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Yield Protocol tried to achieve three applications of fixed interest rate lending, interest rate market and yield curve by introducing “zero coupon bonds”.
Author: Lou Yue
If someone wants to borrow money from you but does not give interest, you should not agree to borrow him, but if he borrows 50,000 yuan from you, he promises to repay you 60,000 yuan in three years, but he won’t Give you any interest, would you still consider lending it to him?
DeFi is the best experimental field for financial innovation today, and Yield Protocol has launched such a “zero coupon bond.”
Yield Protocol Birth Background
As the core business of DeFi, decentralized mortgage lending agreements have always shown an explosive growth trend. According to DeBank data, among the top five agreements with total locked positions in DeFi, Maker, Aave and Compound three major lending agreements occupy three positions. Maker It is also occupying the first position in the agreement lock-up volume all year round.
Source: DeBank, ranking of total locked positions of DeFi protocol
The supply of multi-collateral Dai in the Maker agreement has also shown a geometric growth trend with the use of users. According to data from Daistats.com, the statistics website of Dai, the total supply of multi-collateral Dai exceeded 1.566 billion as of January 25, which is in history. Near the high position.
With the emergence of the DeFi liquidity mining wave, the Maker community has been working hard to manage the supply and demand of Dai. Excessive demand has caused Dai to be much higher than the target price of $1 for a period of time. Based on this, Maker once set a stable fee It dropped to zero and introduced the anchored stability module (PSM), a new tool. Although the short-term supply and demand situation has been improved, the fundamental problem has not been solved. The market needs more tools to manage Dai’s supply and demand relationship.
Source: Daistats.com, Dai supply data
Since the lending model of Maker, Compound and other agreements is a floating interest rate model , its lending and deposit interest rates will correspondingly fluctuate with the user’s lending activities, such as when the market demand for a certain type of asset increases or the total capital pool decreases , Its lending rate will also rise sharply, which makes it has been quite challenging for users to manage the risk of rising interest rates .
In the field of traditional financial lending, people usually choose fixed interest rate products in order to reduce the volatility of interest rates . Such products have been widely used in the traditional financial field, but there are no more options that have been implemented in the DeFi market. Sexual products.
A project called Yield Protocol (yield.is) was created with the original intention of bringing fixed interest rates to the market and regular loan products. The project has developed from the early concept stage in 2019 to the implementation of a series of product applications. , So what possibilities will this Yield Protocol bring to the DeFi ecosystem, how does its product work, and how will it participate?
What exactly is Yield Protocol?
The positioning of Yield Protocol is based on Ethereum’s “fixed interest rate lending” agreement, focusing on the “fixed rate lending model”, introducing secured fixed interest rates, fixed-term lending and interest rate markets.
From the point of view the project background, Yield Protocol team not only won the encryption Paradigm Capital investment fund of seed round financing, the project is Paradigm’s first incubator projects.
Paradigm analyst Dan Robinson first published a paper in the summer of 2019 and proposed a protocol framework called “The Yield”. Based on this framework, a cryptocurrency version of the zero coupon bond “yToken” can be issued on the Ethereum blockchain ( It has now been renamed fytoken), and the other co-founder of the project is Allan Niemerg.
Yield Protocol currently not publish any tokens, Yield Protocol v1 has passed the security firm Trail of Bits audit.
From the product point of view, Yield Protocol has introduced a series of new original fixed-income tokens ” fytoken ” similar to zero-coupon or discount bonds to achieve fixed interest rates. Currently, the first synthetic token product ” yDAI ” developed based on the protocol framework has been online.
Yield Protocol has accelerated the progress of the project in the past six months, and many products have been applied online. For example, in order to provide better liquidity for yDai and Dai, Yield Protocol has introduced a new automated liquidity provision protocol, YieldSpace, with the goal of eventually achieving the best price Discover and trade yDai. Subsequently, the latest tool “RateLock” was released in January 2021, allowing Dai borrowers who pledge ETH on Maker to lock a fixed interest rate with one key, providing users with a one-click convenient operation application.
Synthetic token solution “fytoken”
Yield Protocol introduces a series of new original fixed-income tokens ” fytoken” , which are similar to zero-coupon or discount bonds . The interest rate is calculated from the difference between the discounted value at maturity and the value of the underlying object.
Purchasing “fytoken” is similar to lending a target asset. The interest rate received by token holders is determined by the discount of the current transaction of fytoken and the expiry time. The tokens are fungible and are traded at floating prices, which means The interest rate is determined by the market.
In addition, Yield Protocol also introduced in the white paper a method of designing a new invariant-based market maker. By expressing the required attributes as a differential equation and solving it, it can be used to design custom formulas , automatically create options, etc. More products provide liquidity.
Each “fytoken” with a different maturity date means a different return, which means its price can be used to speculate on interest rates. These implied yields can be used to settle interest rate derivatives on the chain, for market makers to choose different stability and time-consuming reference, or used as input for calculating Compound and dYdX interest formulas. By plotting yields for different periods, you can even construct yields Curve, speculating on expected interest rates or prices.
yToken can also be used to build modules for complex products. Although fytoken has a fixed expiration date, it can build a sustainable product based on it, deploy a fund pool to invest in a short-term fytoken, and automatically roll according to the expiration date.
The first application of the fytokens series fyDai
The Yield Protocol v1 version of the “fyDai” synthetic token has been launched. The fyDai token is based on the Ethereum ERC20 token. Users can use Dai as a mortgage to obtain a fixed-rate loan, which can be one-to-one after the agreed expiry date. Dai is redeemed in proportion to increase the liquidity of tokens.
At expiration, fyDai can be exchanged for Dai at a one-to-one ratio
Borrowers mint and sell fyDai loans, lenders buy fyDai, fyDai can trade freely, usually at a price lower than Dai, and the difference between the two is the source of income. The discounted value is equal to 1 Dai (maturity date). The difference between) represents the interest earned by the lender. Since the market determines the price of fyDai, it also determines the interest rate.
For example, suppose you purchase 1 fyDai, the settlement price after one year from the date of purchase is fixed at 0.95 Dai, and the user income is also fixed because you have fixed investment capital (0.95 Dai) and known future income (from now The first year is 1 Dai), and the fyDai yield to maturity can be calculated to be about 5.3%.
fyDai operation process
The overall process of using YIELD to lend DAI at a fixed interest rate is as follows: the user first deposits ETH into the Yield Protocol deposit contract before lending DAI, the second step is to mint fyDai, and the third step is to automatically sell yfDAI to DAI, lock in a fixed interest rate, and return it to the user in the last step.
For example, if the user deposits 0.5 ETH (calculated at $200) as collateral in the vault, it is allowed to lend up to 132 fyDai (fyDai has the same guarantee ratio for ETH and Maker, calculated based on the current 150%).
If the user decides to take out 100 fyDai-DEC20 (yDai expires on December 31, 2020) on September 31, 2020, and mortgages it at 200%, he will receive 100 fyDai, which can then be sold for 98.8 Dai. Since the user borrowed 98.8 Dai and owed 100 Dai within three months, they actually lent Dai at an annual interest rate of 5%.
The 100 Dai debt can be returned and paid after maturity. If the repayment fails after maturity, the Maker stability fee will be charged to Vault until the debt is paid off or the account is liquidated.
Automatic Liquidity Market Making Agreement YieldSpace
After the introduction of synthetic tokens yDai, in order to provide liquidity yDai and Dai, to achieve in order to find the best price and the purpose of the transaction yDai, Dan Robinson Yield Protocol co-founder Allan Niemerg institutional-grade encryption currency trading platform communications analysts at Paradigm A new automated liquidity provision protocol YieldSpace .
YieldSpace will use the remaining term of yDai as an input to ensure that liquidity providers price yDai based on revenue rather than price. In the absence of any transaction, the agreement will provide a constant interest rate for purchase or purchase of Dai over time. Option to sell yDai.
The formula adopted can ensure that the interest rate implied by the current marginal price of yDai is the ratio of yDai and Dai reserves in the pool, thereby ensuring that the fund pool can provide liquidity within a range of interest rates.
Since YieldSpace will increase its allocation to yDai as the interest rate rises, and reduce the allocation when interest rates fall, YidSpace may perform better than yDai even if fees are not included.
Of course, YieldSpace will charge a certain fee and pay it to the liquidity provider. The fee is also calculated based on interest, which means that regardless of the expiration time, the fee will result in a constant spread.
Fixed interest rate one-key locking tool RateLock
Yield Protocol released the latest tool “RateLock” in January 2021, allowing Dai borrowers who pledge ETH on Maker to lock a fixed interest rate with one click.
RateLock works by migrating users’ Maker Dai loans to fixed-rate loans in Yield Protocol, allowing users to view existing Maker ETH-A vaults and preview the available fixed rates , and then specify the collateral and debt to be migrated Quantity, to migrate all loans at a fixed interest rate, or only part of loans.
The specific operation process is that RateLock repays the user’s existing Maker loan and releases the collateral by quickly casting fyDai and selling it as Dai , thereby migrating the Maker loan to Yield Protocol, and then transferring the collateral to Yield Protocol and casting The new fyDai to repay loans quickly.
For example, load the RateLock tool and select March 2021 as the fixed-term date, then the interest rate will be fixed at 2%, and then the loan will be migrated to the rate of return. The transaction process is relatively simple and convenient.
After the fixed period expires, the Maker ETH-A stability fee will be charged until the debt is paid off. In the future, Yield plans to introduce a tool to migrate user loans back to Maker after maturity .
The function of the advanced version of the use-level RateLock allows users to enter the amount of collateral and debt to migrate. The minimum migration amount is 0.05 ETH. When the amount of debt to be migrated is entered, the tool will update the expected annual interest rate according to current market conditions.
According to the Yield Protocol yield curve (currently using Yield Protocol for Dai’s interest rate) data, the actual annual interest rate of mortgages and loans is basically between 3% and 7%. Although the interest rate data is not outstanding in the DeFi field, it is through fixed Interest rates can help investors make more reasonable predictions about future investment costs and reduce potential volatility risks.
Summary of common problems
- Can a fixed-rate loan be liquidated before it expires?
Through the Yield App, you can repay a fixed-rate loan in advance and get back the collateral. However, if the interest rate changes, the cost of early repayment may increase or decrease . Only by holding the loan to the maturity date can you obtain the locked-in exact fixed interest rate.
- What happens when a fixed-rate loan expires?
After maturity, Dai’s debt can be returned and repaid in Yield Protocol to recover the collateral . Before the debt is paid off, Maker will charge a certain fee , which is consistent with the fee charged in the Maker system.
In addition, after maturity, you can participate in other fixed-rate loans in Yield Protocol. In the future, Yield plans to introduce a tool to transfer loans back to Maker after maturity.
- How to get the best fixed interest rate?
The different maturity dates of Yield Protocol are separate liquidity pools to match borrowers and lenders. The interest rate provided by the RateLock tool is based on the liquidity of the maturity date, and the liquidity with the highest liquidity is usually the closest to the maturity date. , Currently in March 2021.
If the quoted interest rate is high, you can consider locking a part of the debt for later adjustments. Market information will be adjusted at any time. You can obtain better interest rates through small loans to avoid too much impact due to market fluctuations.
Yield Protocol Technical Development Director @acuestacanada updated on Twitter on January 26 on the latest developments of the agreement, “Yield is working hard to make fixed-price products cheaper and more convenient to use. YieldSpace v2 pool can provide a very cool solution for reducing GWei. It can be seen that Yield is committed to providing more convenient and applicable display products for fixed-rate products.
Source: @acuestacanada Twitter
Yield Protocol collected users’ ideas on adding new features to the protocol on Twitter on January 26. A total of 69 people participated in the vote. Among them, “add more Dai mortgage types” received a 15.9% approval rate, and “reduced “Dai fixed interest rate” received a support rate of 13%, “USDC borrowing” received a support rate of 33.3%, and 37.7% of users hoped to obtain higher liquidity rewards. This shows that community users still have further needs for assets and income.
Yield Protocol does not support governance in order to ensure decentralization, so there is no governance token. The agreement is automatically run by the contract, and no one has administrator rights.
However, the agreement is deeply tied to Maker, so it is easily affected by Maker’s governance . Yield vault’s guarantee ratio and fyDai’s loan interest rate after maturity are determined by Maker’s parameters and can be adjusted according to its governance system. In addition, when checking the value of ETH collateral in Yield vault, Yield uses Maker Ethereum oracle data.
If Maker encounters malicious governance behaviors, illegal intrusions, security breaches, and long-term market irrational behaviors will trigger an emergency shutdown to protect the Maker protocol from infrastructure attacks and directly implement Dai’s target price, then fyDai borrowers and loans People will also be affected.
fyDai itself also has interest rate risk . The price of fyDai tokens calculated by Dai is determined by market interest rates. If the interest rate rises, the market value of fyDai will decrease. Therefore, under the environment of rising interest rates, the purchased fyDai may depreciate when it is priced at market value . And this loss will only appear after the user sells fyDai.
On the other hand, since the Yield Protocol is controlled by the contract, there is also the possibility of contract loopholes or hacker attacks.
In general, Yield Protocol has realized the three major contents of fixed interest rate lending, interest rate market and yield curve. The lender issues bonds at a premium, and the borrower buys bonds at a discount, and exchanges assets at a fixed interest rate on the agreed maturity date. Obtain relatively stable income, and the bond is tradable and transferable, and the form is more flexible and changeable. The latest fixed-rate one-key locking tool RateLock function simplifies the operation process. At present, the fixed-rate lending model in the market is not large. Large-scale application, but with the mature development of institutional funds and the market, fixed-rate loans in the DeFi field may gradually become mainstream loans with the entry of traditional finance.
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