I wanted to raise the topic of whether Nexus Mutual should use some of its capital to invest into US treasuries and traditional corporate bonds.
To start, let’s segment out the discussion of selling ETH to stablecoins. I’m thinking of this as an opportunity to get yield on stables, and the amount of stables we should be holding via selling ETH is a separate discussion. I’m bringing this topic up because there’s currently discussions on-going about whether to sell ETH to DAI, and it might be helpful to note that there are options to earn yield on DAI so that it’s not completely stagnant.
This post exists as a forum for discussing the high-level question of, would we want to hold treasuries or bonds? Any vote related to this would be purely a signaling vote.
When it comes to buying US treasuries and bonds, you need a traditional broker and custodian. There is no legitimate way to get around this step. So, ultimately, there will be centralization off-chain with both of those parties (typically the same entity).
There are 2 major options:
Utilize an existing on-chain tokenized bond protocol. For example, Ondo is tokenizing US treasuring with their OUSG token. You send funds to their smart contract to mint the token, they send those funds to Coinbase to offramp to fiat, sending it to Clear Street, a reputable broker, who purchases and holds a Blackrock ETF (AAA) of 1-year or shorter US treasuries. They do the same for a corporate bond ETF (BBB-), and a higher risk corporate bond ETF (BB-). All entities in this chain are USA located.
You offramp funds from Nexus Mutual capital pool to the Panama foundation entity, and contract a broker to purchase whatever treasuries or bonds you want, and to hold them. All entities in this chain would be Panama located.
There’s a third option which is a long-shot, which is that we try to work with MakerDAO to utilize their existing infrastructure that they created as part of MIP-65. This is a similar infrastructure to Ondo, but gives a more diverse exposure to real world assets. I’m particularly impressed by this, and the legal work that went into bringing it to life.
I had a conversation with some of the MakerDAO team about the creation of a vault like this, which would split out a bond essentially, to give more concentrated exposure to their RWA. Ultimately, you’re still carrying the DAI exposure, but you’re getting much more exposure to the RWA piece via the bond. So, it’s slightly more risky than a straight bond / treasury approach, because you hold exposure to something going wrong with DAI.
But, the argument here is whether to hold DAI, or to buy treasuries / bonds. So, to me, you’re getting the MakerDAO / DAI risk exposure anyways if you choose not to invest. I also love how you get such diverse RWA exposure here, and can hop onto the existing very strong railroads they’ve laid down. Long term, this RWA yield should flow through their DSR, but until the RWA are 80-90% of their capital, DSR will always be much lower than the yield on this bond, hence the logic in separating out the bond and buying it directly.
I want to also note that there are a few other protocols aiming to do what Ondo is doing. Backed Finance is the strongest alternative, but has not launched a fixed-income product yet. They are weeks / months away from doing so, and so should be considered. They are Swiss based currently, but I think it’s likely they will ultimately be running this through Lichtenstein. Switzerland is a very friendly entity for this because they allow raw tokenization of treasuries and bonds, will transferred ownership via the token. So, you can buy and hold the actual treasury rather than being required to buy an ETF.
Theoretically, it makes a lot of sense to get exposure to treasuries and bonds, especially given the high rate environment. We’re currently limited on utilizing stables to earn yield on-chain due to technical requirements, the low yields available, smart contract risk and overlapping exposure on the cover side.
Most insurers will hold treasuries and bonds for a very significant percentage of their capital, with good reason. If we can find better yield sources on-chain with a similar risk profile, we should consider those equally, but that doesn’t seem to exist right now.