Tokenization protocol Midas is launching liquid yield tokens, a new type of “onchain hedge fund” architecture, CEO Dennis Dinkelmeyer told The Block on Thursday.
The products are designed to compete with relatively new yield-bearing instruments like Ethena’s USDe and BlackRock’s BUIDL tokens, which Dinkelmeyer said are already “outdated.”
Like USDe and BUIDL, each Midas LYT will tokenize a particular trading or investment strategy, capturing the yield for holders. However, unlike these “quasi stablecoins,” LYTs will have a floating reference value.
Dinkelmeyer claims that, while these “synthetic dollars” may maintain a peg to the U.S. dollar like traditional asset-backed stablecoins, including USDT and USDC, they are truly a distinct financial product used more for investments than as a form of payment or trading pair.
USDe, for instance, was an early attempt to tokenize a cash-and-carry trade using crypto. Whatever yield is generated is distributed via two tokens — a conventional pegged stablecoin and a staked version that earns revenue from the underlying collateral.
“This structure has emerged because issuing a “stable”-coin avoids classification as a security or a collective investment scheme (i.e. ‘fund’), which would require regulatory approval,” Midas wrote in a blog. The transition of fiat-backed tokens “into yield-bearing hedge fund strategies has introduced systemic risks: de-pegs, misaligned incentives and regulatory uncertainty.”
LYTs address the risks by treating an onchain hedge fund as an onchain hedge fund and allowing the tokens’ value to track the performance of its assets. Midas’ first batch of LYTs will tokenize actively managed trading strategies of DeFi asset managers Edge Capital, RE7 Capital and MEV Capital.
“The problem with an on-chain hedge fund is that it cannot be pegged to $1,” Dinkelmeyer said. “If the portfolio underperforms, it depegs and collapses.”
Additionally, untethering onchain hedge funds aims to foster investment flexibility and access to a broader range of assets beyond U.S. Treasuries. The largest tokenized funds today, including BlackRock’s BUIDL and Franklin Templeton’s FOBXX, which are both fiat-pegged, invest primarily in short-term government debt instruments to earn yield.
“By removing the $1 liability constraint, the collateral can include assets beyond zero-duration collateral, unlocking better risk-adjusted returns limited from crowding and market conditions,” Midas wrote.
According to the prospectus, all Midas LYTs will share a common liquidity pool allowing atomic redemption at par value. Each LYT is issued as an ERC-20 asset, meaning they will be composable across the Ethereum DeFi landscape.
Midas has previously launched tokenized products using Treasuries and a crypto basis trade, mTBILL and mBASIS. These products were the first tokenized funds to be open to non-accredited investors in the EU.
Disclosure: The Block's Director of Special Projects, Frank Chaparro, is an investor in Midas.
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