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DeFi needs more fixed rate loan protocols. says a Messari researcher

October 29, 2020

DeFi loan protocols have attracted billions of dollars in liquidity provision by providing high returns The sector desperately needs more fixed income credit optionsAccording to a researcher.

Various protocols including yield, UMA Y. Mainframeare already venturing into the fixed rate loan markets for collateral in cryptocurrency.

According to the Messari researcher Jack purdy, Fixed rates provide security to lenders and borrowers who want to accurately forecast their costs and returns on equity.

DeFi needs more fixed rate loan protocols. says a Messari researcher
DeFi needs more fixed rate loan protocols. says a Messari researcher

With regard to yield curves, which plotted interest rates against different maturity dates, he added Steeper curves mean that lenders will need a higher rate of return to compensate for capital lockup. The flatter curves show that lenders are happy with lower returns as future growth prospects are not so good.

Stable and predictable financial markets are important for future planning when calculating returns and measuring long-term investor confidence. The researcher also mentioned a yield curve reversal that occurs when investors are willing to commit to long-term low interest rates as they anticipate a more severe recession.

In traditional finance This leads to central banks lowering interest rates and the indicator can be used to predict recessions.

The current DeFi scene is anything but predictable and could be described as a mixture of wild west protocols that They offer largely unsustainable returns and boom in the four-digit range to attract liquidity providers and degenerate high yield farmers.

Some of Yearn Finance’s recent vaults that use other protocols are illustrative. GUSD’s new vault currently offers over 2200% APY for stable coin deposits.

When the yETH vault started, with three-digit annual returnsHowever, this quickly collapsed. As a result, ETH’s liquidity has also fallen by around 60% since the vault was opened in early September.

With the leap in performance, DeFi farmers jump from log to log to find the next quick buckleading to token pumps and dumps and increasing network charges, All of this is largely unsustainable for longer-term investment and financial planning.

The researcher highlighted some DeFi protocols that take the temporary approach to borrowing and borrowing cryptocurrencies, including Yield Log which was launched on October 20th. The platform has created a new type of token called “fyTokens” (fixed income).The first of these will be fyDai to allow fixed term and interest rate loans / loans using the MakerDAO Stablecoin.

The UMA protocol has a dollar yield where investors can deposit ETH to coin up to 80% of the USD value in UUSD which can then be exchanged for USD 1 collateral when due. The token can be sold at a discount before it expires for those who want to wait for the reward.

The Mainframe Lending Protocol uses an instrument that is similar to a bond or group of guarantorsThis represents an obligation in the chain that will be settled at some point in the future so that the buying and selling of the Notes enables borrowing and borrowing at a fixed rate. The researcher concluded that more credit and fixed rate credit will bring TradFi and DeFi closer together.

“These new fixed income products will serve all types of financial instruments we’re used to as well as the new ones that this world of single-ended DeFi enables.”