain • Instant redemptions might not be available at all times as the company does not keep $USDC and is dependent on banks, which do not open on weekends.

Closing Thoughts: The trend towards T-bill-backed stablecoins is noticeable, offering a 'risk-free' rate on-chain. Yet, regulatory scrutiny looms, with the SEC eyeing the crypto space. The success of these projects still hinges on regulations & macro.

Some chad frens of mine worth following to learn about RWAs too ↓ @Hercules_Defi @0xTindorr @DefiIgnas @TheDeFISaint @eli5_defi @jake_pahor @tomwanhh @ViktorDefi @definapkin @0xAndrewMoh ... and that is the end of my thread on Tangible's USDR collapse🫡