The Status Quo and Six Trends in Tokenized Government Bonds

By Kyle Liu

On-chain asset tokenization represents a long-term trend with the potential to shake up the existing financial landscape. Within this arena, tokenized government bonds make up an increasingly important segment. The segment experienced a stellar growth of nearly seven-fold in 2023 and is quickly recovering from a brief slump at the end of 2023.

The article dives into the current situation and some exciting trends in tokenized government bonds and the tokenized real-world assets (RWA) sector as a whole.

Current Situation

Tokenized government bonds and other tokenized real-world assets (RWA) have witnessed significant growth, propelled by rising interest rates joining forces with relatively low DeFi yields. This development has reflected investors’ appetite for asset classes that offer more stable, predictable returns. More and more investors, especially those seeking to strike a balance between the traditional financial market and the cryptocurrency market, are favoring these tokenized RWA products.

A Boston Consulting Group (BCG) report estimates that tokenization of global illiquid assets will reach $16 trillion, or 10% of global GDP by 2030. This includes both on-chain asset tokenization and traditional asset fractionalization (e.g. Exchange Traded Funds (ETFs) and Real Estate Investment Trusts (REITs)). Considering the potential market size, even capturing a small portion of this vast market would signify significant growth opportunities for the crypto industry.

Source: BCG, Bing Ventures

Players in the RWA Ecosystem

RWA Infrastructure

Infrastructure providers in the RWA ecosystem, also known as RWA rails, provide the regulatory, technical, and operational infrastructure upon which RWAs are brought into crypto. They serve as the foundation for the entire ecosystem, and the development of RAW rails is vital to the sustainable growth of the RWA sector.

Asset Providers

Additionally, there are asset providers that focus on originating and creating demand for RWAs across various asset classes， including real estate, fixed income, equities, and others, contributing to the sector's diversity and breadth.

Market Size

RWAs are the 11th largest sector in DeFi based on protocols tracked by DeFi Llama, with a combined TVL of over $4 billion. According to a Dune Analytics dashboard by @j1002, the number of holders of tokens associated with RWA protocols reached over 67,000 on the Ethereum blockchain, more than doubling in the last 12 months. Within this sector, the total value of the tokenized Treasury segment increased to $719 million as of Mar 20, 2024, from around $379 million a year earlier, according to RWA monitoring platform RWA.xyz. The average Yield-to-Maturity was at 5%.

Source: RWA.XYZ, Bing Ventures

That said, the combined TVL of RWAs has been slumping for the last several months after peaking at $6.271B last October. The value of the tokenized Treasury segment also dropped from $771 million at the end of last November, but it has moved back to an uptrend since February this year. As the broader crypto market recovers from the bear market, it seems that some people are pivoting to higher-yielding markets like DeFi lending and liquid restaking.

Source: DeFiLlama, as of Feb 28, 2024

User Profiles and Behaviors

We’ve attempted to analyze the profiles and behaviors of RWA users to understand the underlying user demand. We observed that most RWA users are native to the cryptocurrency ecosystem, indicating that the early adopters did not come from traditional investment avenues. One of the facts that can demonstrate this observation is that the average creation date of RWA token holders’ wallet addresses predates the time when RWAs were tokenized on the blockchain. This means that the RWA userbase is a subgroup that evolved from the broader crypto community rather than a community that rose from influxes of traditional investors. RWA users often have a strong grasp of blockchain technology and many have entered DeFi long before RWAs become buzzed.

Source: Dune Analytics @j1002, as of Feb 27, 2024

We used the number of RWA token holders as a proxy to gauge RWA adoption. Both the number of RWA token holders and the unique interactions with RMA tokens have been on a continuous rise despite the recent drop in RWA protocols’ combined TVL. We believe this is a sign of the RWA sector’s increased awareness and positive expectations among investors.

Source: Dune Analytics @j1002, as of Feb 27, 2024

With a time-series analysis of the RWA holders’ wallet addresses, we’ve found that most of the addresses have been in use for a long time and have participated in various blockchain activities. This means that the RWA sector is largely participated by a healthy group of long-term crypto users. 

That said, we did notice growing participation from new wallet addresses as well. This probably means the RWA sector is gradually permeating into more traditional user groups as more traditional financial institutions, including Franklin Templeton and Wisdom Tree, embrace RWAs.

RWAs are bridging the divide between crypto and traditional finance, but they also carry inherent risks and limitations from the real world. Most RWA interactions require checks from traditional financial systems, such as KYC/AML, credit checks, and minimum balance requirements. These prerequisites limit RWAs’ potential to extend financial inclusivity.

Competitive Landscape

We conducted an in-depth comparison of different projects in terms of market share, growth rates, pricing, and user experience to assess the competitive landscape. In the tokenized government bond sector, Franklin Templeton, leveraging its extensive accumulation and brand advantage in traditional finance, holds the largest market share. Ondo Finance and Matrixdock have different user demographics due to their different marketing strategies. Emerging companies like Hashnote and Superstate, while having smaller market shares, are experiencing rapid growth, demonstrating market vitality and diversity.

With respect to pricing, different projects have different management fee rates, reflecting their strategies for market positioning and cost control. For example, Franklin Templeton and Ondo Finance have lower management fee rates, which help attract large institutional investors. On the other hand, Matrixdock and Maple Finance have relatively higher management fee rates, possibly to compensate for revenue pressures stemming from their smaller market shares.

In terms of user experience, providing clear, intuitive, and user-friendly interfaces is crucial for attracting and retaining users due to the nature and complexity of tokenized government bond products. Additionally, with intensified market competition, enhancing service quality and customer support will become key differentiators for each project.

To summarize, tokenized government bond projects are in a phase of rapid development, with significant differences among projects in market share, growth rate, pricing strategy, and user experience. Their prospects will be greatly influenced by the global economic environment, regulatory policies, and relevant technological innovations. To remain competitive, they need to continuously optimize their product features, enhance user experience, and adapt to evolving market and regulatory conditions.

Major Players in Tokenized Government Bond Products

1.       Franklin Templeton

Franklin Templeton is a US-based global asset manager with over $1.3 trillion in assets under management. As a traditional investment firm actively exploring the blockchain industry, Franklin Templeton has launched several blockchain-focused venture capital and equity funds in the past.

￮        Market Share: 48.6%

￮        Government Bond Product's Market Value: $350,077,608

￮        Management Fee: 0.15%

￮        Market Share Change in the Past Quarter: -5.51 percentage points

2.       Ondo Finance

Ondo Finance launched three tokenized bond products by investing in multi-billion dollar, highly liquid, exchange-traded funds managed by the world’s preeminent bond managers, including BlackRock and Pacific Investment Management Company (PIMCO). They are the U.S. Government Bond Fund (OUSG), Short-Term Investment Grade Bond Fund (OSTB), and High-Yield Corporate Bond Fund (OHYG).

￮        Market Share: 17.01%

￮        Government Bond Product's Market Value: $122,511,877

￮        Management Fee: 0.15%

￮        Market Share Change in the Past Quarter: -6.69 percentage points

3.       Matrixdock

Matrixdock is an on-chain treasury bond platform launched by Matrixport, a Singaporean asset management platform. STBT is Matrixdock’s first product, introducing a risk-free rate based on US government bonds.

￮        Market Share: 10.78%

￮        Government Bond Product's Market Value: $77,674,902

￮        Management Fee: 0.3%

￮        Market Share Change in the Past Quarter: -2.11 percentage points

4.       Backed Finance

Backed is a Swiss start-up bridging real-world assets on-chain. The company has issued blB01, a tokenized short-term U.S. government bond ETF, on Coinbase's Layer2 Base.

￮        Market Share: 6.73%

￮        Government Bond Product's Market Value: $48,485,006

￮        Management Fee: 0%

￮        Market Share Change in the Past Quarter: -0.4 percentage points

5.       Hashnote

Hashnote is a regulated company under the oversight of the U.S. Commodity Futures Trading Commission (CFTC) and the Cayman Islands Monetary Authority (CIMA). It is a fully regulated, institutional-grade DeFi asset management platform, offering comprehensive service support, zero counterparty risk, and customizable risk/reward strategies to consumers.

￮        Market Share: 5.92%

￮        Government Bond Product's Market Value: $42,613,396

￮        Management Fee: 0%

￮        Market Share Change in the Past Quarter: +0.2 percentage points

6.       Superstate

Superstate is a blockchain-based asset-management firm. It raised $14 million in venture capital to develop regulated, on-chain funds that U.S. investors can access last November. In February 2024, it debuted its first tokenized U.S. Treasury fund offering on the Ethereum blockchain.

￮        Market Share: 4.16%

￮        Government Bond Product's Market Value: $29,985,969

￮        Management Fee: 0.15%

￮        Market Share Change in the Past Quarter: +4.16 percentage points

7.       Open Eden

Open Eden is a crypto startup established in early 2022. It was co-founded by Jeremy Ng and Eugene Ng, Gemini's ex-Asia-Pacific head and former Head of Business Development for the region.

￮        Market Share: 3.24%

￮        Government Bond Product's Market Value: $23,328,886

￮        Management Fee: 0%

￮        Market Share Change in the Past Quarter: -1.12 percentage points

8.       Maple Finance

Maple Finance is an institutional capital marketplace that provides credit experts with tools to run an on-chain lending business connecting institutional lenders and borrowers. It has been a market leader in private credit. In April 2023, it introduced a new cash management pool allowing non-U.S. accredited investors and entities to participate directly in U.S. Treasury investments using USDC.

￮        Market Share: 1.45%

￮        Sovereign Debt Product Market Value: $10,428,616

￮        Management Fee: 0.5%

￮        Market Share Change in the Past Quarter: -3.23 percentage points

Source: RWA.xyz, Bing Ventures, as of Mar 11, 2024

Predicting Future Developments

We believe six trends will drive the development of the tokenized government bond segment of the RWA market. These trends will transform the market landscape and provide investors with new opportunities.

1.       Deeper Integration of On-chain and Off-chain Mechanics
The tokenized government bond segment will witness a deeper integration of on-chain technology with traditional financial assets. This trend will enable more efficient asset tokenization processes and more timely synchronization of on-chain and off-chain data, significantly improving the efficiency and transparency of transactions. This will, in turn, lead to faster and more trustworthy trading experiences for investors, potentially attracting more capital into the area.

2.       Increased Compliance with Advances in RegTech Solutions
With increased regulatory attention around digital assets, tokenized government bond projects will be forced to strengthen their compliance. We believe more blockchain-based compliance solutions, such as those using smart contracts for compliance checks, will emerge to meet increasingly stringent regulatory requirements. This will boost investor confidence and encourage more institutions to participate in this market.

3.       Increased Cross-Chain Interoperability
Advancements in cross-chain technologies will enable seamless interoperability of tokenized government bond products on various blockchain platforms, enhancing liquidity and accessibility across the entire market. This will provide investors with more choices and flexibility and reduce market risks. Additionally, increased cross-chain interoperability will promote the convergence of international markets, creating more global investment opportunities.

4.       More Customized and Personalized Products
We expect projects to introduce more customized and personalized products to meet the specific needs of different investor groups. These products will include those that precisely target an investor’s risk preference and investment objectives, enabling them to achieve their financial goals better. This movement, in general, will allow investors to have a more diversified range of investment choices.

5.       Enhanced Transparency and Security
Projects are expected to place greater emphasis on transparency and security, leveraging blockchain technology's traceability and tamper-proof nature to enhance investor trust and confidence. This will attract more risk-sensitive investors to participate in the market and help mitigate market manipulation risks.

6.       Integration of Cutting-Edge Financial Technologies like AI
The application of artificial intelligence for market analysis and predictions, as well as the generation of automated investment strategies, will be a significant innovation direction for the Sovereign Debt RWA market in the future. With these innovative developments, investors will be better informed and empowered to seize market opportunities.

Promising Project Types

Based on the above understanding, we believe the following five types of projects will be worth paying attention to.

1.       High Compliance Projects
Amid more and more stringent regulatory requirements, projects that have a high level of compliance and offer high transparency are more likely to gain favor in the market. These projects will be able to establish a trustworthy reputation and attract more investors.

2.       Technology-Driven Innovative Projects
Projects that fully leverage cutting-edge technologies such as blockchain, artificial intelligence, and big data, particularly those capable of providing efficient trading and investment strategies, are poised to secure a place in the market. These projects will bring faster and smarter investment experiences.

3.       Cross-Chain Compatible Projects
Projects that boast seamless interoperability across different blockchain platforms, especially those providing a broader selection of assets with optimized liquidity, will have a clear competitive advantage.

4.       User-Friendly Platforms
Platforms that are easy to use and provide comprehensive customer support and educational resources will be more popular, especially among non-professional investors.

5.       Low-Cost, High-Efficiency Solutions
Projects that excel in cost control and operational efficiency, such as those offering low management fees and highly automated services, will be able to win out in the competitive market.

In conclusion, investors are more inclined to seek higher-yield investment opportunities under a hiking Federal Reserve. The growth of the RWA market indicates that despite macroeconomic pressures, its potential for high returns has attracted a significant amount of capital. With regulatory improvements and technological advancements, we expect the tokenized government bond market to continue to grow, especially given the increasing adoption of digital currencies like stablecoins and CBDCs.

That said, tokenized government bond projects may face stricter regulatory requirements in the future, particularly in anti-money laundering (AML) and Know Your Customer (KYC). As the regulatory environment becomes more stable, these projects are expected to integrate more seamlessly into the traditional financial system while providing investors with new investment channels and risk management tools.

To mitigate the inherent risks associated with RWA products, we believe tokenized government bond issuers should adopt decentralized governance decision-making mechanisms, such as the DAO framework used by many issuers in the private credit category. Such mechanisms enhance transparency, allow for better risk assessment and mitigation, and also help ease regulatory compliance. 

Author Bio

Kyle Liu is the investment manager at Bing Ventures and a seasoned crypto analyst and writer. He provides insightful analysis and research on a wide range of topics, including market trends, sector analysis, and emerging projects. He is especially strong at providing forward-looking analysis on DeFi-related topics.