Could infrastructure finance help bring stability to stablecoin treasuries?
With many stablecoin projects de-pegging and sending shudders through the web3 ecosystem in recent months, there is a need for more robust solutions to prop up the treasuries of stablecoin projects.
A couple of weeks ago, one of our VCs, Jahed Momand from Cerulean Ventures, met me for lunch here in Barcelona. As well as showing me the best place to order a paella, he also dropped a fantastic idea on my plate.
In recent months, there have been multiple stablecoin projects doing the unthinkable and de-pegging from their so-called “stable” value. It predominantly occurred with the algorithmic stablecoins, many of which didn’t recover — UST, Luna’s sister token being one of them. A few stablecoins with fiat in the treasury also had brief de-pegging issues. While this has sent a shudder across the web3 space, as always, being the resilient bunch we are, I believe it will bring the next wave of innovation with better and more resilient solutions.
Jahed raised one such innovative idea: the use of security tokens from infrastructure investments could help prop up the treasuries of the stablecoin projects.
It’s a compelling idea. To elaborate, let’s look at the types of infrastructure investments that Silta Finance deals with, such as solar, wind farms, and other types of sustainable infrastructure. Many of these borrowers desire medium to long-term loans of up to 10 years. The interest rates are generally fixed, repayments are regular, and default rates in infrastructure finance are seen as one of the safest investments globally — the reason why pension funds tend to invest in such projects. Moody’s observed a 10-year cumulative default rate (CDR) of 5.5% (Basel definition of default) for project finance bank loans between 1983 and 2018.
Moody’s also observed that sustainable project finance bank loans demonstrate lower default risk, with green projects exhibiting a 10-year CDR of 4.9% (Basel) and 2.9% (Moody’s), below those of non-green projects. Social projects were at an even lower risk spectrum with a 10-year CDR of 1.1% (Basel) and 0.4% (Moody’s), the high prevalence of availability-based payment structures with governmental off-takers benefitting these types of projects.
“Infrastructure wins against the hardest of times.”
Holding real-world asset pegged stablecoins could generate yields that have low correlation with crypto, stock, and other asset market fluctuations. Infrastructure is a basic necessity — people pay their electricity and water bills even in a downturn or crypto winter. It is known that project finance and real-world assets (RWA) are cash-flow generating assets which are less correlated with the global financial markets than other types of asset classes. Infrastructure wins against the hardest of times.
Silta itself doesn’t directly offer loan pools or security tokens. Silta’s value-add is to bring a pipeline of infrastructure projects that undergo a rigorous due diligence process and financing marketplace where borrowers and financiers can broker deals. That said, the financing partners that we are aiming to finance deals through, such as Centrifuge, Goldfinch, and TrueFi, all provide security tokens when lenders invest in their loan pools. These security tokens could be the golden ticket which brings more robustness to stablecoin treasuries.
I’m excited to see the future for stablecoins, as there is so much design space. I’m also excited to see where Jahed takes me for lunch next!
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