Midas Launches Liquid Yield Tokens

Tokenization protocol Midas is launching liquid yield tokens (LYTs), a new type of “onchain hedge fund” architecture, as announced by CEO Dennis Dinkelmeyer to The Block on Thursday.

The products are designed to compete with relatively new yield-bearing instruments, such as Ethena’s USDe and BlackRock’s BUIDL tokens, which Dinkelmeyer describes as “outdated.”

Similar to USDe and BUIDL, each Midas LYT will tokenize a specific trading or investment strategy, capturing the yield for holders. However, unlike these “quasi stablecoins,” LYTs will have a floating reference value.

Dinkelmeyer claims that while these “synthetic dollars” may maintain a peg to the U.S. dollar like traditional asset-backed stablecoins (e.g., USDT and USDC), they are fundamentally different financial products meant for investment rather than for payment or trading pairs.

For example, USDe was an early attempt to tokenize a cash-and-carry trade utilizing crypto. Its yields are distributed via two tokens: a conventional pegged stablecoin and a staked version that earns revenue from the underlying collateral.

> “This structure has emerged because issuing a ‘stable’-coin avoids classification as a security or a collective investment scheme (i.e., ‘fund’), which would necessitate regulatory approval,” Midas explained in a blog post. The transition of fiat-backed tokens “into yield-bearing hedge fund strategies has introduced systemic risks: de-pegs, misaligned incentives, and regulatory uncertainty.”

Tokenization of Actively Managed Trading Strategies

LYTs aim to mitigate these risks by treating an onchain hedge fund as an onchain hedge fund, allowing the tokens’ value to track the performance of their assets. Midas’ first batch of LYTs will tokenize the actively managed trading strategies of DeFi asset managers Edge Capital, RE7 Capital, and MEV Capital.

Dinkelmeyer remarked, “The problem with an on-chain hedge fund is that it cannot be pegged to $1. If the portfolio underperforms, it depegs and collapses.”

Untethering onchain hedge funds is intended to enhance investment flexibility and grant access to a broader range of assets beyond U.S. Treasuries. Currently, the largest tokenized funds, including BlackRock’s BUIDL and Franklin Templeton’s FOBXX, mainly invest in short-term government debt instruments to earn yields.

> “By removing the $1 liability constraint, the collateral can include assets beyond zero-duration collateral, unlocking better risk-adjusted returns limited from crowding and market conditions,” Midas stated.

According to their prospectus, all Midas LYTs will share a common liquidity pool, allowing atomic redemption at par value. Each LYT is issued as an ERC-20 asset, meaning they will be composable across the Ethereum DeFi landscape.

Midas has previously launched tokenized products utilizing Treasuries and a crypto basis trade, known as mTBILL and mBASIS. These were the first tokenized funds to be accessible to non-accredited investors in the EU.

Disclosure: The Block’s Director of Special Projects, Frank Chaparro, is an investor in Midas.