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Jack Purdy
Fixed-rate lending is one of the most important primitives underpinning the global financial system And yet it has been sorely lacking in DeFi... that is until recently This is a big deal and here’s why 👇
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Jack Purdy Oct 28
Replying to @jpurd17
Not only do these instruments provide certainty for lenders/borrowers looking to accurately forecast their cost/return on capital But it creates important derivative metrics that provide valuable insight into investor sentiment
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Jack Purdy Oct 28
Replying to @jpurd17
When the yield curve steepens it means lenders require a higher return to compensate them for locking up capital This suggests that they expect there to be higher yielding opportunities elsewhere Which translates to positive expectations for future growth
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Jack Purdy Oct 28
Replying to @jpurd17
On the flipside, when the curve flattens it shows lenders are comfortable with lower yields as the prospects for future growth aren't as bright Taken to the extreme, when long-term maturities dip below short-term this is known as inversion
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Jack Purdy Oct 28
Replying to @jpurd17
When the yield curve inverts it's because investors are willing to lock in low long-term rates as they expect a more severe downturn will lead central banks to lower rates This indicator has predicted every recession in recent memory
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Jack Purdy Oct 28
Replying to @jpurd17
Translating this into cryptospeak… Yield curves could steepen when the next big corporate announces a BTC purchase as it may mean we’re in the next bull market Lenders will then a require higher return on capital since the opportunity cost of lending is higher
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Jack Purdy Oct 28
Replying to @BKBrianKelly
Now if starts shilling XRP on CNBC again then the market may feel the top is near and the curve may start flattening as investors would rather park stablecoins in a stable, low rate instrument
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Jack Purdy Oct 28
Replying to @UMAprotocol
So who is seeing this vision of fixed-rate lending in crypto come to fruition? The first instance came this summer with yield dollar
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Jack Purdy Oct 28
Replying to @jpurd17
Users can deposit ETh to mint up to 80% of the USD value in uUSD which is then redeemable for $1 of collateral at maturity uUSD can then be sold on the market at a discount to anyone willing to wait for expiry to earn that premium
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Jack Purdy Oct 28
Replying to @jpurd17
There are currently ~$23 million uUSD for the next Dec. expiry between he two collateral types While this is a good start, it is obviously somewhat restricted given the single maturity
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Jack Purdy Oct 28
Replying to @MakerDAO
Based on the same whitepaper, Yield Protocol launched with a few key differences Rather than being redeemable for $1 of collateral fyDai can be redeemed 1:1 with Dai as the collateral is automatically rolled into a vault eliminating forced exposure to the collateral
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Jack Purdy Oct 28
Replying to @jpurd17
fyDai also trades on its own custom AMM Instead of naively charging a flat 0.01% the fee is based on the current interest rate and time to maturity ensuring its proportional to the interest received This prevents a situation where users pay more in fees than interest received
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Jack Purdy Oct 28
Replying to @Mainframe_HQ
Another soon to be launched protocol is which continues to build on this idea They introduce the concept of a guarantor pool where users deposit Dai (or cDai, aDai, etc.) which sits ready to liquidate underwater loans
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Jack Purdy Oct 28
Replying to @jpurd17
This backstops the system and allows users another opportunity to earn yield In addition, both guarantor and borrower collateral will be used for flash loans to further juice yields
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Jack Purdy Oct 28
Replying to @jpurd17
This is only the beginning. We’re just now touching the surface of whats possible with fixed rate loans...
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Jack Purdy Oct 28
In their mature state, we could see them included in interest rate algorithms for money markets Or used in tandem with to price different tranches of debt The possibilities are endless 🤯
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Jack Purdy Oct 28
Replying to @jpurd17
What the first iteration of DeFi floating-rate lending did to interest-bearing accounts, leveraged trading etc... These new fixed-rate products will do for all types of financial instruments were accustomed to as well as new ones enabled by this uniquely composable world of DeFi
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