The Future of Tokenized Yield | Will Beeson, Sonya Kim, Abhi Pringle, and Mickey Graham

Amazing. So, we're ready now for the next panel. I know we've got a couple of talks after that as well and some of some of you wanted more spicy conversations. So, we've got Mickey Graham now who's going to be rolling on and talking about the future of tokenized yield along with his gang of really really talented people. Mickey, I'm going to let you take over.

Thank you so much everybody and all the best everyone.

Thank you. Test one, two, one, two. How's the How's the mic volume? Are we good?

Awesome.

Well, thank you everyone for being here. My name is Mickey Graham. I am the co-founder and general partner of Metallayer Ventures. We are a $25 million worth focused on the intersection of traditional financial services and the onchain economy. With me I have two who are pushing forward the future of tokenized yields coins RWAS and institutional DeFi.

Um so I'll let them introduce themselves and then I'll add a couple words on top of that.

Go ahead.

Hi everybody. Will Bon uh we're building a company called Uniform Labs which is liquidity infrastructure for tokenized assets. So our thesis I suppose is that ultimately uh much of finance including securities including financial markets will be replplatformed on chain. If we look across the the spectrum of assets which are currently available in token native form, there are some very high quality assets. But the access to these assets and the ability to subscribe and redeem is often um constrained by by tradi uh payment rails or settlement cycles.

And ultimately for the the shared vision of onchain finance to flourish, we need to deliver instant convertability, instant settlement in blue chip tokenized assets against tokenized cash in the forms of stable coins and ultimately tokenized deposits. Uniform Labs is building that infrastructure. Our liquidity layer uh is called multi-liquid. It's live on Ethereum mainet today. uh and it supports uh instant liquidity in blue chip assets like money market funds, private credit uh and private equity.

Hey, great to meet everyone. This is uh this is Obby. I'm one of the founders of Theo Network. Uh we're a end-to-end tokenization platform focused on bringing uh high yield low duration credit products on chain starting with um money market funds and then moving into structured products. And the focus for our business is pro, you know, we want to make RWAs available on chain, high quality RWAS on chain, but also make them liquid, tradable, and available across most environments.

Hi everyone, my name is Sonia. Um, I'm one of the founders at 3F Labs, building 3F protocol, which is currently being developed. Um, we're probably going to go live in the next month or so, so please, uh, make sure to follow us at 3F_XYZ on Twitter. Um, you may have seen this week there was a lot of chatter on Twitter about, uh, RWA looping. Uh, perhaps it's the bare market and tokens are down and, um, people are starting to look at real yields.

Um, what we're trying to do is allow people to gain higher real yields through uh leveraging our WAS except we're trying to not do that through looping, which we believe is the most inefficient way for non-atomic assets. Um, so happy to go into it later uh during our Q&A, but um yeah, we definitely want to kill looping altogether for RWAs. don't think that that's the most uh UX friendly way of gaining leverage carry yields for investors.

Thank thank you so much. So the thing I love about this panel is that we basically have the full stack institutional tokenization and DeFi future represented on this stage starting with Will who's building the base layer and interoperability um infrastructure. Aby who's building full stack infrastructure for bringing tokenized products into the blockchain into blockchain based systems and Sonia who's building onchain institutional primitives like prime brokerage and leverage. Um so between the three of them you can kind of imagine what happens when you bring RWAs into blockchain based systems add instant and deep liquidity and then be able to bring leverage to build better strategies. Um, so we'll unpack each one of those things kind of individually and really get a glimpse into what this future looks like.

Um, so to kick it off, I think we would all probably agree, maybe obby not fully, that we've largely solved issuance. Um, so what's holding back the broader adoption of tokenized products? I think Will would probably say liquidity. It's okay. We could share.

We can share our mic too. Um, so I I was going to say we will kind of dive into each of those. Liquidity is one answer that Will would say, but I think access and compliance might be two others. Um, so let's start kind of with those topics. Um, so Will, I will pass it over to you and I would love to hear a little bit on why liquidity has been such a persistent barrier to adoption kind of why is it difficult to solve and what does it unlock?

Sure. So maybe immediately pointing to the the constraint when it comes to tokenized assets today, we all live in an onchain world or at least aspire to. Crypto assets are natively atomic 247 because they're onchain. If you issue a financial asset, a security as a token on on blockchain, you expect the same experience. But that's not the case because to initially invest in one of these products, what you have to do is maybe you take stable coins, maybe send them to an issuer.

The issuer in order to buy real world assets uh offramps that stable coin into fiat which takes time. They then purchase uh an off-chain asset. If it's a security then it settles based on traditional security settlement cycle. So maybe T+1 if it's a treasury at that point two days later they have the treasuries in in the reserves of the of the fund and they can they can issue the the token. So you've basically spent two days out of the market investing in this product.

Uh and then if you want to get your money back, you redeem back to the issuer and it's the same T plus2 process because you're basically unwinding the same uh flow from before. So in a given week to get in and out, you're basically out of the market for 4 days. Uh oh, those are business days by the way. Uh because none of this happens on weekends. So even if you have a whole week to invest say excess stable coin liquidity into a high quality yield source, you can't do it.

So then who so then who who are the buyers of these assets? Well, right now the buyers of these assets are effectively like kind of long only buy and hold. Maybe they're treasuries, maybe they're they are um I don't know protocol reserves who are purchasing high quality yield sources and basically holding them in in perpetuity. Uh so so that doesn't immediately translate into secondary markets into liquidity into buyers on one side sellers on the other which means that there there's effectively no way to quickly enter and exit a position in any of these uh these tokenized assets. So fundamentally that's where the quote unquote liquidity issue comes from and why there's no liquidity in these in these markets.

So how do you solve for that? It's a combination of two things I think. U the the the starting point is basically create the uh infrastructure the the connective tissue which allows for buyers and sellers to be able to seamlessly interact on secondary in these assets. And then secondly you need to plug into enough use cases where that instant settlement nature of the assets is an unlock. Uh so things like uh DeFi lending, things like um collateral management across multiple venues that can only happen in a blockchain context but that solve real world uh real world problems and and kind of as a byproduct create that demand for instance settlement secondary uh secondary venues for these types of assets.

But I appreciate it's a bit philosophical, but ultimately that's that's kind of the state of play when it comes to liquidity today. And I think that the the the final I guess the next stage of the market which we see developing and I think there Obby can can confirm if it's if it's what he's seeing as well but basically instead of taking the tokenized asset to market and looking to place it with a a buy and hold investor to take the tokenized asset plus the liquidity availability to market as as as a joint you know joint offering. So now the buyer is buying an asset with the ex with the expectation of liquidating it instantly because it's now it's a part of the use case or it's a part of the workflow that they're building. And we think that change that that that upgrade in terms of the go to market in a lot of these assets is ultimately what's going to start this liquidity flywheel which will generate demand for more liquidity which will generate more instant liquidity based use cases and and ultimately help re realize really the the the value proposition the whole point of of tokenizing assets and bringing them on chain.

Yeah. And I want to double click on this really quickly before we kind of move into other tokenized products that Obby and Sonia are building and kind of where we see this future going. But I think one thing that I've been wrapping my head around is that these institutional tokenized asset issuers, think Black Rockck, Fidelity, Franklin Templeton, Wellington, they all need KYC users on these products to drive liquidity. Um, so I think it's important to talk about permissionless versus permissioned DeFi when we talk about institutional DeFi. Um, so I'm curious, are we building kind of two separate systems here where all of this liquidity will need to be KYC to interact with these institutional products?

Or is there a way that we can be repackaging some of these institutional assets into more permissionless DeFi primitives? Well, I I look forward to Aby's answer on this because I think it's very squarely in his wheelhouse, but it's very obvious to me that we're building one system uh because these assets uh are now a available in self-custodial wallets, right? Like I I think at the highest level even taking a step back from there it's like traditionally we we live in in a world where an account is a effectively a balance that you uh that is maintained for you at an institution. An institution holds that account for you maintains it for you. I think that the future state is one where your wallet is your account and and you are the account owner and you take that account to multiple institutions and can interact with them in different ways.

Some of those institutions can be centralized institutions that we're used to today. some of those institutions can be D5 protocols can be new new form of uh of of financial uh financial actors and I think that that is kind of one answer to the question of what what's what's the interplay between the traditional financial system as we know it and the existing actors and DeFi and so I think we end up with a kind of blended end state and then when it comes to the assets themselves I think we will definitely end up in situations where certain venues certain assets certain use cases are fully permission fully KYC and other types of use cases. For instance, uh where you can separate the uh kind of economic value flow between um which which needs to sit between regulated um potentially regulated firms but certainly known entities. Separating the value flow from potentially the the the provision of some of the services around that value flow. And I think some of the services you can do on a permissionless basis even against a permissioned asset.

Yeah, that's great. And I'd love to hear Sonia and A's thoughts on this specifically kind of how we can take permissioned assets and products and reformat them via vaults and other mechanisms to adopt instit or more retail liquidity.

Yeah. So I guess um the way I kind of think about the market is there's definitely a market for regulated KYC uh only uh instruments and those are primarily uh compliance friendly right so I think the the real advantage from like okay KYC like uh single wallet holding like can't non-transferable it's primarily if if you're like managing a treasury or you're holding assets on chain because you have like somewhat of an onchain business but you're not really active in like the DeFi ecosystem you're not trying to maximize yield or like rotate capital quickly. Uh you're better off holding it in a KYC account because it's compliance friendly. It's easier to manage like the actual regulatory overhead especially with the compliance department. But I think that the primary growth that we're seeing in RWS is in the the nonkyced like RA like wrapperized or um pass through type uh tokenized uh products.

And the the strategic advantage there is you and when you think about the customer base in crypto that wants to invest in ROVs, it's primarily yielding uh u like opportunity maxing uh um entities. So it's like funds like large traders um yeah token holders. And what they're looking to do is like one they're looking to find the best rates, find the best products they want to hold and like rotate between them, but also leverage them using like vaults like lending protocols etc. And those lend themselves a lot better to non-Kyced um assets and tokens because if you want to liquidate, if you want to borrow money against assets, you need to be able to liquidate them instantly. You need to be able to exit them quickly to rotate to new products.

And so having liquidity and having the ability to transfer is is a is definitely a huge advantage. And it's a much wider market than just a KYC or or um yeah, like non-transferable assets that were the original RWS that came into the market.

Yeah. And Sonia, anything to add here? I'm not a lawyer. So from a legal perspective, I'm not really sure what's, you know, technically legal or illegal or just, you know, right now we don't really actually have a framework for what is legal or legal in many of the DeFi related activities because the regulatory regime hasn't caught up to yet what we're experimenting in DeFi. But one thing that I thought was very interesting that is happening you know at scale is the the model that Sky ecosystem has taken.

So um for those of you who are not familiar Sky is the largest decentralized um stable coin. They have USDS which one can stake to earn the yield of the um of the allocation system that the subdows um you know uh enable um and each of the subdows uh their remit is to generate yield on a or best yield on a riskadjusted basis. Um from what I can gather the um the way the the Sky ecosystem has navigated this um friction between permissionless DeFi and KYC uh you know needs of the institutional products that some of the subdows are investing in is that they make sure that there's a separation between the minting um function and the allocation function. So the minting function you know happens at the DeFi level. uh it's permissionless anybody can come and mint the USDS but at the allocation level and you know some of the subdows are investing into um these regulated KYC necessary uh products that um the subdows are the ones that are KYCing and are eventually getting the reserves from the um from the sky ecosystem you know USDS inventors but it is very necessary that there is a clear separation between the the minting function and the allocation function in order for this to be seen as um as I guess compliant legally compliant.

So I think there's interesting um structures and experiments going on to merge these two worlds which are inherently at odds with each other. But you know this this is kind of an experimental territory and I like that this is happening you know in real time at scale and we'll see how the regulators view if and when they catch up the sort of activity um and the marriage of the two different worlds.

Yeah, this is this is so fascinating to me. Um, we at Metlayer were investors in Athena and I think one of the reasons we were really excited about the protocol was the idea of a tokenized structured product represented as a synthetic dollar. I think we've seen the explosion of the basis trade, but that's kind of just scratching the surface for how we can package all sorts of novel yield into different instruments. I think Abby and Sonia are really on the forefront of kind of experimenting with what else we can do. Um, so I'm curious from Abby and Sonia's perspective kind of what is on the horizon in terms of some of these novel tokenized strategies represented as synthetic dollars.

Yeah. So I think that's a good point you brought up. Athena kind of um showcases like what the market is looking for which is primarily low duration mid to sing like yeah mid to sing uh mid to high single digit yields and like easy access to liquidity. So I mean technically Athena I guess is a synthetic dollar but really what it is is it's a it's a very liquid uh very low duration bond like or like yield like product money almost like a money market fund and that's what made it so popular. Uh and what customers are looking for now in the ecosystem is something similar that they can kind of enter with cash that maintains a dollar peg that they can exit quickly if they need to to access other opportunities that has deep liquidity on chain that can be leveraged and and looped if needed to to basically enhance yields.

And I think that looking on chain today, there isn't that many like cryptonative yield sources left that can enable that. And so I think a lot of what and I think that's healthy because um obviously crypton native yield is generated primarily from leverage trading and kind of unsustainable source. It's not productive capital at the end of the day. And so as that market scales up like functionally the yield has to drop. And we're seeing that now like cryptonative yields are like averaging 3 to 4% around the treasury yields uh or like yeah short duration treasuries or money market yields which is kind of where we expect them to be land since it's unproductive capital.

And so, you know, some of the things that we're looking at at Theo are finding ways to deploy capital and low duration uh strategies that generate mid to single high uh mid to high single digit yields. Uh currently we're focusing on products like gold and like borrowing uh lending gold and then hedging that look and we're move and looking at other commodities markets as well to target that you know high singledigit yield that's low duration that's liquid on chain that let's you know that functions somewhat like a money market with a little bit of an added risk but that gives that the customer the opportunity to generate that yield but also exit their position quickly if they need to. I think like that's that's kind of like what where I see the growth in RWS today, which is like sure there's a lot of these like um counterparties who want to hold and just they just buy and hold for a long period of time. Uh like like let's say like longer duration debt or or instruments like that that yield that are higher yielding, but they primarily don't they could just do that offchain too like the like funds are um yeah like c uh like yeah funds are institutions that want to buy debt. they can go access that through OTC desk or banking banks etc.

What's really more interesting I think for users on chain is like can we find high high yielding instruments that are actually low duration like that's actually so that they can kind of wait and see when there's opportunities in crypto to rotate out of those products and back into cryptonative yield sources.

Yeah. And Sonia, how does 3F think about this?

Yeah, I think um for us all the assets are going to be on the blockchain at some point, right? um all the assets that we hold right now offchain will come onchain and we've seen the market cap of RWA assets this year um go parabolic but what's interesting for us to think about is what can you do with these RWAs onchain that you can't do offchain such that it compels a user to buy that asset right we're talking about new forms of utility that are uniquely enabled by blockchain rails Um in that regard 3F is enabling uh leverage on RWAS. Um this is a form of leverage carry trade. So for instance if you buy a you know say Janice Henderson's AAAL which yields 7%. Um and then you can borrow against that on say Morpho or A um you know at a rate that's lower say 4%.

you have a 3% spread in between the asset you you own and the borrow rate against that asset onchain. And you can keep doing this, you know, loop it over and over again to pump up your real yield. Um, you can't do that offchain. You know, if you have a CLO fund by Janice Henderson, you go to your banker and say, "Hey, I want to use this as collateral and borrow money so I can buy more of this collateral." And then you pledge that collateral um to borrow more money to buy more of this asset.

No banker is going to give you this loan because um you know who knows what you will do with this loan, right? Um it's kind of like the 3AC situation all over again. If um you know the CFI lenders of 2021 when they lend three AC bunch of money and it was in their discretion to do whatever they needed to do. Um, so what's amazing about blockchain rails is that the money flow is completely visible and we have this unique opportunity to allow leverage carry trade on yielding assets all on chain. Um, as I mentioned briefly, looping however for non-atomic assets with delayed settlement is a total pain in the ass.

Um if you were to you know buy the asset, collateralize it on a lending protocol, borrow against it, then buy the asset again and loop it, each loop can, you know, take you the liquidity cadence of the underlying. And if your, you know, underlying is like T+ one even uh to do 30 loops would take you like 30 days to build up your your trade and then 30 days to unwind, which is poor UX. Um so our workaround is that fully onchain there'll be uh liquidity providers who bridge the gap. So uh if you wanted to 5x leverage the Janice Henderson CLLO fund through a 3F um there will be you know with 1 million capital there will be a prime broker who gives you an upfront loan of 4 million. So together the 5 million can be deposited into the tokenized fund.

The tokenized fund then gets collateralized on a lending protocol such as Morpho. You can draw a loan against that collateral to pay back the prime broker. And this is all, you know, going to be automated through the 3F protocol with one click. And this is a use case that's only enabled through blockchain rails um thanks to some of the earlier innovations of our friends at Morpho and you know um our friends at these like tokenization um agents. So, we're really excited about finally being able to compose all of the things that we've collectively developed as an industry to be able to uniquely enable a new source of yield like Obby said, um, that is not possible offchain.

Awesome. Well, we could really talk about this all day and it's incredible to see where the future of this market is going. Um, but I think we're at time here. So, can I get a huge round of applause for Avi, Will, and Sonia? Thank you for joining us.

Thank you for having us.