Bringing stablebonds to DeFi: why we invested in etherfuse

By Sep Alavi, General Partner, and Marthe Naudts, Venture Scout

Bonds are the basis for all financial products of the modern world.

Apart from blockchain-based products, which often do not correlate with real-world value production and usually offer yields derived from either a native inflationary supply issuance or from trading/investing in other on-chain assets.

Unfortunately, this means that, despite abundant innovation in how users can use, trade, stake, lend, and borrow crypto assets, the assets themselves ultimately resemble a recursive function with no base source of real-world value.

Any business aiming to either:

a) generate real yield on their treasuries, or

b) pass on real yield to customers, could off-ramp its balance sheet into fiat currency, purchase real-world assets, earn yield, and then convert back into crypto assets.

This assumes not only currency and banking risk, but also cost and time inefficiency. Most, therefore, prefer to allocate to the following real-world assets available on-chain:

1. Tokenised private credit: providers such as Maple, Goldfinch, and Credix, are offering tokenised credit to businesses in emerging markets where access to credit is limited and/or expensive, and where the creditworthiness is harder to assess. This makes this asset class high yield, but high risk.
2. Tokenised physical assets: a wide range of physical assets from gold, to real estate, to crypto miners themselves are being fractionalised and represented as tokens on-chain. Despite several well-funded attempts, no successful players have won out in the tokenised physical assets space, because the ostensible benefits of being on-chain (increased liquidity and price transparency) have yet to materialise.
3. Tokenised government bonds: by far the most reliable and liquid source of yield on-chain is therefore US treasury bills, in which providers such as Ondo, Backed, and PV01 purchase US treasuries on behalf of users, and provide them with a tokenised version which is then freely tradeable and exchangeable for the principal and the yield upon KYC. These are intended as a more efficient way to issue and settle bonds, by removing intermediaries involved in settlement and thereby improving secondary liquidity. This is therefore a very safe and liquid form of yield.

Given the need for real-world value upon which to offer other sources of yield, the market for T-bills has indeed exploded. Data tracked by 21.co shows that over $1.1bn in Treasury notes have been tokenised on public blockchains.

This near 10x increase since January 2023 is partly driven by macroeconomics and geopolitics, notably the increase in average interest rates globally over the past year, with the 10-year T-bill rate up from 1.69% in March 2022 to 4.58% as of May 2024. There were also blockchain-ecosystem tailwinds contributing to the additional 18% bond deposit growth since traditional finance giant BlackRock announced the Ethereum-based tokenised fund BUIDL in March.

At the time of writing, BlackRock’s BUIDL has gathered over $245m in deposits, marking it second to Franklin Templeton’s Franklin Onchain U.S. Government Money Fund (FOBXX) — one share of which is represented by the BENJI token- which has by now garnered over $360m in deposits.

Source: Dune Analytics Dashboard

Now, Investment 101 advises to allocate to assets with real yield and with different risk/reward profiles. Naturally, one might expect the demand for US T-bills to extrapolate into tokenised emerging market (EM) bonds, given the similar risk profile (most government defaults chanced at close to 0; or at least closer to 0 than equities and crypto assets), higher reward too, and low correlation with other traditional asset classes.

Source: Bloomberg chart demonstrating EM local currency index yields vs global aggregate.

Indeed, Vanguard recently reported that emerging market (EM) bonds could outperform much of the rest of the fixed-income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over US investment-grade bonds, and a longer duration profile than US high yield. Charles Schwab, meanwhile, considers the current rally in EM bonds to be likely to continue as developed economies see lowering inflation and central banks cutting interest rates relative to EM rates. However, there are two limiting factors for widespread EM demand: regulatory red tape, and ineffective distribution mechanisms.

Take Mexico, for example, which is the second largest bond market in Latam, after Brazil. Mexican bonds are termed CETES. These are:

• Low risk: The Mexican bond market is highly liquid with $623bn in outstanding debt and an average daily trading volume of $5–7bn. CETES are backed by the Mexican government, which is considered a highly reliable borrower by international rating agencies including Fitch Ratings which consistently rates them BBB.
• Short-term options: Mexican bonds have maturities ranging from as low as 1 week to one year, making them less sensitive to interest rate risk.
• Sources of high yields: recently averaging at over 11%. With macroeconomic shifts increasing US producers nearshoring to Mexico, investors may want exposure to the benefits the Mexican economy and currency will receive.

However, it is very difficult for a retail or enterprise investor to set up a brokerage account or bank account and provide details to qualify as a qualified investor in Mexico to buy Cetes. Likewise, for most individuals, accessing emerging market bonds is difficult, and at best requires going through a mutual fund or ETF or having the sophistication to set up a KYCd domestic account. Because of this, there are multiple large sources of unmet demand for Cetes and other tokenized emerging market bonds, which no competitor is offering comparable 1:1 pegged access.

Enter, etherfuse

Etherfuse is a protocol that tokenises real-world emerging market bonds, which are pegged 1:1 with the underlying asset (contrary to stablecoins issued by Circle and Tether), self-custodied (contrary to bonds issued by Franklin Templeton/ Blackrock) and freely tradeable (contrary to bonds issued by Ondo/Backed which are only accessible to qualified investors).

With etherfuse, a user only needs a mobile device and a simple crypto wallet to access Mexican bonds and other tokenised EM assets.

In doing so, etherfuse brings a safe, stable, and interest-bearing store of value to DeFi, which can be used to trade or collateralise other trades. Beyond DeFi, by becoming the regulated entity to purchase the asset from, and enabling KYC at the point of yield redemption alone, etherfuse lowers the barriers to owning and trading emerging market bonds.

Etherfuse’s vision is to capture and expand the EM bond market by removing the manifold barriers that currently prevent people and businesses from accessing the high, real, and safe yields these assets provide.

The potential market for these ‘stablebonds’ is vast, encompassing the global bond market of $135tn.

Etherfuse plans to tokenize other real-world assets too — in fact, they aim to have over 3,500 RWAs, including most governments’ short-term debt and anything available on the Mexican stock exchange within the next 18 months. Providing an API to the blockchain world that connects to some of the safest investment assets enables app developers to build much safer, higher-yield, and more stable products like savings accounts, IRAs, and stablecoins.

We are proud to have co-led etherfuse’s $3m seed round with North Island Ventures, with participation from the Department of XYZ, and other stellar angel investors. We spent significant time with the team, and have been consistently impressed with their tenacity, dedication and patience, particularly in the complex and arduous regulatory landscape that they are building a moat by navigating.

After graduating from MIT, David Taylor (etherfuse’s CEO) spent nearly a decade in software engineering at enterprises including Boeing and Apple. AJ Taylor, David’s brother and CTO, also has a background in software engineering, before founding his own payments infrastructure start-up, Neural Payments, giving him the fintech and payments expertise needed to navigate the backend design and APIs powering etherfuse.

If you’re interested in diversifying your treasury investments or finding out more, please reach out to us, or the team directly at dave@etherfuse.com.