How Tokenized Treasury Bills Work On-Chain

A tokenized T-Bill is a digital asset representing a claim on an underlying U.S. Treasury security held by a custodian. Each token is a standardized ERC-20 or similar fungible token, enabling fractional ownership and programmability.

• Fractionalization allows investment with small capital.
• Programmability enables integration with DeFi protocols like lending markets.
• This matters as it bridges traditional finance liquidity to blockchain ecosystems.

The legal and custody framework is critical. Assets are held by a regulated Special Purpose Vehicle (SPV) or trust, with tokens issued as debt obligations or beneficial interest certificates.

• Bankruptcy remoteness protects token holders from issuer insolvency.
• Regulatory compliance (e.g., SEC exemptions) dictates investor eligibility.
• This structure provides the legal backbone ensuring the token's claim is enforceable.

Tokenized T-Bills generate yield primarily through discount-to-par value. Investors buy tokens at a discount to face value (e.g., $990 for a $1000 T-Bill) and redeem at maturity for the full amount.

• Accrued interest is often represented by an increasing redemption value.
• Automated settlements on-chain handle maturity payouts.
• This transparent mechanism provides a predictable, low-risk return stream.

Tokens are created via primary issuance directly from the sponsor after fund subscription. They then trade on secondary markets, including both centralized exchanges (CEXs) and decentralized exchanges (DEXs).

• Primary mint requires KYC/AML and often a minimum investment.
• Secondary liquidity allows exit before maturity without redeeming the underlying.
• This dual-market structure balances access with liquidity for holders.

The redemption process involves burning tokens to receive the pro-rata share of the matured underlying T-Bill proceeds. This is typically managed by the issuer or a designated agent.

• On-chain burn triggers an off-chain settlement instruction to the custodian.
• Stablecoin or fiat payout is sent to the holder's wallet.
• This ensures the token's value is ultimately backed by the real-world asset settlement.

Composability refers to using tokenized T-Bills as collateral or yield-bearing assets within decentralized finance. They can be locked in lending protocols, liquidity pools, or used as stable asset reserves.

• Collateralization in protocols like Aave or Compound provides borrowing power.
• Yield aggregation strategies automatically reinvest proceeds.
• This unlocks novel financial products combining TradFi safety with DeFi innovation.

Accrual accounting tracks interest earned daily, even before payment. The token's underlying value increases proportionally to the T-bill's yield, which is reflected in its redeemable amount or a separate rebasing mechanism.

• Interest accrues continuously based on the T-bill's published rate.
• The accrued value is programmatically added to the token's internal accounting.
• This provides real-time transparency into earned yield, unlike traditional quarterly distributions.

Rebasing tokens automatically adjust the holder's token balance to reflect accrued interest, keeping the token price stable relative to the underlying asset. Non-rebasing tokens maintain a constant balance, with the accrued value increasing the token's redemption price.

• Rebasing simplifies UX by showing yield as more tokens.
• Non-rebasing is preferred for DeFi composability as balances are static.
• The choice impacts integration with lending protocols and DEX pools.

Yield is distributed via smart contracts that manage the cash flows from matured T-bills or coupon payments. This can be a claimable reward pool, direct airdrop to wallets, or an automatic reinvestment function.

• Funds are held in a secure, audited treasury contract.
• Users may need to claim rewards, incurring gas fees.
• Some protocols auto-compound by purchasing more T-bill tokens.
• This eliminates intermediary banks and manual processing delays.

Proof of reserves is critical for verifying that the promised yield is fully backed by real-world assets. On-chain attestations or zero-knowledge proofs validate that treasury holdings match the token supply and accrued liabilities.

• Regular, verifiable audits of the custodied T-bills are published.
• Users can independently verify backing via on-chain data oracles.
• This transparency mitigates counterparty risk and builds trust in the yield source.

On-chain yield events create transparent records for tax purposes. Each accrual or distribution transaction is recorded on the blockchain, providing an immutable ledger of income.

• Accrued interest may be considered taxable income as it is earned.
• The immutable ledger simplifies annual reporting and compliance.
• Protocols may provide tools or data exports to calculate tax liability.
• This contrasts with opaque reporting from traditional brokerage accounts.

Tokenized T-bill yield can be layered with native DeFi yields. Holders can use these tokens as collateral to borrow stablecoins or provide liquidity in pools, creating a risk-adjusted yield stack.

• Use as low-volatility collateral in lending protocols like Aave.
• Provide liquidity in stablecoin pairs on DEXs for additional LP fees.
• This composability allows users to earn both real-world and crypto-native yields simultaneously.