● Participant A fulfills his bid and gets 192 DAI, earning 5%
interest rate.
● Participant C partially completes his bid and gets the remainder 269 DAI, which is a 7% interest rate. His original bid of 10%, if fully fulfilled, would have generated 383 DAI during the two weeks period if Pool X had earned sufficient interest.
● Participant B fails in his bid and does not get anything.
As you can see, there are a lot of mind games involved! Moreover, interest rates are not technically fixed. However, the system rewards users who can gauge the amount of interest they should earn from their bids. This incentivizes users to conform to a ‘safe’ bid if they are uncertain about the amount they could earn. Bidding too high or bidding the floating rate could result in lesser gains or none at all. Thus ‘safe' bids effectively become the
‘de facto’ fixed interest rate over time.
II. How do they intend to maintain that promise?
Each type of promise requires a different methodology. For example, Saffron Finance offers insurance to Tranche AA users by giving them the earnings first, in the event of a deficit.
Understanding how each promise is maintained allows users to determine which protocol is more reliable.
III.How dependent are they on external agents to maintain that promise?
Developing protocol mechanisms that influence user behavior are essential to all FIRPs. For example, Yield requires relatively even ratios of lenders and borrowers to maintain fixed interest rates.
Identifying such traits allows users to determine how exposed the protocol’s promise is to factors outside their direct control.
If we consider these criteria, it is impossible to say which would be the best fit for you. Ultimately, it boils down to each individual’s preferred risk appetite, the type of financial instrument required, and the belief in the underlying protocol’s mechanisms. And perhaps more importantly, the industry is still nascent because many protocols are still getting established - they have yet to prove themselves, especially during difficult market conditions which threaten their ability to offer fixed-interest rates.
Associated Risks
One of the most significant risks is a FIRP’s ability to provide fixed-interest rates. Most of these protocols rely on external agents or other users to actively participate in the protocol to drive market functionality.
If there is an inactive community or a disproportionate amount of user profiles and liquidity (e.g., more lenders than borrowers for Yield, or more participants in Tranche A than Tranche AA for Saffron Finance), FIRPs may not be able to back their fixed-interest rates.
Notable Mentions
● Notional
Notional facilitates fixed-rate, fixed-term lending and borrowing of crypto-assets. Much like Yield Protocol, both protocols have very similar functionalities as Notional creates a zero-coupon bond system via the introduction of a novel financial primitive called fCash. There are, however, some key differences. In particular, Notional has a different Automated Market Maker and different collateral options.
● BarnBridge
BarnBridge leverages a tranche system (similarly to Saffron Finance) for yield-based products. However, BarnBridge also has another product (SMART Alpha) that offers exposure to market prices through tranched volatility derivatives.
● 88mph
88mph is a yield aggregator which offers fixed-interest rates. They are able to maintain their rates through the introduction of floating- rate bonds and a unique tokenomics structure that helps influence market behavior.
● Pendle
Pendle is an upcoming protocol that allows users to tokenize future yield, which can then be sold for upfront cash. Essentially, Pendle will calculate your expected yield, effectively locking in your interest rates.
Conclusion
FIRPs are a new suite of protocols that are bound to become a staple in the DeFi scene. We highlighted three examples because they are innovative and able to showcase DeFi’s potential when combined with traditional fixed- income instruments.
There are a lot of exciting developments in this space that offer unique products and services. We already have protocols combining price prediction and yield aggregation; imagine if a bank offered competitive betting services on fixed deposit yields? We have not even discussed protocols that tokenize future yields, which essentially allow anyone to create their own bonds and sell them off for upfront cash.
As this area develops further, we expect more institutional interest in FIRP products. Fixed-income instruments have always been commonplace in traditional finance. However, as aggregate debt levels and inflation continue to rise, and the value of the US dollar continues to fall, FIRPs may offer more reliable yields.
Recommended Readings
1. Report on Tranche-based Lending in DeFi
https://consensys.net/blog/codefi/how-tranche-lending-will- bring-fixed-interest-rates-to-defi/
2. Fixed-Interest Rate Protocol Highlights
https://messari.io/article/fixed-income-protocols-the-next-wave- of-defi-innovation
3. Why Fixed-Interest Rates are Important
https://medium.com/notional-finance/why-fixed-rates-matter- 1b03991275d6
CHAPTER 12: DECENTRALIZED YIELD AGGREGATORS
Crypto gave birth to the activity of yield farming, where users can earn yields just by allocating capital in DeFi protocols. Many crypto natives have since become yield farmers, searching for farms that offer the most attractive yields.
Due to the sheer number of new yield farms being released each day, no individual can be aware of every opportunity. With sky-high returns, the opportunity cost of missing out on new yield farms is increasingly high.
Yield aggregators are born to serve the need of automating users' investment strategies, sparing them the trouble of monitoring the market for the best yield farms. Below we are going to look into several decentralized yield aggregator protocols.