TZ-bills — from the USD Tez Reserve

Introducing TZ-bills, a Tezos smart-contract alternative to T-bills

Published in

USD Tez (USDtz)

5 min readOct 30, 2019

A TZ-bill is a bond token; a digital asset issued through a Tezos smart-contract through a Tezos security token standard, returning an appreciated investment as a lump-sum payment to the purchaser upon the designated day and time defining ‘maturity’.

Of course, the concept is derived from Treasury Bills (more commonly referred to as T-bills). T-bills are a debt instrument issued by the United States Treasury—and for a similar purpose as TZ-bills. The USD Tez Reserve will sell TZ-bills through Tezos.bond to help fill its 4:1 over-collateralization target for its reserve silos — or more specifically, to assist the activities which will fill the silos. TZ-bills (as a smart-contract) will reward its purchasers for their astute foresight in the opportunity.

Here’s a bit more context to show how TZ-bills will help USD Tez fill the reserve to capacity—and to grow from 1:1 collateralization up to 4:1 collateralization—very quickly.

Securities Categories:

Equity Securities (e.g. Stocks — preferred and common)
Debt Securities (e.g Bonds, Debentures, Term-Loans)
Derivative Securities (e.g. Futures, Options, Swaps)

Bonds a major vehicle of the “Debt Security” family. T-Bills are a type of Bond. There are several types of bonds, though it should be noted in Tezos staking, baking bond deposits have a very specific association (nonetheless rooted in the general concept of a bond).

Types of Bonds:

Treasury Bonds « — (just focus on this one for now)
Municipal Bonds
Corporate Bonds
Convertible Notes

Treasury Bonds are issued by governments, whenever they need to generate more funding. Money raised from Treasury Bonds serves to collateralize the FIAT money that governments print, by giving them a lendable reserve that can generate interest. That interest enables these respective treasuries to pay back their bond purchasers upon the date of maturity and profiting to expand their own activities in the future, ideally less dependent on bonds. Effectively, they are borrowing money from the citizen purchaser of the bond and paying that citizen back with interest over time.

The U.S. Treasury issues T-bills (the most common and well-known type of Treasury Bond in the world) as well as other debt instruments, including:

Treasury Bond Types

Treasury bills « — (just focus on this one for now)
Treasury notes
Treasury bonds
Treasury Inflation-Protected Securities (TIPS)
Floating Rate Notes (FRNs)

Facsimile example of a T-bill sold by the US Treasury

TZ-bills, purchasable with USD Tez (USDtz), will pay return rates that will likely end up far better than the return rates of T-bills, making it a more attractive investment opportunity without the significant downside of risk. TZ-bills are not just simply offered with the “full faith and credit of USD Tez Foundation” (as T-bills are offered with the “full faith and credit of the United States government”), but with something much stronger — a smart-contract executed through the Tezos blockchain.

To see the current return rates of newly issued and historically issued T-bills, visit this link from the United States Treasury auction.

TZ-Bill Auctions

Likewise, TZ-bills will be issued through an auction format—more specifically, a descending auction format (specific choice of ‘descending auction’ format was inspired by Arthur Breitman’s NYC talk on Checkers).

The bond’s price is measured in its discount from $1.00 so expressively a descending auction would be the most appropriate alternative to the U.S. Treasury’s auction structure of T-bill auctions.

That is, the auction of a TZ-bill will start with a minimal amount of return by the date of the TZ-bill’s maturity. For example, the auction will begin at offering a sale price of $0.99 for each dollar that will ultimately be returned to the purchaser by maturity date. If there are no takers, then the price would lower to $0.98 cents, and if there are no takers still, then the price would lower to $.97, so on and so forth.

Eventually, an individual participant will stop ‘holding out’ and make the purchase since FOMO will kick-in, as the auction’s competition-factor increases in an inverse relationship to the TZ-bill’s offer price, and each participant knows this.

Risk Premium

When you buy a TZ-bill, it’s because you believe you will get the value promised of you by the underlying token—USD Tez—which has its own sources of underlying value and an engine for growth.

People’s confidence in a digital asset will vary. The way this plays out in the market for TZ-bill auctions is, first, there is an added risk premium to TZ-bills relative to T-bills. Therefore, we can foresee the descending auction being less competitive, and therefore landing on a better price for discount and yield.

For example, a 6-month T-bill for $100 dollars at maturity was recently auctioned for $99.18. For most people, that sounds like its not worth it, but if ‘safe’ is what you’re looking for, a T-bill is a solid investment. After all, it’s backed by the U.S. Treasury.

Naturally, a 6-month TZ-bill would inspire less confidence (at first) because USD Tez Reserve is very much not the United States Treasury. Although this should not be a shock to the reader, and while this may sound self-deprecating, I bring it up because (as the keen observer may have already realized), it’s actually an advantage to the purchaser.

How to make money from TZ-bills

The first TZ-bill auctions will be so non-competitive relative to T-bill auctions that the buyers will lock-in great deals. Once TZ-bills start producing fantastic returns for their purchasers (as will be evidenced through the blockchain record, and formally verifiable for soundness), it will only a matter of time before the rest of the market catches on, leading to more competitive TZ-bills auctions, resulting in more competitive outcomes. This increase in competition will perpetuate forward-confidence in the USD Tez Reserve, enabling more “treasury bond” inspired offerings to be proliferated.

Therefore, the people who have the most to gain will be the earliest adopters — that is, the earliest participants in TZ-bill auctions, because the TZ-bills they end up purchasing will be the TZ-bills that have the highest returns maturing in the shortest amount of time.

If you haven’t already, be sure to check out the preceding article:

USD Tez — Collateral² (squared) Model