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How quickly will tokenized TBills eat into tokenized cash market? Pt.2

Since I published last week’s post on “synthetic dollar” with 15% yield gaining traction faster than BlackRock’s tokenized money market fund, the Big Three of tokenized TBills market had seen a new No.1 - Ondo Finance.

A reader also aptly pointed out that the term “synthetic dollar” was not the best characterization. Tokenized hedge fund strategy fits the product description much better. As such, I will be borrowing this term for this second part of the series.

In the last past, we delved into product mechanisms, negative funding risk and smart contract risk. For this second part of the series, we will focus on 

  • Liquidity risk 

  • Counterparty risk 

  • Growth drivers

Let’s dive right in.

Liquidity risk

Whenever there is a banking crisis, e.g. Bear Stearn in 2007 or Sillicon Valley Bank in 2023, people like to say it is a liquidity issue (market distress) as opposed to a solvency issue (can’t get paid back). Well the problem is that liquidity issues often lead to solvency ones.

Below is the list of the top liquidity venues for USDe according to Coingecko.

Notice there are essentially only 4 pairs with over $1 million trading volume in the last 24hrs? Notice also that of these 4 pairs, the +/- 2% liquidity depth is at most around $450k on Curve between USDC and USDe?

Now imagine you are holding 4.5million USDe, which theoretically should be worth $4.5million USDC, and you would like to exchange this amount into USDC to exit your USDe exposure. The problem you will be facing is that a) you will have to accept that your 1 USDe is worth less than $1 USD and b) there is simply not enough liquidity in USDC on the market to exchange your USDe into.

Sure theoretically one can take 1 USDe back to Ethena and submit it for redemption back into one of the collateral assets, but please-line-up-nicely-and-wait-for-your-turn approach rarely works in stressed market periods.

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