How SuperBonds Unlock Fixed DeFi Income
SuperBonds will be interesting to several types of investors, from those dabbling in crypto to hardened TradFi veterans and institutions looking for a professional approach.
This article will explain what innovation SuperBonds adds to the existing DeFi market and how you can benefit from it. Don’t worry if you still have doubts about whether a fixed-income product in DeFi can really work — you will end up on the correct side of the bell curve after this article.
- What fixed income is
- What bonds are
- Why fixed income products are rare in DeFi
- How SuperBonds changes the DeFi bond game
Crypto and finance beginners should read it all; experienced investors can jump to the latter two sections.
What is Fixed Income?
Fixed income is an investment that pays fixed interest or dividends on a principal until the principal is returned (called the maturity date). Fixed income is generally tied to debt, which the government or a company issues.
For example, the US government needs to raise $1 billion dollars and issues debt (called bonds) at an interest rate of 1% for 12 months. As an investor, you can buy up to one billion dollars worth of these bonds and receive a so-called treasury bill (the name of the one-year bond) in return. The government gets your principal and invests it (hopefully in something useful). 12 months later, you receive your principal and 1% interest on it.
These investments are called fixed income because your investment return is fixed and predictable (your interest rate is locked in for the duration of the bond).
What are Bonds?
Roughly speaking, bonds are IOUs that governments or companies offer. Both governments and companies offer bonds to raise capital to finance large projects. A bond can have different maturity dates — from one year up to ten years.
For investors, bonds have several advantages:
- They have predictable returns and provide information about the health of a government’s / company’s finances.
- They provide a stable flow of income because bonds with a maturity date longer than one year have yearly interest payments.
- They are a way of preserving capital: investing in the bonds of a stable government is the safest investment available. (Of course, there are also risky bonds, so-called junk bonds).
- Bond markets are massive, and the main way for institutional investors like pension funds to invest their capital. A country’s pension fund cannot simply invest in an asset like Bitcoin — the market is too small (and too risky), so the fund invests a good chunk in bonds.
This high-level overview begs the question: why are there no crypto bonds?
Why DeFi Lacks Bonds & Fixed Income Products
ICMA estimates the global bond market at $128 trillion, but DeFi protocols only have $38 billion in total value locked, according to DeFi Pulse(down from its all-time high of $107 billion). Fixed income protocols only make up a fraction of that because most total value locked in DeFi is not in fixed income products.
Firstly, real-world bond markets involve a lot of regulatory and administrative requirements. That is a risk for DeFi bond markets (lack of regulatory clarity) but also a massive opportunity (increasing settlement efficiency). It is more efficient to settle bond payments through code (a smart contract) than through a complex system of institutions controlled by people.
Second, decentralized finance is highly experimental and not very sophisticated. Many protocols are essentially just trying to pull money out of the investor’s pocket but do not create real value. The real-world bond market makes the world go round — governments pay for their budgets through bonds, and companies raise capital for investments and operations. DeFi protocols still have not identified their utility that would require them to raise capital through issuing debt.
Since DeFi is still experimental, protocols prefer to offer floating interest rate products instead of fixed income products. The average crypto investor is a retail investor that expects and hopes for quick and massive returns. They would rather earn a high yield and go broke trying than invest in a “boring” fixed income product.
Professional investors understand the potential but hold back due to the sector’s risky nature and lack of appropriate products. The only product akin to fixed income are “crypto earn” products offered by centralized providers like Nexo. However, these offer neither the liquidity professional investors are looking for nor do they have significant advantages compared to TradFi bonds.
But what if there was a product that would enable DeFi protocols to issue debt and retail and institutional investors to earn that predictable yield bonds promise?
How SuperBonds Unlocks a DeFi Bond Market
Given the enormous size of the global debt market, DeFi bonds will be a thing sooner rather than later — so someone has to build them. Bonds are an indispensable primitive for more complex (and higher-yield) financial products. SuperBonds unlocks the decentralized bond market in DeFi.
Bond traders are offered two options: a 30-day bond or a 90-day bond with a fixed yield. In our MetaYielder product, the risk is underwritten by liquidity providers looking to take on the risk to earn a higher, variable rate. The yield is farmed by deploying the capital through Wormhole and farming the yield cross-chain.
An ELI5 example:
- Bond trader Joe is a retail investor that wants to try fixed income. He buys a 30-day bond for 10K USDC at an 8% APY (annual percentage yield). On a one-month investment, he will thus receive about 0.67% on his principal.
- Bond trader Jamie is a big institutional fish looking for a DeFi bond market. He cops a 90-day bond for 1M USDC at a 14% APY. On a three-month investment, he will thus receive 3.5% on his principal.
- A group of liquidity providers (LPs) is happy to provide liquidity because they expect to make a higher return through deploying their capital to SuperBonds. They provide the capital to pay out Joe and Jamie.
- The SuperBonds platform utilizes the provided liquidity and deploys it through Wormhole to farm yield in various protocols.
→ After 30 days, Joe redeems his bond for the 10K USDC principal and about 67 USDC interest.
→ After 90 days, Jamie redeems his bond for the 1M USDC principal and about 35K USDC interest.
→ The LPs receive a constant flow of yield through platform rewards and excess returns that compensate for their added risk.
However, if Joe and Jamie decide to redeem their bonds earlier, they can do that too, as bonds are issued as NFTs and redeemable at face value any time before their maturity date.
In the long run, DeFi protocols will likely become LPs and the emergence of a DeFi corporate bond market will be aided by SuperBond’s second product MetaLend. But more about that in a few weeks.
Very few products offer a comparable value proposition to SuperBonds. No product does it with the same sleek user experience and vision to create a long-term cornerstone of the DeFi ecosystem. Check out the Dummies’ Guide to SuperBonds for a complete introduction to the platform and the SB token.