Decentralized Finance (DeFi) has rapidly evolved, drawing inspiration from traditional finance (TradFi) to create innovative solutions. The development of fixed-income products in DeFi largely mirrors the principles of financial engineering already laid out in traditional finance. This innovation enables growers to better control risk and reap higher returns. DeFi platforms such as Notional Finance, 88mph, and Yield Protocol are pioneering fixed-rate, fixed-term lending and borrowing. They reflect the highly structured approach to fixed income embodied in traditional finance. This article will examine the historical context and major milestones in DeFi’s fixed-income evolution, noting some of its similarities to TradFi markets.
The “DeFi Summer” of 2020 was a watershed moment for the industry, igniting innovation and experimentation. In the meantime, a number of protocols appeared to address the need for fixed-rate instruments. They wanted to restore a sense of stability to the often-chaotic DeFi market. By leveraging the composable nature of DeFi, these platforms introduced mechanisms for fixed rates and terms, mirroring the sophistication of TradFi fixed-income markets.
Early Pioneers in Fixed-Rate DeFi
Each of the other platforms became innovators in their own right, bringing different solutions to the fixed-rate DeFi space. Notional Finance, founded in 2019 and launched in early 2020, was among the first to offer fixed-rate, fixed-term borrowing and lending on Ethereum. This innovation allowed users to lock in interest rates for a set period, providing certainty in an otherwise unpredictable market.
Apart from laying the groundwork for fixed-rate DeFi, 88mph was an early pioneer of effective yield advertising. The platform’s first version (v0) went live in April 2020, with its latest version released in late November 2020. 88mph provides users an easy way to lend or borrow crypto assets at fixed interest rates. With investor interest in stable returns growing, this new service provides a powerful solution.
First developed and released in 2021, Yield Protocol took the fixed-rate DeFi world a step further by offering fixed-rate, fixed-term borrowing and lending. These platforms together set the stage for increasingly sophisticated fixed-income products within the DeFi space.
Leveraging Composability for Fixed Rates
Projects like BarnBridge, 88mph, and Saffron Finance took advantage of DeFi’s composable nature to introduce fixed rates to pre-existing yield opportunities. These platforms provided an onramp for users to earn a higher, potentially fixed rate on many underlying DeFi yield aggregators, boosting capital efficiency and risk management.
BarnBridge, for instance, developed a token (BOND) that acted like zero-coupon bonds. This groundbreaking method meant investors could bet on the yield rate of their choosing and limit their own risk to varying degrees. BarnBridge (BOND) rocked to a TVL of $79 million. Its market capitalization even soared to an impressive $125 million, clearly demonstrating the increasing demand for fixed-income products in DeFi.
For more: Fixed Yield DeFi vs. Traditional Fixed Income in Yield Farming Rewards
Structured Products and Risk Mitigation
Beyond new yield-bearing opportunities, DeFi has spawned a wave of structured products that aim to reduce risk. These products can take the form of tranching, wherein assets are grouped into pieces containing different levels of risk, with each piece appealing to distinct investor types. Junior tranches, for example, take losses first, providing higher yields but exposing investors to more risk.
Moreover, the world’s first cryptocurrency-denominated, blockchain-settled bond to take place in the UK was issued by LuxDeco in partnership with Nivaura. This initiative became a watershed moment for combining traditional finance with decentralized finance and showcased how blockchain technology can greatly streamline the process of issuing and settling bonds.
These similarities between DeFi and TradFi fixed-income markets are clear in the kinds of products and strategies coming to fruition. As DeFi matures, it will most resemble the deeper, more liquid, and more stable traditional fixed-income markets. With this evolution will come a wider range of advanced investment opportunities.
