George Mandres - Building Yield Curves in DeFi and Unlocking New Use Cases

Transcript

yeah perfect thanks uh yeah so term structure uh you know we're trying to to you know build yield Curves in defy and unlock new use cases for uh for you know for for the industry um so you know I've I've gone through my background so I'm just going to go right into the protocol uh so what we're doing we're a non-custodial fixed income protocol that aims to establish interest rate curves you know yield Curves in in defi by having fixed rate fixed term borrowing and lending um the way we're going to do this is by having a customized ZK rollup which we call a ZK true up for you know fast scalable secure transactions and the whole vision is to you know build these interest rate curves that are going to be you know help they going to help us you know build investment Tools

in Defi and and and infrastructure and any sort of you know structure product going forward and that's going to kind of lead to tokenized real world Assets in the future um so if we look at where the market is right now uh like for example AV V2 um we see that you know 47% of borrowed volume and and 39% of lend volume is kind of repaid or redeemed after 30 days so if you see here like anything beyond the month there's no real activity nothing happening and so there's no such thing as a as a as a yield curve as a term structure of Interest ratees so um let's go back to basics um you know what is a yield curve so if you have on the x-axis you have the time to maturity and then

on the y- axis you have an interest rate um you know in a normal functioning Market or normal economy you have this upward sloping concave looking curve and what this kind of tells us is that you know the higher the longer the time to maturity the more uncertainty in theory you have about the possibility of getting your money back and therefore the higher interest rate that you should be charging like if I you know if I'm lending money to my friend for a week I'm going to charge him an interest rate but you know if I have to lend money to an unknown person in an unknown country for the you know three years I'm probably going to have more uncertainty and more risk and I'm going to feel less comfortable lending my money and so I need to get paid more uh so that's kind

of what the yield curve is and we also call this the term structure of interest rates and interest rate curve these are all kind of you know similar terms that you hear in trfi and that you know we kind of use interchangeably um so you know with with fixed income and with with kind of yield curves and things like that there's a lot of things that that have been done in trfi over the years and there's a lot of use cases and I I want to quickly go through um some of these use cases because I think they're important um so you know first use case Capital preservation and income generation so let's say you have some spare cash you can buy like let's say us treasury bond that pays you a coupon that has a yield to maturity so if you hold it to

maturity you get some yield back and in theory that's going to help you preserve your capital and you know generate some extra income if you're lucky you're going to be able to beat inflation as well which is kind of you know that's that's a tough question right in the last couple of years you couldn't but anyway um then once you establish these um interest rate curves um these different kind of points on a on a curve what you can do is you know you have the tools and the means to kind of be able to Value any sort of simple and complex Financial product um the reason for that is because any sort of product at the end of the day is a stream of kind of future cash flows and if you have the right tools to Discount those cash flows

correctly to the present then you can kind of value anything um what else we can do we can use it we can use you know fixed income as a benchmark for pricing and for risk management purposes so um you know another example you know let's say I can invest in us treasuries at you know 5% and these treasuries are by backed by the US government by the US Treasury so you know I'm kind of sure that I'm going to get my money back or you know I can have an investment opportunity where maybe I can lend money to a real estate developer in New York that is building office towers and let's say I'm getting 5% on the US treasuries I'm getting like 6% on the on this on this opportunity to lend to this this real estate investor and obviously the question becomes like is this 1%

difference high enough to kind of compensate me for the extra risk that I take for the fact that you know the the lender May default and things like that so it's it's very important as a as a benchmark for looking at at you know other kind of asset classes and going up the risk kind of curve um other things we use it for you know duration as a liability management if you're like a pension fund and Insurance Fund you know you can use fixed income to kind of tailor this kind of exposure um if you're a company you can you know use fixed income for funding for liquidity management you know let's say you want to raise funds to kind of build a new Factory or you know you you may need like cash for the next month for you know some kind of expenses and things

like that um you know then you know again you can hedge various sort of payables and receivables so you know kind of streams of cash flow in the future any sort of like interest rate risk um if you're you know a Trader um you can kind of you know look at the Spectrum of different kind of uh asset asset classes within fixed income and you can Arbitrage against different interest rate instruments and you know if you're a if you're a degenerate you can use it as leverage for RIS taking which you know everyone loves in a in in a bull market um so where is the kind of potential Market size here uh if you look at the top 10 defi lending uh and borrowing kind of protocols I mean the tvl is around 12 billion I think this this this is a little bit outdated with

with the marketing you know kind of with the bull market it's probably more closer to 20 billion I would guess but at the end of the day it's it's it's peanuts if you look at it compared to fixed income which is you know 100 plus trillion and then to the interest rate derivative Market which is over 600 trillion in US dollars so you know the the upside is is enormous the total addressable Market is really really big and you know the idea of defi you know coming and and eating some of trat five Pi makes a lot of sense you know if you look look at it on a you know 20- year Horizon um if you look at kind of you know product gaps within defi so the yellow ones are kind of what we have in defi right now the white ones are the

ones that we don't and we haven't had like much success and you know we are the kind of blue dot there and um so it's to me this is really interesting because you know we have kind of money markets VI aen compound we've jumped already to tokenizing real world assets and then we've gone all the way up the complexity curve to having like options and Structured Products but like we don't have a very strong Foundation we don't have a very strong like kind of backbone and and base layer and pricing layer because we don't have kind of bond markets you know from Bond markets from from reliable and functionable bond markets you know you can have you can actually build forwards and term Futures uh as as per the chart and then you know an interest rate swap curve and from there bootstrap a discount Factor curve

which is basically the thing I was talking about earlier we you know the the thing that helps us to Discount any sort of future cash flows to the present so once you have that kind of up and running and works well then you can you know use like models like the black schs model or like more complex ones to Value any sort of like options and you know discount them and and take their present value and then you know you can use all these different things combined together and get to structure products so you know to kind of conclude very quickly on this chart like I think you know we are yet to to Really build a strong Foundation a strong backbone to to be able to get to options and structure products and other things and I think that's what we are trying to achieve um

with with the bond market that we're building um yeah so again some of the you know Solutions offerings that that we have so again uh in defi you have these floating interest rates this API that varies block by block and so like you know you lend your money let's say it says 6% on a like tomorrow it can be like 4% and the day after can be 3% and then if you draw the line and you take the average for the last for the for you know for 30 days you can be like oh actually lend my money for like an interest of 3% and you know people in threy and in people in general they like certainty and they like to be thinking about like okay I'm going to lend my money for you know 30 days and I'm going to get a 6% annualized rate on it so

that's kind of what we are trying to do we're trying to come with fixed interest rates we're trying to to have this API that you know varies by tenor so you know if you lend your money for a month it's going to be this if it's going to be for three months it's going to be this and if it's going to be for 6 months it's going to be much higher um again when you comes to efficiency and transparency so you know in defi we have this peer Topol model and this amm kind of pricing um that and you know to me it looks a little bit like a black box like you know liquidity can be kind of drained from there like some whale pulls out their liquidity and like the market get gets unbalanced you don't know exactly like what is the real flow

behind what is the real size that you can do and we we need to get to a place where we are kind of peer-to-peer Market driven order books and what that actually means it means basically you have bids and offers you see the stack of bids and offers and Market participation and then you that's that's kind of how markets have worked for hundreds of years so you know we have had uh you know order books and you know people putting bids and offers for you know commodities for hundreds of years and not just you know Financial products for speculation I think that's where we need to get in order to kind of on board institutions and and you know be able to to to kind of scale up um yeah so the way we are trying to do this is by having three three pillars primary

markets secondary markets and repo markets um repo markets are coming much later down the line so I'm not going to be talking about that but the idea of primary and secondary markets is you're going to be able to do all these different things that I was talking about earlier you know use these markets for you know payment investment pricing liquidity management Arbitrage hedging you know allocating your your your risk and your portfolio and things like that so um this is just you know a chart of primary and secondary and repo markets um if we go into um primary markets so what you can do in primary markets you're going to be able to borrow and lend at a fixed rate for a fixed amount of time um the kind of the way it works is let's say for example you want to borrow usdc you put a maturity date 29

of March 24 obviously that's that's past now but you know if you did that in January that would have been like you know like an equivalent of three month sort of thing these maturity dates are standardized the way we have them in trefi you you can use um you know various types of collateral like uh like WRA teeth and that's going to allow you to borrow a specific amount of usdc and uh you know the idea is that you're going to get matched via an auction auction process with our ZK rollup so you know the workflow is very simple the borrower places an order to borrow at y% and then the lender puts puts an order to to to lend at x% you know and and if they get matched there there's a you know there's an erc20 fixed income token that that gets minted to the to the

lender um then if we think about secondary markets so what are secondary markets for um a very simple example would be let's say you've participated in primary markets and you've decided to lend money for 6 months at I don't know 6% interest rate so your money is kind of locked for 6 months and you know you're going to get 6% annualized on it uh but let's say you know there's this crypto bull market that's all over the place and you know people are borrowing like crazy and they want leverage and you know they want to buy every single altcoin in the universe and mcoin and so the interest rate for like a two Monon uh uh for for for a two- Monon you know borrowing gets to 15% and you're like okay I've lent for like 6 months at 6% that's actually quite bad when I could

have just waited and you know L now at 15% and and the idea is the idea of secondary markets is to make any sort of fixed income token tradeable and you can you know you can put limit orders and Market orders to trade these fixed income tokens the way you would have had in traditional Finance where you know there's an issuer let's say the US the US Treasury IT issues a treasury bond and then you know people can then buy and sell those bonds as they kind of see fit and you know kind of try to find better Market opportunities um so yeah the the secondary Market workflow is actually quite simple you know people put just bids and offers and then they should get meshed we have this order book it which is transparent you're going to see the size and people are going to be able to uh you know to to

get their volume done at a particular price um so you know the use Cas is for uh Market participants are many um you know it goes from miners that can like that they're going to mine Bitcoin and they can use like Futures and forward to sell the the the the the Bitcoin that they mine to like you know option Traders and market makers and any sort of person that wants to HED their interest rate risk via primary and secondary markets and any sort of you know structured product that you can think of is is going to be able to be tradable in these primary and secondary markets um I want to talk very quickly about stable coins a little bit so um obviously everyone kind of knows what a stable coin is and these are some of the you know characteristics of them you

know trust pricing unit exchange value and and reserve and um at the moment I think there are a couple of pain points um you know we don't have you know hedging and valuation functions we cannot discount payments in advance to the present like you cannot pay someone for like I know in six months time we don't have as I said like kind of yield curves and investment products as kind of Lego pieces to to build on um and so I think this kind of leads to just fragmentation of liquidity fragmentation of of of transaction volumes there's there's very limited product varieties there's in general just kind of very limited use case apart from you know me sending money to my friend via some Network maybe thron because it's cheap and that's kind of it um so the idea of you know our primary and secondary

markets is you know we want to be able to create these forwards and Futures and discount Factor curve and interest rate curve we can use that for any sort of supply chain payment cross border payments micro payments um you know cash in advance payments that are discounted you can use it to price any sort of derivative and synthetic product you can use it for liability management and the idea is to kind of create much more liquidity and and scalability um so for example one of the use cases that I think is really interesting is if you're like a stable coin iser um like you know Circle that issues usdc you can do a lot of things with term structure so um you know you can use it for cap optimizing your capital structure um you can use it to you know for refinancing so replacing

existing debt with new debt at favorable terms so for example maybe you've um you know you've you've issued something at you know 7% the market has gone down to 3% you can refinance that debt uh you know you can restructure your debt so maybe extending the maturity profile of your debt uh and in general you can use any sort of you know interest rate derivatives and forwards and Futures to kind of HED your various interest rate interest rate risks um another interesting use case um that I really like again let's say you're a stable coin issuer and you think that a well- behaved market for your stable coin a well- behaved borrowing and lending Market should be anywhere between 4% and 8% so let's say basically the borrowing

and lending late rate should be anywhere between 4 and 8% if it goes below that you think it's too low compared to thread fi if it goes beyond that you think it shows you know excessive behavior that you potentially want to correct for and you know you want to put that in a more behaved Manner and so the way to do that is by kind of creating a floor and the cap and so the the way you create the floor the bottom part of it is by you know borrowing more of your stable coin in primary markets via term structure so like let's say if the interest rate goes to 3% you're going to keep borrowing and keep bidding those markets until you know you can you can get to the to your floor desired level of 4% and equally if like let's say um

you know Market goes to 10% you want to set up a cap at 8% you can keep buying um stable coin fixed income tokens in secondary markets via our platform and that's going to you know make you uh create this interest rate Corridor um in terms of trading strategies that you know you can you can use and you can do things um you know you can have carry strategies you can you know borrow at low yields and then you know land at high yields as I was kind of talking about earlier you can buy fixed income tokens that are yielding a lot and then know you know once they kind of move moving price sell them at lower yields um you know you're going to be able to borrow low low yielding tokens and lend them on centralized or decentralized exchanges use them to kind of farm

points rewards and you know ape into anything that you think of uh you can you know borrow to increase your leverage in Bitcoin in ethereum in altcoins and I should have said mem coins as well but I forgot um and uh again you can you know you can borrow to Arbitrage against other kind of dislocations in terms of you know fixed income dislocations across Defi and and you know kind of correct those things and and you know pocket the difference um so some of the things that that I like um for example here you can use repti e as collateral you can borrow usdc against it you can then go and buy the E usdc pair on a on a centralized or decentralized exchange so you would sell your usdc by if you're going to end up

with this if you can go and stake it for SD and so what you're going to end up is you know you're going to be able to lever up your your your uh your ethereum and you can keep doing that to kind of keep Levering up your your your state ethereum um equally you can use rap Bitcoin as collateral you can borrow usdt for free months um you sell your usdt against rep Bitcoin and then you're going to be able to you know buy the rep Bitcoin Bond on term structure and sell a free month uh Bitcoin future and that's going to allow you to Arbitrage the spot future basis and for example for some of you may you may know about this new stable coin called etina that you know a lot of the yield that comes from etina is coming from you you know

doing this Arbitrage between between spot and and and and future um another interesting example here the second one uh again you can use rep State e as collateral you can borrow usdc you're going to buy the die versus usdc pair so you would sell your usdc against die on a centralized or decentralized exchange and then you can stake your die for S die on anything like a spark pool that gives you like 15% out um and so what you're going to end up with you're going to have both SD and S di taking yields so I think that's that's quite interesting for for for for the bull market um in terms of you know our platform I think we're going to um have a lot of thread fi benefits you know we're going to be able to to to provide further legitimacy to the industry from

a from a traditional Finance perspective we're going to have more you know more compliance with regulations by having these transparent benchmarks you know a one month borrowing and lending rate is going to be here three months is going to be here and so on and so forth um you know we're going to have by by having this this transparency we're going to be able to kind of Benchmark investment performance we're going to have you know in general any sort of capacity that you've had in thread five for like investment con investment diversification portfolio construction hedging various interest rate risk tailoring your risk taking views and things like that um one other use case that I think is really interesting you know once you get to rwa tokens uh the yellow thing here uh you're going to be able to kind of you know use term

structure for kind of fixed rate borrowing against your rwa tokens so we we plan to enable that as well um so so in general there's a lot of things that you know you can put together call options put options synthetic structures with fixed income and then get to all these different you know Lego and composable pieces that that that we've had in in threat five for many years um so yeah that's where I think things are going I think we're going to Generation 3 where we're going to have this you know we're going to have non-custodial wallets with ZK capabilities we're going to have peer-to-peer not peer Topol with ZK order books and you know we're going to have a customized ZK for for better costs and you know in the future basically we're getting to a ZK defi ecosystem that's going to enable you

know fixed income products any sort of derivatives and structur products and then from from there on to real world assets and kind of you know complete Defi and you know make it really comparable to to trfi um that's it from from me uh we have our website here and you know my my contact details thanks a lot