Understanding Backed Finance: A Guide for Beginners

Introduction

Cryptocurrencies have been sluggish throughout 2023, with market funds continuously draining in the context of rising interest rates and limited supply. Real World Assets (RWAs), valued at trillions, have caught the attention of many investors. Thus, numerous institutional investors hope to bring these assets onto the blockchain, sparking a new crypto hotspot. The RWA narrative has emerged under this backdrop, driven by both internal and external demand, providing a tool for retail and institutional investors to bridge assets on and off the blockchain. Leading DeFi protocols like MakerDAO have already introduced RWA-related businesses, and Compound’s founder has ventured into creating an RWA company. Due to these protocols’ existing user base and strong liquidity, they hold a significant first-mover advantage, intensifying competition in the RWA sector.

Backed Finance aims to offer users exposure to various RWAs. With established partners off-chain and a solid foundation in compliance and transparency, this article delves into the official tokenization products launched by Backed Finance, explains its business logic, and analyzes the current development of the project.

Overview of Backed Finance

Backed Finance is dedicated to the RWA (Real World Asset) Treasury bond market investment platform, offering risk exposure to real-world assets like U.S. Treasury bonds through tokenization for investors who meet KYC (Know Your Customer) requirements. The project was established in 2021, with team members hailing from Israel and Switzerland, though they have limited experience in the crypto industry. The protocol also carried out a seed funding round in May 2021, but the amount was not disclosed. Currently, the project has not issued a native governance token yet.

Product Series

Backed Finance officially launched four products: bIB01, bIBTA, bHIGH, and bCSPX, among which the core product is bIB01. These four products are anchored to the underlying assets of the iShares series of ETFs managed by BlackRock, charging users a 0.2% fee for minting and redemption. The team plans to launch more products anchored to other real-world assets in the future.

Source: https://backed.fi/

The bIB01 token is anchored to the iShares Treasury Bond 0-1yr UCITS ETF (IB01), focusing on the index of U.S. government bonds with a maturity of one year. This index was launched on February 20, 2019, with a fund size of $8.67 billion. Composed of 99.23% treasury bonds, its current closing price is $109.11.

Source: https://www.tradingview.com/symbols/LSE-IB01/

Purchasing bIB01 tokens grants investors exposure to the risk of one-year U.S. Treasury bonds, currently yielding 5.22%. As a risk-free investment, short-term U.S. Treasury bonds play a significant role in traditional finance. Backed Finance introduces the yields of U.S. Treasury bonds to the blockchain through tokenization, offering a favorable investment option for investors with low-risk appetite during the bear market phase of the cryptocurrency market.

Source: https://assets.backed.fi/products/bib01

The bIBTA token is anchored to the iShares Treasury Bond 1-3yr UCITS ETF, tracking the performance of the 1-3 year U.S. Treasury bond index. This index was launched in April 2017, with a current fund size of $4.35 billion. It is composed of 99.47% treasury bonds and 0.53% cash assets.

Source: https://www.tradingview.com/symbols/LSE-IBTA/

The bHIGH token is anchored to the iShares series High Yield Corp Bond UCITS ETF, providing blockchain investors with exposure to the risk of high-yield corporate bonds denominated in euros. This index was launched on September 21, 2017, with a current fund size of approximately €616 million.

Source: https://www.tradingview.com/symbols/LSE-HIGH/

The bCSPX token is anchored to the iShares Core S&P 500 UCITS USD ETF, allowing blockchain users to track the risk and return of the S&P 500 index. This ETF was launched in May 2010, with a current fund size of $76.56 billion. The S&P 500 index is considered by investors to be the best indicator of the performance of large-cap U.S. markets, comprising approximately 500 top-listed U.S. companies, accounting for about 80% of the U.S. market capitalization.

Source: https://www.tradingview.com/symbols/LSE-CSPX/

Business Logic

First, users need to pass the KYC certification by Backed Finance, which requires investors to be professional users or qualified investors in compliance with the Swiss Financial Services Act and the regulations of the European Parliament and Council Directive. After passing the KYC certification, users transfer USDC to the designated wallet for Backed’s specific products, and Backed, as the issuer, purchases assets through product brokers and entrusts them to an off-chain custodian. At the same time, the RWA tokens minted by Backed are also sent to the whitelist wallet registered by the investors, completing the purchase process.

If users want to redeem USDC, the process is reversed. Investors submit a redemption request to Backed, who then sells the corresponding position to Licensed Resellers and returns the USDC to the investors’ wallet, completing the redemption operation. The protocol architecture diagram shows that it is allowed to sell RWA tokens to retail clients or circulate them in the secondary market.

Source: https://assets.backed.fi/structure

Due to legal reasons, Backed Finance prohibits access from Iran, North Korea, Syria, and the United States of America, and does not provide services to countries like Afghanistan, Belarus, Myanmar, and Zimbabwe.

Compliance and Transparency

Compliance is one of the key issues for the RWA bond protocol, where having formal institutional regulation can ensure the compliance of the protocol’s own business and also reduce the legal and regulatory risks for investors. Backed Finance obtained approval from the Financial Market Supervisory Authority (FMA) in May 2023, in compliance with Swiss law.

By establishing subsidiaries, Backed Finance acts as the issuer for risk isolation and collaborates deeply off-chain with two Swiss B2B banks for everything from purchasing government bond ETFs to custody, with professional asset security agencies ensuring the safety of its off-chain assets.

To ensure that every USDC can buy corresponding assets off-chain, Backed has established a Proof of Reserve system, where off-chain assets are audited by the professional auditing firm The Network Firm and supported by data on-chain through Chainlink. The official announcement of the Proof of Reserve system has revealed information about the current circulation of RWA tokens.

Source: https://por.backed.fi/

Development Status

Since the narrative of Real World Assets (RWA) began, the total value locked (TVL) in Backed Finance has been relatively stable, currently around $45 million. The team is also continuously launching products that are pegged to more asset targets. Among the currently launched products, bIB01 has the highest TVL ratio, with a total value locked of nearly $35 million, accounting for 77.78%.

Source: https://defillama.com/protocol/backedfi

Regarding the annualized yield of major products, the highest yield product is bHIGH, with an annualized yield of 6.48%, followed by bIB01, with a yield of 5.22%.

Conclusion

Backed Finance offers investors who meet KYC requirements exposure to U.S. short-term treasury bonds and other assets through tokenization, with the backing of professional auditing institutions further enhancing the authenticity of its off-chain assets and investor trust. The team aims to increase a variety of off-chain assets, but the RWA track is still in its early stages of development, and the problem of information asymmetry between on-chain and off-chain is inevitable. Investors should still be cautious of the related risks.