RWA strategy: Providing VAI-bIB01 liquidity on PCS

General Discussion Venus Discussion
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As laid out in our RWA strategy proposal, we divide the journey in three prongs. The first one is to get back to the peg and enable VAI minting which is waiting on the PSM (soon!). The third one is to work on the Credix proposal which will take more time. This post will detail our progress on the second prong, which is about increasing VAI utility through RWA (Real World Assets).

Summary

  • Put some treasury assets to work investing in bIB01 token (t-bill ETF, 5% annual yield)
  • Bootstrap VAI-bIB01 liquidity using $1M from the treasury to put VAI as the centerpiece of RWA liquidity

About bIB01

bIB01 is a token provided by Backed Finance tracking the price of the IB01 ETF. It is designed as a structured product under the DLT Act of Switzerland. US citizens are not allowed to use it. Steakhouse has invested time and capital digging into the product and will release a full risk assessment in the near future.

At this stage, suffice it to say that the performance (graph below) follows the 3-months t-bills yield (second graph below). There is duration risk, but it is quite muted and not really significant when yields are above 4% like they are these days.

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Current yield is around 5%. It is important to note that Backed charges 50bps on minting and burning operations but no fees otherwise. Therefore, assuming rates stay constant, a bit less than 1 quarter of holding the product is needed to cover the minting/burning costs (it is not a short-term product due to those fees).

Putting VAI as the Centerpiece for RWA liquidity

We have been in discussion with Backed Finance and they can provide their products on BNB Chain should there be demand. Pancake Swap is also willing to push them forward.

There is an opportunity to achieve two goals at the same time:

  1. Earn yield on a portion of Venus treasury assets
  2. Establish VAI as the centerpiece for RWA trading

If VAI becomes the USD-stablecoin with bigger liquidity and less slippage to transact to other kinds of assets (DeFi like BNB or RWA like bIB01), it will have more utility for people that will consider switching to use VAI. Moreover, liquidity provision on AMM will increase the outstanding VAI.

There are 3 options:

  • Providing a PSM-like module for bIB01. This solution would require quite some time to implement and would remain unconnected from the PCS interface.
  • Providing a PCS v3 ranged pool. This solution would be quite efficient but is technically complicated. Also, operationally, we would need to move the range as bIB01 is increasing in value.
  • Providing a PCS v2 pool (full range). This solution is not very efficient (most of the liquidity would be badly mispriced), but is technically and operationally simple.

A proposal could be to use the treasury to acquire $1M of bIB01 token from Backed (through a market maker, possibly using the limit order feature of PCS).

1M VAI would be minted from the system. The whole PCS pool would be valued at $2M, therefore not undercollateralizing VAI.

A $2M VAI-bIB01 LP seems to be a minimum. Indeed, V2 pools are quite capital inefficient. Even with a $2M pool a $5000 buy or sell order would move the price by 50bps. Adding 30 bps (0.3%) trading fees, that’s an 80 bps (0.8%) cost. As a reference, $5500 is the minimum mint order for Backed.

We don’t expect this strategy to generate a lot of trading fees quickly. The key value here is to provide VAI utility as a bridge to Real-World Assets. The $1M bIB01 would also generate $50k per year at the current rates (but cost at least $10k for fees) instead of USDC which is not generating anything.

Providing liquidity for a security like bIB01 comes with some regulation issues. We are still exploring the best avenues for executing this in a safe way through external legal counsel. For instance, we could decide not to offer frontend access to the relevant smart contracts.

Next steps

Assuming the community is interested in this proposal, Steakhouse will continue working on the actual implementation.

Should this pool work well and get arbitraged, it would be possible to withdraw the USDT-VAI LP provided earlier this year to stabilize VAI.

If Venus succeeds at bootstrapping VAI-bIB01 liquidity, it will also be possible to add bIB01 as collateral on Venus which would be the first USD yield bearing asset there.

Make your voice heard!

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Hello Venus Community,

Thank you for your interest in investing some of the protocol’s own treasury in bIB01 tokens and in seeding a VAI-bIB01 Liquidity Pool. We thank @Steakhouse for the proposal and would like to express our support for this initiative.

As the issuer of bIB01, Backed believes that this asset can be a valuable tool for treasury management, providing to the Venus protocol, a source of yield uncorrelated to the crypto markets.

Backed Finance AG (a Swiss company headquartered in Zug) issues EVM-compatible security-tokens via its subsidiary, Backed Assets GmbH, that track the value of structured products. These structured products are fully backed by the underlying, which is held in a secure third-party Swiss custody account, separate from the bank’s balance sheet and thus bankruptcy remote, removing third-party exposure. Backed Assets GmbH has filed and approved a prospectus for the security-tokens with the FMA in Lichtenstein.

bIB01 is a price tracker for the iShares $ Treasury Bond 0-1yr UCITS ETF (IB01), an index composed of US Dollar denominated government bonds issued by the US Treasury, with remaining maturities between zero and one year.

Thank you for considering bIB01 as an investment and a source of growth for the Venus protocol. We hope the community votes in favor of this proposal, and that Venus protocol will find more of Backed’s products useful in the future.

You can find more information here:

bIB01 Factsheet

Backed Assets legal documentation

DISCLAIMERS:
The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any securities regulatory authority of any State or other jurisdiction of the United States and (i) may not be offered, sold or delivered within the United States to, or for the account or benefit of U.S. Persons, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons (as defined by the U.S. Commodities Futures Trading Commission). The following information may not be distributed outside of jurisdictions where prospectus will be approved and/or passported, in particular not in the United States or any other restricted jurisdiction.The offering or sale of the securities in certain jurisdictions may be restricted by law including because of the underlying(s). For a description of certain restrictions on offers and sales of the securities and on the distribution of this refer to the product documentation.The information does not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If the laws or regulation of a jurisdiction require that an offering of securities described herein be made by a licensed bank, securities firm or insurance company or any of its affiliates, the offering shall be deemed to be made by such other party or such affiliate on behalf of the Issuer or holders of the applicable securities in such jurisdiction. Some of the information published contains forward-looking statements. Users are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. Backed Assets GmbH undertakes no obligation to publicly update or revise any information or opinions published. Backed Assets GmbH reserves the right to amend the information at any time without prior notice. Past performance is not an indication or guarantee of future performance of a Backed product or underlying asset. The value of any investment may be subject to high fluctuations and, in some circumstances, investors may not recover the original amount invested. The information contained may not be considered as being a substitute for economic, legal, tax or other advice and users are cautioned to base investment decisions or other decisions solely on the content delivered herein. An investment decision with respect to Backed equities must only be made on the basis of the official documents published in accordance with applicable securities laws. Users should consult their investment advisers or other advisers prior to making any decisions.

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Update on this one.

The latest actions of the SEC are providing some concerns about those kind of product. We will need to see where the dust settle.

We should get more legal advice next week.

To be clear, it’s not about buying bIB01 that would be 100% fine. But without the ability to provide it as a way to defend the VAI peg, there is less value.

We continue to work on how to fix this.

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