A Fixed Income Future for DeFi Max Fiege

my name is max i'm one of the co-founders of fiat dao a new d5 protocol launching sometime next week hopefully on ethereum and what i'll be talking about today is kind of the case for fixed income assets in d5 going forward as it is kind of what we're building on top of so to get things started um i'd like to do a quick definition of what i mean when i talk about fixed income so fixed income assets are ones where you essentially have a known yield over time uh usually these are debt instruments where a borrower is you know borrowing assets from a given protocol there we go sorry about that borrowing assets from a given protocol with a known repayment date and a known kind of interest rate and i've shown an example here from one of the existing d5 fixed income protocols notional finance in which a lender is lending 100 to the protocol a borrower who has collateralized their eath is borrowing dye from the protocol and then at a known point in the future is repaying that you know principal amount plus interest in d5 today the majority of these fixed income assets are represented as zero coupon kind of proofs of liquidity so if you've like lent into one of these protocols you would then essentially have an iou that you can redeem at some point in the future for the amount of money you're owed and that's kind of what we'll be focusing on today now when we think about how d5 compares to tradify on this topic it's quite interesting in that in tradify the kind of size of the fixed income market is massive globally and it's relatively on par with the global equities market as well around 120 trillion for both now if we think about crypto and kind of the d5 space in particular that has not played out whatsoever um you know if we look at the kind of total crypto market cap sun's bitcoin that brings us to about one point trillion in assets and as of this morning going off of d5lama there's about 45 billion in tvl in lending protocols and of that 45 billion a very very tiny drop is fixed income or fixed yield and so that kind of brings to mind you know kind of these questions about why is this the case is this an opportunity um and what can we do to you know change this dynamic and so to give a bit of background on myself and why myself and my co-founders are working on this problem i as of you know between last year march through last year october worked at a d5 protocol called barnbridge where we were issuing kind of like these smart yield assets where users could lock in a fixed rate over time now they didn't get a lot of traction and when we kind of dug down as to why that was the case we kind of realized there were a few differences between how the tradfy market for these types of assets work and how it works in d5 so in tradfy if you have good quality bonds there's a ton of leverage available to you especially when we're talking about government government issued bonds uh not only that but there is also a vast network of market makers that'll work with you to you know offload those bonds when you need to granted if everyone tries to do it at the same time you run into liquidity issues but it's still a whole lot different than what we have in d5 today for the most part if you take a fixed income position in d5 you can't really use it for collateral anywhere else um there are no real dedicated market maker networks at the moment and for the few protocols that have kind of built toward the direction of automated market makers for these positions they're kind of forced to fragment their liquidity across every single tenor that they might support and so for the most part if you're using fixed income in d5 today the buck kind of stops there you hold it until maturity maybe you're able to you know sell at certain sizes but the the real bread and butter use cases you see in traffic do not exist for the most part in d5 meaning it just has not been super attractive as kind of the last slide showed right i think 2.5 3 of uh lending tvls in fixed income protocols today and then there's also just the reality that locking up your capital for three months six months in d5 i mean that's how many cycles at this point so there's just a lot of incentives against um going down that route at the moment um and so that brings me to what we're building a fiat dao and essentially our view on kind of this topic was that the answer really lies in unlocking leverage for these positions similar to what kind of repo markets do in the real world for those of you who have financial backgrounds and so from a very simplistic 30 000 foot view what essentially we've built with this protocol is a maker style system in which you're actually able to bring supported collateral types and then a singular asset called fiat short for fixed income asset token because we like a good joke and then go about your merry way for the duration of the bond and so we've published a white paper on this that relates to the code base we're kind of putting into production next week but essentially the idea is that through dynamic loan to value ratios you know you can essentially support illiquid collateral types and allow users to mint a relatively liquid asset against them you know if there's six months till maturity you can mint less than if you know maturity is tomorrow and what this winds up doing it has a number of kind of emergent effects as a result so by allowing you to mint fiat against your bond collateral you can now go mint more bonds you know to the extent that there's secondary liquidity for you to do so so you're actually able to lever fixed income positions and get a larger fixed rate secondly it reduces kind of the opportunity cost of using these protocols because now instead of having to put up a hundred dollars to sp you know to lock in four um fiat allows you to put up a hundred dollars and do some multiple of that four um and then on longer time frames what i'm really interested in this kind of working on is this concept of what happens when you aggregate all these bonds into a singular protocol right now becomes a lot more straightforward maybe to do collateral swaps or at least have like oracles for the interest rate information that is kind of endemic to these bonds you're holding and so with all of that in mind you know we view this as kind of being the first step of getting fixed income and defy on on par with how systems operate in tradify um and to those of you who have followed us to date you'll know that you know we we take quite a cue from maker dow but we'll be releasing more information about kind of more medium term goals for our protocol design that actually borrow from ave and curve as well in particular kind of like liquidity buffers for those of you who are familiar with you know all those kind of concerns in the traditional markets they're also here once you have all these liquid assets so that's kind of where our governance token and kind of additional utility will focus on and so here i just included a quick uh kind of diagram of potential user flows uh for people who use fiat and it's really this concept of two main pathways right if you have fiat you can if we have you know partners working with us perhaps you can mint more assets against the fiat token itself or you know if there's deep enough secondary liquidity you can sell that fiat token for more of the underlying so in scenario a you see an example where fiat theoretically could be a collateral type for abracadabra and so because element finance offers mim denominated bonds you can actually imagine a flywheel effect here that would allow the user to lever their kind of fixed yield from element and then scenario b we take an example that would be secondary market denominated meaning you take your fiat you sell it for usdc and you run it through barn bridge and actually develop a levered fixed income position there now leverage is a whole beast as we all know but one of the kind of realities that would emerge from these types of flywheels working effectively you know rolled out in a responsible way and of course um is that you would hope to see um kind of like the borrowing costs go down over time right because you're just attracting so much liquidity uh to these protocols by doing these types of pathways and i think you know at least it's my opinion that that will do a lot for d5's role as being a real productive source of debt capital going forward just because nine percent you know unstable coin borrowing that's already over collateralized makes sense if you're chasing crypto gains but it doesn't really make sense if you're using that financing for you know real world economic activity right which is the ultimate goal uh hopefully of of everyone building uh in d5 and now just a little bit of amusing on my end um it when we view kind of the landscape today for stable coins or kind of you know the reserve currency uh category that's building out as well um we see a lot of different protocols competing for user attention or user liquidity um and to date that mostly kind of resides in a very contemporary implementation meaning you know if you're providing liquidity on liquidity on curve you're getting those rewards bi-weekly it doesn't matter how many times protocol bribed in the past if you stop bribing your liquidity leaves and so when we think about you know some of the language that has been used with bitcoin in the past specifically this idea of the lindy effect right you know the longer something's been around the harder it is to kill off fixed income i think will really serve that role for d5 whether it's like a stable coin trying to be you know the alpha or any other types of assets that are trying to kind of like take on that more um medium of exchange roll um there there really is something to be said for you know x amount of that supply is locked up for the next six months for the next 12 months right like stable coins that are locked away can't break your peg and so on um and you know that's i think a pretty general view there's obviously nuance that's uh that needs to be accounted for but i really do think like the winners in a lot of these spaces will be determined um kind of by their ability to work in fixed income protocols as a result now that all sounds great but of course it does come with a lot of risk which we've seen in the real world everyone's kind of familiar with like oa financial crisis dramas and narratives at this point presumably you know um if everyone tries to sell bonds or get out at the same time right the illiquidity of these assets really does manifest itself you know primarily in huge discounts to what they were previously valued at and so on um but i think the reality is that it just opens kind of like the avenue for you know opportunities for more defy innovation and so i've listed a few points that we kind of keep in mind well as we build our fiat um and i'll just run through them real quick so for example underlie or foreign exchange risk right like what happens if you have an eth denominated bond and eth goes out the window and now you can't really sell that position because you got to wait you know three months for it to unlock that i think creates large demand for the services platforms like ribbon finance and dopex provide with put options and we ourselves are working on a partnership with olympus dow that kind of goes down this route of even repurchase agreements uh with the respective protocol that issued the underlying asset number two really excites me which is this concept of you know we're probably a few months out from dao starting to do like debt financing given the given the speed at which uh d5 is moving these days and so that then opens kind of like the opportunity for credit default swap markets and all the you know things that again you know that we have analogies with uh in in trad five markets um and then lastly for runs on collateral right like um you know for us at the protocol level we recognize that there's a need for a certain liquidity buffer for example and so i think you know backstop protocols are a very new kind of concept in d5 but you might be familiar with like just in time liquidity providers or i think b protocol is one of the main backstop protocols in other lending markets at the moment and so with all this in mind you know fixed income does bring with it a new risk that i don't think d5 is super familiar with these days but given all the analogies we have and the work that has been done in d5 over the past year especially on the derivatives front i would say i'm confident that these are risks that can be addressed and so just to recap um we at fiat dao believe that fixed income hasn't been super appealing to the d5 crowd uh just due to the fact that the buck kind of stops once you take those positions you can't really do much with them and so we're looking to address this problem by offering a leverage protocol that essentially reduces the opportunity cost of entering those fixed income positions in the first place and the hope is that by building out these types of solutions you know both ourselves and i'm sure we're not going to be the last that build in this direction we all stand to benefit as greater and greater liquidity enters uh debt capital markets here in d phi and while that does come with risk we've innovated our way through other risks in crypto and i don't see that uh ending anytime soon so i think we have a few minutes left for q a if anyone has questions i'd be happy to answer it's