What is BUIDL? Analyzing the Decentralization finance in which BlackRock participates

Author: Luke, Mars Finance

If you ask what the next most promising “gold mine” in the encryption industry is, the answer may be in the Belad tokenization currency market fund (BUIDL). Recently, Curve and Elixir have teamed up to break the norm and plan to closely link TradFi and Decentralized Finance through BUIDL. This is not just a simple cooperation, but a new revolution of value investment - a brand-new financial tool that combines stablecoins, US Treasury bonds and stETH, ready to redefine the future of Decentralized Finance.

This article will delve into BUIDL, a seemingly calm but infinitely potential project, how it subverts our understanding of Decentralization finance, and allows TradFi bigwigs to embrace a new future.

BUIDL: Innovative digital asset investment platform

BUIDL is an innovative investment fund launched by BlackRock, a leading global asset management company. Unlike ordinary funds, BUIDL is a tokenization fund that focuses on combining TradFi assets with Blockchain technology to provide investors with a new ‘compliant’ investment approach. This fund not only uses Blockchain as investment vehicles but also breaks the traditional impression of ‘high risk’ and ‘low stability’ in the encryption market by innovatively combining stability and compliance, greatly enhancing the confidence of institutional investors. It is an exploration by traditional Wall Street giants to optimize asset management, liquidity, and security using Blockchain technology.

Basic Structure and Legal Framework

The BUIDL Fund was established by BlackRock USD Institutional Digital Liquidity Fund Ltd. in the British Virgin Islands (BVI) in 2023, initiated by BlackRock, and obtained Compliance qualification through a specially established regulatory framework. The fund, based on exemptions approved by the U.S. Securities and Exchange Commission (SEC) under Reg D Rule 506© and Section 3©(7), is only open to accredited investors and is not subject to traditional securities laws restrictions on the number of investors and fundraising size. This legal framework provides flexible fundraising conditions for the BUIDL Fund while ensuring Compliance and Risk Management.

The issuance of the BUIDL fund has no upper limit and aims to attract capital globally. According to SEC registration documents, the fund’s sole distribution channel is Securitize Markets, LLC, an SEC-registered securities broker. In addition, Securitize-related entity Securitize, LLC acts as an SEC-registered transfer agent, responsible for registering and recording ownership of securities on the on-chain Block. This design greatly enhances the transparency and security of fund flows.

Securitize was co-founded by Carlos Domingo and Jamie Finn in 2017. It is the world’s first fully digital security issuance platform that pioneers in using blockchain technology to transform alternative asset opportunities. In 2019, Securitize became the first transfer agent registered with the SEC and operating on-chain on the blockchain. The following year, it further expanded its business scope to include broker-dealers and alternative trading systems. In short, Securitize can be considered the most comprehensive and regulated real-world asset infrastructure in the blockchain space. In previous news, BlackRock led a strategic financing round of $47 million for Securitize.

The minimum investment amount for the BUIDL Fund is $5 million (individual investors) and $25 million (institutional investors), which provides a clear market target for high-net-worth individuals and institutional investors.

Investment strategy and product design

BUIDL’s investment strategy primarily focuses on low-risk, short-term Liquidity assets, especially U.S. Treasury bonds and repurchase protocol. The annual yield of these assets usually ranges between 2% and 4%, ensuring stable capital appreciation of the fund and providing investors with steady returns. The value of each BUIDL token is pegged to 1 USD, ensuring that investors’ assets are not affected by market fluctuations and providing stable income similar to cash assets.

Currently, the BUIDL APY is 4.50%, with a management fee of 0.20-0.50%, depending on the on-chain issuance of the assets on different chains. Currently, BUIDL is issued on Ethereum, Arbitrum, Optimism, Avalanche, Polygon, and Aptos, a total of 6 on-chain issuances.

Based on the chain of issuance, it is not difficult to see that BUIDL adopts the ERC20 Token standard and designs the Allowlist mechanism. The transaction of Token is limited to the Address within the Allowlist, and the transfer between non-Allowlist Addresses will fail. This measure effectively ensures the security and compliance of the fund and prevents illegal transactions from occurring.

Regarding the redemption rules, the BUIDL Fund provides daily redemptions and conducts redemption operations through Securitize. Investors can redeem based on their Token holdings, at an Exchange Rate of 1 BUIDL = 1 USD. All redemption operations will be completed at 3:00 pm off-chain USD Settlement operation on each business day, usually T+0. The calculation and distribution of profits also have clear rules: at 3:00 pm Eastern Time on each business day, the foundation will calculate profits based on investors’ holdings and distribute them by issuing BUIDL Tokens on the first business day of each month.

Wall Street giants officially enter Decentralized Finance

In 2023, as the encryption industry rapidly develops, TradFi giant BlackRock gradually increases its follow-up on blockchain and Digital Money. As one of the world’s largest asset management companies, BlackRock has over $100 trillion in Assets Under Management, and its entry into the encryption market is undoubtedly a major industry news. Every move by BlackRock is seen as a sign of TradFi’s gradual acceptance of the encryption industry. The launch of BUIDL Fund marks the formal intervention of TradFi in the ecosystem of Decentralized Finance (DeFi).

Why did BlackRock launch BUIDL? To understand this, we need to start with BlackRock’s investment philosophy. As one of the world’s largest asset management companies, BlackRock has always been committed to providing investors with risk-controlled investment products. However, the high fluctuation of the cryptocurrency market, especially when there is a huge fluctuation in the market, often makes traditional financial institutions hesitant. In the past, institutional investors were worried about entering the decentralized finance market: factors such as high fluctuation, lack of compliance, liquidity risks, etc. all greatly reduced the acceptance of encryption assets in the TradFi field. The emergence of BUIDL is precisely the innovative product launched by BlackRock to solve these pain points.

The advantages of tokenization funds

In comparison to TradFi products, the BUIDL Fund demonstrates incomparable advantages in multiple aspects.

Efficient fund management with low time costs

When managing funds in traditional Financial Institutions, it often involves multiple intermediaries and complex processes, such as third-party custody, clearing, reconciliation, etc. These have led to high management costs and time latency. However, BUIDL funds use blockchain technology to directly record all transactions and asset management on-chain, reducing the intermediary links. This simplified process not only improves efficiency but also significantly reduces management costs, allowing investors to obtain higher returns.

The real-time Settlement and transparent transaction records provided by blockchain make the management of BUIDL Fund more efficient. Investors can check the account status and trading history in real time to ensure the security and Liquidity of funds. TradFi products often take several days or even weeks to complete subscriptions and redemptions, while the 24/7 uninterrupted real-time trading and redemption mechanism of BUIDL Fund address this pain point.

Stable returns and low-risk characteristics

The asset allocation strategy of BUIDL Fund gives it a unique low-risk characteristic. 100% of the fund’s assets are invested in ‘cash-like’ assets such as short-term government bonds, repurchase protocols, etc., ensuring a stable source of income. This configuration not only maintains the value of each Token at $1, but also protects investors from market fluctuations.

The introduction of the Rebase mechanism allows investors to receive tokenization Interest income on a monthly basis. This transparent and automated allocation method is more efficient and intuitive than the traditional cash payment method of funds. In addition, since the fund’s assets are almost entirely composed of highly liquid assets, investors can not only obtain stable returns, but also adjust their funds at any time, ensuring the flexibility and operability of the funds.

Innovative tokenization model and regulatory Compliance

The BUIDL fund has also ensured full compliance. By setting up an SPV in BVI and applying for Reg D securities exemption, the BUIDL fund can legally and compliantly open up to accredited investors, and strictly comply with relevant regulatory requirements. This enables investors to invest in a transparent and compliant environment without worrying about the risks of illegal or opaque operations.

ONDO first, CRV last

In just 8 months, the Market Cap of BUIDL has reached $500 million, ranking second among all RWA products. As of the time of writing, $160 million of the BUIDL on the Ethereum mainnet is held by ONDO. The familiar feeling of DeFi’s nesting doll has reappeared in the RWA track, and ONDO is the first beneficiary since BUIDL’s launch.

Why does ONDO need to hold BUIDL?

Liquidity and efficient asset management: The core product of Ondo Finance is the currency fund OUSG, and these funds require efficient subscription and redemption mechanisms. Using BUIDL instead of short-term treasury bills significantly improves settlement redemption time, realizes instant and 24/7 subscription and redemption, and ensures more efficient liquidity management of its funds. At the same time, through BUIDL, Ondo can enhance the cross-chain interaction compatibility of funds while ensuring liquidity, allowing these funds to flow between multiple platforms and protocols.

Bidirectional reciprocity, drop the funding threshold: TradFi products usually have a high investment threshold, with BUIDL’s minimum threshold being 5 million US dollars, which undoubtedly limits ordinary investors, especially retail investors or small institutions, from participating. However, through Ondo Finance, the user’s threshold can be greatly dropped, reducing the minimum investment amount to 5000 US dollars. This not only makes the funds more flexible but also enables TradFi products to attract a wider range of investors, including those small and medium-sized investors or DeFi users who were originally unable to participate due to high investment thresholds.

Since holding BUIDL from ONDO, the price has also risen by over 200%, making it the first project to reap the benefits. The latest news is that Curve is partnering with Elixir to bring BlackRock’s BUIDL into Decentralized Finance.

CRV will be the next project to be ignited by BUIDL

Elixir is a blockchain network that focuses on order book trading infrastructure and deUSD (a fully collateralized and interest-bearing synthetic dollar). deUSD is supported by stETH (used to create delta-neutral positions through ETH perpetual futures) and US Treasury bonds (through MakerDAO’s USDS treasury bond protocol). Since its launch, deUSD has been rapidly adopted by the market, with a supply exceeding $160 million in just 4 months.

Elixir’s new ‘RWA Institution Program’ allows institutional investors to do more with tokenized assets. For example, BUIDL token holders can now mint deUSD while maintaining their original investment returns. Meanwhile, Elixir has chosen Curve as its primary liquidity center, further solidifying Curve’s important position in Decentralized Finance.

This collaboration is of extraordinary significance to Curve, marking a crucial step in the integration of TradFi and Decentralized Finance Depth:

For RWA investors: this collaboration provides them with new opportunities in Decentralized Finance while preserving existing real-world asset returns, essentially achieving a win-win situation.

For the Decentralized Finance ecosystem, collaboration has brought reliable institutional capital, further enhancing market stability and liquidity, making the entire ecosystem more mature.

Curve benefits greatly from this integration:

Consolidate its market position: Strengthened Curve’s role as the preferred platform for stablecoin Liquidity, especially with the support of high-quality assets such as deUSD, Curve will continue to be the first choice for institutional investors.

Attracting more institutions to participate: Through the powerful and mature platform Curve, more traditional Financial Institutions can seamlessly enter the DeFi ecosystem, bringing in more funds and participation.

Increase TVL and swap fees: as more RWA assets are minted into USD on Curve, it will enter a positive cycle: more volume → more liquidity → more income for Curve’s liquidity providers and veCRV holders.

Curve’s powerful infrastructure is crucial for the adoption of this type of institution. By providing Depth Liquidity and efficient trading for deUSD, Curve bridges the gap between TradFi and Decentralized Finance. As more institutional assets like BUIDL enter the ecosystem, Curve plays an increasingly prominent role as the primary venue for stablecoin Liquidity, bringing more trading opportunities and profits for participants in TradFi and Decentralized Finance.

It is worth noting that, although the CRV price pumped 90% in the 5 days after the relevant news release, its market capitalization of 1.3 billion US dollars still lags behind ONDO’s 2.5 billion US dollars, and the value discovery of CRV is still on the way.

Conclusion

With the innovation wave led by BlackRock BUIDL sweeping the financial industry, the boundary between Decentralized Finance (DeFi) and TradFi is becoming increasingly blurred. BUIDL is not only an upgrade of financial products, but also a profound change in financial concepts, a new benchmark leading global financial innovation. Just like every major breakthrough in the encryption world, it is always accompanied by the participation and recognition of TradFi giants. Today, as BUIDL continues to develop, the potential it brings to investors and the market is gradually emerging, which is worth our continuous follow.

In this new financial era, how to stand at the forefront of the wave, seize the opportunity of cross-border integration, will be an important proposition for every investor.