RWA will drive significant growth in DeFi.

Written by: Huang Shiliang

In the next five years, a large number of traditional financial assets are expected to gradually go on-chain, which is what the industry commonly refers to as RWA (Real World Assets), with government bonds being one of the most important types.

Currently, U.S. government bonds have already gone on-chain, but the existing model is not "orthodox" enough.

Standard tokens, such as the various ERC20 tokens we are familiar with, have the characteristic of being permissionless, allowing any wallet to transfer freely and being widely used in exchanges and DeFi. However, the current "U.S. government bond token" is not a true ERC20 token; it resembles a "reverse ETF." For example, MakerDao's government bond model involves financing to purchase government bonds, which are then held in custody by banks, with the returns directly distributed to investors, lacking a true "government bond coin" that can circulate freely on-chain.

Although there are already some government bond-related tokens, such as STBT[1], which represents the rights to U.S. government bonds, it is not an ERC20 standard and has not yet been widely used in mainstream DeFi scenarios.

The Next Step for Government Bond Tokens: Standardized ERC20 Tokens

The next step for government bond tokens is to develop into standardized ERC20 tokens, allowing them to officially integrate into the cryptocurrency ecosystem. As ERC20 tokens, they can enter DeFi mining projects or circulate on exchanges.

Government bond tokens are particularly suitable for the DeFi ecosystem because they inherently possess the characteristics of a "mining shovel."

Compared to stablecoins like USDT, government bonds offer stable returns and less price volatility, making them strong competitors to stablecoins. For example, when exiting cryptocurrency trading, holding government bond tokens instead of USDT is undoubtedly a better choice for yield.

Application Scenarios in DeFi: As Collateral and Liquidity Pools

Government bond tokens have relatively stable prices, making them suitable as collateral for lending platforms like Aave, enabling leveraged operations, which is favored by cryptocurrency gamblers.

Due to the stable returns of government bond tokens, they can further activate various staking mechanisms in the cryptocurrency space. Rebalancing techniques similar to stETH and wstETH can be applied to government bond tokens. Observing the activity of stETH and wstETH in DeFi can reveal the potential of government bond tokens.

Although the price of government bonds has low volatility, they are not stablecoins; historical data shows that government bond prices fluctuate around 10% in the long term, with daily fluctuations of about 1%.

This moderate volatility and price stability make government bond tokens particularly suitable for building liquidity pools in AMM protocols like Uniswap, thereby earning trading fees. In platforms like Uniswap, the TVL (Total Value Locked) of stablecoin trading pairs ranks among the top, due to lower impermanent loss.

As assets that tend to approach their face value over the long term, if government bond tokens are combined with stablecoins to form liquidity pools, their impermanent loss will also be relatively small and easy to calculate, making them very suitable for liquidity pool mining, similar to the USDT-USDC stablecoin trading pair.

If government bond tokens circulate widely in DeFi, trading pairs of government bond tokens on Uniswap are likely to become one of the trading pairs with the largest TVL.

Global Perspective: The Potential for Tokenization of Government Bonds in Various Countries

If U.S. government bonds successfully achieve on-chain circulation, other countries may gradually issue government bond tokens on-chain. At that time, government bond tokens from different countries can be combined into liquidity pools to serve as counterparty positions for forex traders, which will bring extremely large trading volumes.

Conclusion

The tokenization of government bonds and their transformation into orthodox ERC20 tokens have a broad future ahead. They are expected to become the largest on-chain real asset after U.S. dollar stablecoins, further driving the development of DeFi.

[1] https://www.matrixdock.com/stbt

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