Can DeFi fixed rate products attract traditional large funds to enter the market?

Original title: "Will fixed-rate products allow traditional large funds to flow into DeFi?" "

Original source: Azuma, Odaily Planet Daily

The enthusiasm for DeFi has cooled down, but those crazy stories are still vivid.   

When "farming" is the hottest, all kinds of fruits and vegetables come into battle, and the annualized yield (APY) of the top mine All the way up, the APY (annualized yield) of 1000%+ or even 10000%+ has attracted countless speculators.

However, it should be noted that the APY provided by almost all DeFi products (including basic lending agreements such as Maker and Compound) are floating The rate of return, the actual annualized rate of return will fluctuate greatly with the growth of funds in the pool, the adjustment of mining rules, and the price changes of output tokens. In other words, investors cannot accurately predict forward capital returns based on book APY.

In fact, in the traditional financial market, fixed-rate loans are the most important form of loans. Yield Protocol founder  Allan Niemerg  stated that about 90% of mortgages in the United States are fixed-rate loans. Currently, some of the largest financial products are either fixed rate products themselves—such as the bond market (over $100 trillion) or derivative products with a fixed rate component—such as the interest rate swap market (estimated to exceed $500 trillion ).

In recent months, there have been increasing calls for the introduction of fixed interest rates in the DeFi market, and products with this concept have also appeared one after another. Odaily Planet Daily selected several representative products - Yield Protocol, 88mph, Notional, Barnbridge, analyzed and compared each product, and tried to clarify the differences in operating logic between different products.

From the perspective of whether the product itself provides lending functions, we can divide the above products into two categories:

The product itself provides Lending function: Yield Protocol, Notional;

The product itself does not provide lending function, and needs to use other protocols to realize income: Barnbridge, 88mph.

The first type: the product itself provides lending function

The representatives of this type of product are Yield Protocol and Notional.

Yield Protocol was incubated and established by the cryptocurrency investment institution Paradigm, and the product has been released so far beta v0.2 version. The protocol works much like zero-coupon bonds in traditional financial markets. Specifically, Yield Protocol introduced a derivative token called fyToken. Since the test version only supports the stable currency Dai for the time being, the derivative token is currently only  fyDai. fyDai The mechanism can be converted into Dai 1:1, but it can only be executed after the specified time expires, so its price will often be lower than Dai itself.  

In the process, the borrower can choose to use ETH as collateral (the minimum mortgage rate is consistent with Maker) to generate a certain amount of fyDai, because the price of fyDai is generally For less than Dai itself, lenders can choose to buy fyDai for a relatively small amount of Dai. In this way, the borrower can borrow a certain amount of Dai they need by mortgaging ETH, and the lender can exchange fyDai 1: 1 back to Dai that is more than the principal after maturity, earning income from the difference.  

According to different expiration times, fyDai itself will have many subdivisions (as shown in the above table), The farther the time is, the lower the price of fyDai will be (for example, the price of fyDai-DEC20 is higher than that of fyDai-DEC21).

For lenders, the difference between fyDai and Dai is the source of income. After buying fyDai, the difference The income represented behind will also be fixed. Take the above picture as an example, assuming that the lender purchases 1 fyDai at a price of 0.95 Dai after one year, since the principal (0.95 Dai) and future return (returning to 1 Dai after one year) have been determined, a simple calculation shows that the lender The yield to maturity is about 5.3%.

Another representative fixed-rate lending agreement is Notional, which has previously received 1.3 million from eight investors including Coinbase Ventures, 1confirmation and Polychain US dollar investment, and a beta version has been released on the Ethereum network.

Similar to Yield Protocol, Notional currently only supports the stable currency Dai, and both borrowers and lenders can choose three different loan cycles, the longer the loan cycle, The corresponding level of interest rates will be higher.

In terms of the specific execution process, Notional has introduced the concept of the derivative token  fCash, which operates in the same way as  fyToken, which can be redeemed after maturity corresponding amount of original tokens.

The second type: the product itself does not provide lending function, and needs to rely on other agreements to generate income

DeFi Fixed Rate Generation Protocol 88mph This week It has just been launched, and it has gained a certain amount of attention because of the incident of "the hacker attack fails, and the rice is lost".

88mph currently supports  USDC, UNI, yCRV, crvSBTC  and other tokens, the agreement will put the tokens deposited by users into Compound, Aave and yEarn and other DeFi products to earn floating income (corresponding to the generation of five pools including aUSDC, cUSDC, cUNI, yUSD  and ycrvSBTC), and by aggregating fund pools (sharing risks among different pools), income bonds (easy to understand In order to package and sell the floating income for a period of time in the future, in exchange for urgently needed cash flow) and other in-depth designs, try to ensure that users can also get stable income when the floating interest rate drops sharply.  

Users can deposit funds into the corresponding pool and choose 7, 14, 30, 60, 90, 180 , 365 and other seven different redemption cycles, 88mph will directly give the fixed interest rate of each pool on the interface (taking 75% of the current floating interest rate). It should be noted that the interest rate within 88mph will only change according to the pool, and different loan cycles will not affect the interest rate.

After depositing funds, users will receive an ERC-721 protocol non-fungible token (NFT) representing their interests, which can be transferred to Other accounts can also be sold directly on marketplaces such as OpenSea. When the loan expires, the user can get back his principal and the interest based on the fixed rate output, and the equity NFT will also be destroyed simultaneously.

Barnbridge  has also caused a certain amount of heat in the market recently. It broke through 200 million US dollars in an hour.

Odaily Planet Daily has separately sorted out the operating logic of Barnbridge. To put it simply, Barnbridge is trying to issue derivatives to invest in other DeFi protocols. and risk cutting.

According to the roadmap, Barnbridge plans to launch Smart Yield Bonds products in the first quarter of next year. An example to illustrate:

Assuming that the total amount of pledged assets in a DeFi application is 1000 DAI, the annualized rate of return ( APY) is not fixed.

Theoretically, the entire pledged asset can be divided into two parts according to the risk tendency: 700 DAI is classified into the Senior part (the red area in the figure below, the risk tendency is lower) , the rate of return is fixed at 5%; 300 DAI is classified into Junior (the blue area in the figure below, with a higher risk tendency), and the rate of return is not fixed. The advantage of this is:

If the final APY of the application can reach 10%, then the annualized income will be 100 DAI, of which the Senior part will get 700 * 5% = 35 DAI, the Junior part can get 75 DAI, compared with the principal of 300 DAI, the rate of return is as high as 21.6%.

If the final APY of the application is only 3%, then the annualized income will be 30 DAI, of which the Senior part will still get 700 * 5% = 35 DAI , the Junior part needs to fill up the loss of 5 DAI.  

In this way, more conservative funds can choose to invest in Part A and get a stable 5% return; while more aggressive funds can choose Part B, with a smaller investment, to gain greater returns.

Summary

Protocols such as Yield Protocol and Notional that provide their own lending functions hope to The concept of coupon bonds was introduced into the DeFi field, but because the overall logic of the product is not complicated, it seems somewhat similar. For the sake of stability, most of these products currently only support stablecoins (such as Dai), and it remains to be seen whether they can be extended to other types of more currencies in the future.

In terms of security, Yield Protocol has passed the audit of Trail of Bits . It should be noted that the current version of Yield Protocol does not support governance, so there is no governance token; similarly, there is no governance token related content found in Notional's white paper.

Products such as Barnbridge and 88mph are relatively more flexible. They do not directly provide loans, and need to rely on other DeFi protocols to generate income. Because the integrated DeFi protocols provide All of them have floating interest rates, so it is inevitable that the profit will be lower than expected. The solution adopted by Barnbridge is to let high-risk investors replace low-risk investors to take risks; 88mph uses some deep designs to try to ensure User's fixed income.

The third-party organization Hacken has completed an independent audit of the Barnbridge smart contract, Audit has also been completed by Quantstamp. It should be noted that the coverage of the above-mentioned audit work is only the protocol itself. Another key risk factor faced by such products is the contract risk of integrating DeFi protocols. Protocol integration - such as 88mph chose Compound, Aave, yEarn.  

In general, although new DeFi products featuring the concept of fixed interest rates have appeared one after another, and the staking mining launched by Barnbridge and 88mph have achieved good results response, but the products of most projects are still not officially released. Odaily Planet Daily believes that in the currency circle where the risk appetite is much higher than that of the traditional financial market, most investors have long been accustomed to tightrope-like stimulation, and the rate of return provided by fixed-rate products does not seem sexy enough. Waiting for more projects to land; on the other hand, traditional institutions standing on the other side of the market pay more attention to risk control while pursuing profits. The design of fixed-rate DeFi products is also close to traditional financial products, which may attract some interested investors. By.

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