What are the fixed-income agreements for DeFi, and how will ERC-3475 change the existing pattern?
Original title: " What fixed income agreements does DeFi have, and how will the new standard ERC-3475 change the existing landscape? "
Original author: Cereal Killer
Original compilation: The way of DeFi
There is currently a total addressable market for fixed income products worldwide of approximately $11.9 billion. But in the DeFi space, this number is less than millions of dollars.
So why is it so difficult to create fixed-rate asset instruments in DeFi? How will the new Token standard ERC-3475 change the existing market structure? Guys, let's take a deeper look at fixed income and ERC-3475.
How is the interest rate in DeFi lending determined?
In the current DeFi market, in order to balance supply and demand, most lending protocols use utilization rate-interest rate feedback control mechanism:
When the supply in the market is greater than demand, the mechanism lowers the interest rate to encourage borrowers to borrow, and when the supply is less than demand, the mechanism raises the interest rate.
Therefore, due to fluctuations in the market, it is difficult for the interest rate of the lending agreement to remain stable (see the figure below).
This is the source of market demand for fixed-rate assets.
The market's need for stability and predictability comes from:
- In order to Have more control over your own investments
- In order to develop complex financial products
Before we dive into today's content, let me first Introduce some terminology to ironies.
Par Value: The dollar amount paid to the bondholder at maturity
Zero Coupon Bond : A bond that does not pay interest during the life of the bond. Investors buy zero-coupon bonds at a discount to their face value The coupon bond is the wheat you grow in the field, and the income you get from harvesting the wheat is the face value. And the seeds you buy to grow the wheat are the discounted price you pay for the bond.
Two current fixed interest rate models in the DeFi field
Currently, there are two ways to Guaranteed fixed interest.
Transaction "Zero Coupon Bond"
Borrowers use ERC-20 Token Issue "bonds" in the form of bonds, obtain target assets from lenders, and repay at a fixed interest rate after maturity.
Source: Yield Protocol White Paper
The price and interest rate of issued "bonds" are determined by the supply and demand of a single trading pool in the protocol.
Yield Protocol implements an AMM (Automatic Market Maker YieldSpace) to minimize arbitrage losses with consistent rate quotes.
For example, in Uniswap , as long as there is a price change, arbitrage-> Occurs when interest rates change.
According to a chart comparing the market impact of Uniswap vs Yield Protocol. Yield Protocol outperforms Uniswap in both interest rate and market quotes.
Notional Finance uses cTokens (Compound packaging Token ) as the underlying asset is distinctive.
This design enables the funds stored in the liquidity pool to generate interest over time, improving the capital efficiency of liquidity providers.
Divide the principal and interest, and then Token
In Element Finance, users deposit their funds into a vault (in the case of Yearn Finance) for a floating interest rate, minting the principal Token (as a zero-coupon bond) and yield Token (variable interest earned).
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The agreement creates a "secondary market" in interest rates.
But it also doubles the exposure to automated market maker risk, because the principal and profit Token A separate pool is required. At the same time, interest rate differential issues are more likely to arise.
The interest income earned in the treasury can also be redistributed according to risk tolerance.
For example, Pool A contains low risk fixed rate assets. Pool B includes high-risk, floating-rate assets. Its basic logic is similar to the "principal return" we just mentioned Token ". But the difference here is that this structured product does not rely on automated market makers.
Barn Bridge issues ERC-20 in Pool A Token NFT other than , allowing price discovery in internal systems.
The performance and problems of the current DeFi fixed rate agreement
So how are these agreements performing? Woolen cloth?
Notional Finance performed better than other protocols, with a total lock-up volume of up to 73.39 million, and the annualized rate of return of USDC reached 3.25%.
All four protocols experienced massive declines in total lockup, partly because we entered a bear market.
Source: DefiLlama
Defects of the protocol itself
Of course, in addition to this reason, these protocols themselves also have certain defects.
The income is not ideal
If the yield agreement can provide something with Aave What is offered on /Compound is slightly the same, or even lower, so why should anyone use these protocols? In addition, the competition outside the DeFi field is also fierce. For example, the interest rate of the DAU-year treasury bond in the United States reached 3.76% in June.
Limited choice
Currently DeFi products are only offered for a period of a few months or a maximum A year's time.
In real life, some bonds last for many years and pay investors regular interest (non-zero interest) before maturity.
Therefore, traditional finance provides more choices.
The idea of a DeFi protocol being censorship resistant and decentralized is great, but if the product doesn't meet the standards found in traditional finance, mass adoption won't happen.
ERC-3475
However, we now have the opportunity to issue by upgrading the ERC-20 More advanced bonds.
Why are we issuing new standards? What about the new standard?
Current ERC-20 Token Standards represent a single entity, without complex data structures.
For example, if you want to issue a DAI-based bond, you have to create a new ERC-20 Token , such as fDAI, which is pegged to DAI and represents an obligation to borrow DAI.
But with ERC-3475 invented by Debond Protocol, you can now issue bonds directly on the underlying asset (DAI) without creating a new Token .
This is because ERC-3475 can record complex redemption logic (expiry date, coupon, credit quality, etc.), while ERC-20 cannot.
At the same time, ERC-3475 also unlocks new applications that existing protocols cannot do. In reality, for example, a growing company could issue a convertible bond where bondholders could convert their debt into stock if they agreed to a lower interest rate.
This is a win-win for both parties because:
- The company is in Lower interest paid in early stages
- If the project is successful, the investor gets a profit from the stock
In the context of Web3, Early stage protocols can issue ERC-3475 to raise capital, allowing investors to:
- Lend money to their favorite projects in a more secure way
- Flexibility to convert bonds to ERC-20 (DAO governance, profit sharing) if they wish to participate more
And when decentralized bonds become more mature, we need Web3 credit rating agencies to better categorize assets.
Summary
Bonds in DeFi are a huge undiscovered blue ocean market.
Maintaining a fixed interest rate is difficult due to market volatility.
We now have a new Token system, bonds with more complex structures can be issued.
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