Remember mid last year when everyone in crypto was excited about the steady 5% US Treasury yield you could get through one of the tokenized fund/ETF/TBill wrappers?
Well fast forward to 2024, while the total digital asset market cap more than doubled to over $2 trillion, the total onchain allocation towards the US TBills has been declining. See chart below.
Why haven’t more big projects allocated towards these tokenized products? Apart from being an inferior product, tokenized TBills face 3 additional challenges:
Complexity of DAO governance
Lack of understanding of investment and allocation process
Lack of competitive products
Let’s dive in.
Complexity of DAO decision making
DAO stands for decentralized autonomous organization and it is an idiosyncratic creation of crypto. Instead of having a hierarchy of decision makers who manage day to day affairs of an organization, say a company, in a DAO, everyone who holds a share of the company is invited to vote on many, if not most, operational decisions. Basically lots of people debating and arguing and voting on a wide range of topics.
Apart from the obvious difficulties with alignment between differently incentivized parties, a big challenge for decision making in such a context is responsibility and expertise.
Responsibility implies KPIs and headlines by which they are measured by. Yet when everyone has a general responsibility, no one has any particular responsibility for an objective. And thus is the situation with DAOs when it comes to making any treasury management or asset allocation decisions. There is no dedicated and empowered personnel to take forward investment decisions. As a result, you have many opinions on the topic but no one to execute.
And in cases where there are specific organizations tasked with voting on these allocation decisions, not everyone has the right expertise to make informed decisions. There is a reason why sophisticated teams are required to manage multi-million or billion portfolios at asset managers. Consider this, how are you supposed to optimize allocation splits and manage risks associated with a portfolio of reverse repos, 3 months TBills, 2 year TNotes, 7 year TNotes and single individual investment grade credits etc without having being a portfolio manager with a 10 year success track record.
Many of the delegates may also themselves be a service provider or have other interests/incentives that may distract them from a singular focus of maximizing return while minimizing risks.
It’s not rocket science to understand that an organization with a significant balance sheet should have a focused treasury management objective, a comprehensive allocation and risk management framework and dedicated resources for monitoring and adjusting portfolio positions.
However, it is very difficult to solve this bottleneck from the outside. Since most of the challenges here are organizational, projects themselves must figure out how to organize more effectively when it comes to their asset allocation approach and execution.
Lack of understanding of allocation process
It is clear there exists a huge gap between the execution and the idea that we would like to see our $200+ million treasury managed prudently in an effort to maximize risk-adjusted return that help us grow our runway and bootstrap our tokenization ecosystem.
Most projects interested in the idea do not have a clear set of investment objectives and parameters that shape any subsequent conversation and work in asset allocation. Of course this also relates back to the issue earlier that no one is in charge of coming up with such a set of objectives and criteria.
Whilst the organizational problem is internal, education and research content can serve as facilitators in a big crypto organization’s road to unlocking the benefits of asset management. There are several components to this education process.
Assembling a dedicated team
Provide an overall framework for asset allocation & risk management
Deep dive into specific asset classes, assets and cost analysis
I have been working closely with Centrifuge and ecosystem stakeholders on these topics. You can read examples of these here.
Lack of competitive products
Although there has been a proliferation of TBills with 90 days or shorter maturity, there is a distinct lack of options for longer term considerations. A quick glance at the market choices show the limitation of product offerings at the moment.
Of course short duration TBills satisfy certain liquidity requirements. However, what happens if I want to lock in a 2 year yield or I want to take a view on a 5 year yield dropping to 3%? The current product category limits the demand sources, which is already constrained by the 2 challenges we outlined above.
Additionally, apart from a small market in repo and niche integration cases across the broader financial ecosystem in crypto, most of these tokenized assets are non-transferable and non-tradeable.
Asset holders are limited to a one dimensional buy and hold strategy. You cannot use tokenized MMF as collateral across DeFi or posting your tokenized TBill positions on provider X with another provider.
If tokenization promises interoperability and capital efficiency, then those are certainly not being fully utilized right now. And if one of the market's main functions is to allow for seamless liquidity and trading then a large portion of the market is excluded from this buy and hold product.
When coupled with a higher management fee structure, no wonder it is not doing better. If you have a big chunk of capital to allocate, say $2 billion, are you willing to pay 50bps extra management fee a year to service providers with no additional benefits? For those of you in the traditional asset management business can you imagine making 50bps on a product like MMF or Treasuries when your largest clients are paying low single digit?
Another big challenge for this category of product will be the recently launched structured product that is offering synthetic dollars with double digit yields. The product scaled from 0 to $500mil in 3 months. But of course that is a topic for another time.
Conclusion
6 months ago at a tokenization conference where I heard people confidently declare that tokenized TBills were going to see massive traction. It sort of made sense at the time. The Fed Funds Rate was over 5.25%, the chart of total tokenized US Tbill was up to the right and MakerDAO was making over $120 million from their TBills allocation a year.
6 months later, the conversation is focused on when the Fed will be cutting rates while the historically successful launch of spot Bitcoin ETF has propelled the crypto market return to over 100% and MakerDAO hasn’t changed its offchain 5bps fee structure to an onchain set up.
The market condition changes at a speed that most projects can not adjust on the fly. And they shouldn't aim to chase the market. The only thing that matters is whether they can build products that offer sufficient benefits to users. Instead of focusing all engineering and BD resources on emulating what is en vogue at the moment, I encourage everyone in the space to think deeply about what products or services will be of value in the future for a long time.
Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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