Flux Finance Enables Borrowing Against Tokenized Treasury Bonds

DeFi Lending Protocol Attracts Over $10M In Stablecoins In Five Days Since Launch

By: Owen Fernau Loading...

Flux Finance Enables Borrowing Against Tokenized Treasury Bonds

Tokenized U.S. Treasury bonds may soon see increased DeFi utility after being listed as a collateral asset on a new lending protocol.

Flux Finance, a lending protocol that went live on Feb. 8, has attracted nearly $11M worth of U.S. dollar-pegged DAI and USDC stablecoins in the five days since.

The protocol has likely managed to pull in a significant amount of capital because it allows Ethereum DeFi users to permissionlessly lend their stablecoins to borrowers using tokenized ETFs representing U.S. treasuries as collateral.

The OUSG tokenized ETF was launched last month by Ondo Finance and is only accessible to qualified purchasers who have gone through know-your-customer (KYC) and anti-money laundering (AML) procedures.

Ondo also developed Flux, though the lending protocol is technically decentralized and governed by holders of ONDO tokens.

Leveraged Treasury Trade

Flux’s launch opens up a major trading opportunity.

OUSG holders can leverage their positions in US Treasuries by borrowing and then selling their DAI or USDC for more OUSG, which can then be deposited again in Flux. The process can be further repeated to build a highly leveraged position and maximize users’ yields.

This leveraged trade should carry relatively low risk given that US Treasuries are not nearly as volatile as cryptocurrencies like Bitcoin or Ether — Borrowers get liquidated if their loans surpass 92% of the value of their OUSG. Only KYCed entities which are eligible to hold OUSG can liquidate positions by buying the tokenized ETF at a discount.

For holders of DAI and USDC, Flux opens up a new lending opportunity which is tied to the demand for OUSG leverage.

It’s too early to predict the levels at which yields on USDC and DAI will stabilize. So far, DAI has attracted higher demand on Flux and is offering a nearly 5% yield to lenders as of Feb. 13. That’s almost 300 basis points above the yields offered on Aave and Compound, DeFi’s biggest lenders on Ethereum.

On Flux, the USDC yield of 2.77% is trailing that of DAI, but it’s still roughly 40 basis points above what Compound and Aave offer on the stablecoin.

T-Bill Yields

Seraphim Czecker, head of risk at Euler, another major lending protocol with $267M in value deposited according to DeFi Llama, told The Defiant that he expects the lending rates on DAI and USDC on Flux to “semi-converge” with Treasury bill yields.

If Flux manages to establish a new base rate for some of crypto’s largest stablecoins, other lending protocols may be forced to adapt to continue to attract deposits.

Jai Bhavnani, formerly of Rari Capital and currently CEO of Waymont, a company which aims to offer what it bills as a “crypto-native wealth experience for high net worth individuals,” according to its Twitter profile, is thinking along these lines.

“Tokenized t-bills will change the lending markets,” he tweeted on Feb. 8. “While the risk is higher in Flux (newer protocol), the higher rates likely reflect leverage on OUSG. Lending protocols must adapt or die.”

Liquid Tokens

Interestingly, DAI and USDC supplied on Flux are represented by liquid tokens called fDAI and fUSDC. If lending on Flux takes off, fDAI and fUSDC could start to proliferate throughout the DeFi ecosystem, similar to how liquid staking derivatives like stETH, rETH, and the recently launched dsETH hope to do so.

Flux is optimistic about its fTokens’ potential. “As tokenized loans against US Treasuries, fUSDC and fDAI will serve as building blocks for other protocols,” the project tweeted on Feb. 8. “They will be used as collateral at lending and derivatives protocols and in AMMs.”

There’s also the potential for OUSG and Ondo’s other tokenized ETFs to gain wider DeFi adoption. Ondo’s other two offerings are OSTB, which represents the short-term corporate bond ETF, MINT, and OHYG, which represents the high-yield corporate bond ETF, HYG. However, integrating those products is more complicated given that they are permissioned assets.

In an ironic twist, given the competitive pressure the protocol may put on its fellow lending platforms — Flux is a fork of Compound V2.