The Evolution of DeFi: Fixed-Income Protocols | Jerry, Term Structure | ETHTaipei 2023

Jerry who has a very strong background in traditional Finance from term structure thank you thank you good morning good afternoon folks before I start I wanted to just tell you the background of this uh slide is the actually the nft you can get it at our booths just by playing a little gun of the DK audiobook then you'll get this nft and the booster said that the entrance building that you can you can go check it out for those who don't know me my name is Jerry I'm the co-founder and the CEO of term structure I've been working in uh Investment Bank for 25 years starting from money market Traders and then 15 count Traders and then foreign exchange Trader during the last 12 years I was managing the greater China trading desk uh main responsibility will be of course risk management Business Development and of course governance so I decided to retire last year because of this the evolution of defy I have spent some time looking at defy and I figured out that what I've been doing in Shopify for 25 years is nothing in D5 so I make a right decision and I decided to retire and jump into D5 so here I am let's start a look at what we can learn from traditional Finance right if we look at the financial the debt financial markets there are three pillars supporting this markets so the first one is money markets and then foreign change and fixed income so what does money market do the money market that the market participant to borrow and land the short-term liquidity or cash management so it normally use the floating interest rate and in D5 we have I have a compound maker doll they serve a similar function and then we have a Foreign Exchange Market that actually is a Marketplace for people to exchange different currencies for payment for Investments or for aging purpose and here in D5 we have a uniswab we have curve we have a balancer in some similar purpose and in financial markets we have a huge fixed income Market which is even bigger than Equity Market but in D5 we don't we don't see any fixed income protocol that being successful just like what we've seen in money markets and uh Exchange Market by the way I wanted to check uh here how many of you uh if you can raise your hand and know what the term structure means in financial markets uh okay I think less than 10 and less than 10 percent so term structure means the relationship between year to maturity and the time to maturity if you draw the picture of the relationship on a chart you will see the curve that curve we call your curve so this is a definition of a term structure of interest rate that's why we decided to do uh to use term structure as the main thing that we want to do so let's take a look at the potential Market size here so facing a market in our real life it's over 100 trillion US dollar with this as an underlying we have interested Mark uh interested directives markets which is six times bigger right over 600 trillion but you may think why do we need that huge interest rather it is because people need that to hedge hedge your essay and liability on your balance sheet but we don't have that luxury in divine and the people use the interested narratives to reduce your funding costs use intrusive derivatives to enhance your investment return that's why we need intracell services but if you look at the Divine the top 10 device we only have a PV of a 12 billion even the whole device probably is still at the 12 billion but that is actually coming from this white dot so if you think of maybe 400 500 years ago the 2550 income Market is just the size of the white dot and think of what we want to do here we want to expand that white Dodge to how much like like a 100s one tens you think about how big we want to extend that white dot then how much jobs that we need to do today so let's look at the trajectory of the market evolution so this is the product complexity we are here at the money market stage the why does comes here but we don't have a bar Market so interest rate forward confusions options or up to the structure products basically the market is really really kept so what we need to do is to First build a bomb Market on top of the money market by using the theory of discount Factor with design factors we will be able to find the bond market through the proper mechanism of marketplace or system protocol whatever we can build and with the fixed interest rates being found then together with the money market floating rates no matter it's overnight rates or the interest rate by block we will be able to construct interest swaps with the interested stops building up together with one markets then we can leverage the theory of an interested parity to figure out what is the full price the full price means that if today you want to exchange the eth into usdc one year later what is the price that you can trade with what is price that you wanted to deal with your counterparty this is these four prices for you to hedge the future exposure or you want to design any structural products you always need the full price and then once we have a full price we will be able to build up 10 futures Perpetual future is this great invention it gives us the opportunity to trade and to uh express our view on cryptos let's give to give us the opportunity to Arbitrage or speculation right or you want to trade based on the funding fee right you can do that a lot of things but you cannot hedge three months six months or one year with certainty of your funding fee so term future serves that purpose for you to be able to hedge without like cash you just use margin to hedge through the term Futures markets that's what we do in traffic and then with those Market build up then we can leverage the brake show models or other option pricing methodologies you will be able to find the options you may argue that we already have options markets but if you ask any option Traders or any option service provider platform exchange they will tell you it's just too small there is no scale they don't have a a hedging tool because there is no forward the option Traders they want they need to hedge forward particularly if we do one-year options they need to hedge one year forward otherwise they are exposed to interest rate exposure for one year then we can think of further structural products or real world assets we want to package by using options Futures forward into the swap or Banks so we need to go step by step to build this to make it a scalable Market what about the market structure what makes a full fish income Market of course first we need a fixed rate fixed to maturity date so with that the next thing that we needed to build is a market driven Marketplace what is market driven Marketplace So currently the people in crypto like to use automatic Market maker but that only give you a choice our ticket or leave it you cannot live in order to buy or sell a bank tokens or to borrow and land a Europe like preferred price so we need to build a protocol which allowed our users to decide what they what is the label they want to trade they can live in order for a couple of hours couple of days until it traded or they just cancel the order so when to build that and then after that we need what does the fixing a market composed of it composed of three interdependent Market they are primary markets secondary market and the repurchase Market we call it repo Market so primary Market is the marketplace for you to for borrowers to borrow fixed interest rates at the fixed to maturity date so with that then we will know what is the funding cost or potential uh return for the uh for the fixed interest rate at a certain uh uh a period and here in D5 when we talk about primary markets as a lending uh of course that we need like a one of the token to be over characterized token and then the other tokens or the same tokens Can Be the borrowing underlying token so this is what we want to build and then the next is the secondary Market the secondary Market is the marketplace for you to discover the price for investment tool for the certain period of time so people can live in older than buying sale bonds so they are the price Discovery mechanism for people to decide where they want to invest with the minimum risk without credit risk or like minimum uh a platform risk and then third one is the repurchase Market which is report Market we're talking about and the Ripple Market actually is a market for the bank holders or Bank token holders to use that phone tokens underlying to a circulatory to borrow the tokens for the short period of time this is the marketplace for people to leverage or you if you need it for catch some certain cash management for only just a few days or you need to adjust your liquidity position you use Ripple Market with all this in place the one more thing which is very important that we need is the primary dealers so we need to have a primary dealership system where provide incentive for primary dealers to provide uh the market liquidity to be the market maker for primary markets secondary market and the reaper markets with incentives of course the family dealers they will be able to get the weather for fee for transition fees get the incentive rewards get the the chance to speak about to set a policy or vote for the policy so this is the whole thing will just compose the full 15 count Market that we wanted to build but look at look at us where we are now we're still not seeing any successful fish income protocol in D5 so we're thinking about the automatic Market maker which I mentioned that it's not suitable for fit income products and with think of it that we think some protocol use peer to pull peer-to-poo is also not suitable for fishing gun products because if you think of like the uh similar to Ave if we have a four billion of a deposit but we only lend out the one billion the one billion guys pays four percent the four billion guys will get only one percent so this is the capital inefficiency about the peer-to-poo and then we may consider should we go on layer one or two or three in layer one it's another uh suitable for other book because they might incur High guest theme right we need to consider that and then on what about layer 2 or layer 3 and what scalability we need and we shoot the optimistic or Decay roll up peer-to-peer markets and we need to consider the auction privacy we need to consider the compatibility with other protocol on layer one and how do we build that so this is a solution we're going to provide this is the key to unlock device so first of all we need to build up a thicker roll up we call it DK2 up this is the customized DK rub particularly for the D5 and to do the zika auction um fixed income products and the thicker older book for 15 cam products so with DK2 up we have a scalability we can decide against fee so we make sure that the user does not need to pay guest fee when they place an order or cancel order until they have a transaction done so they pay transaction fees and with zk2 up that we can make sure we have a privacy through auction of course the most importantly we need to make sure we have a data availability we can control our role of frequency whenever we have a accumulated certain uh translation volume then we do draw up the auction process that we plan to do is one hour per auction so 24 auctions per day around the clock so we wanted to use that and make sure that we have a data Integrity data availability so the very important effect uh function that I wanted to mention is that even with with the data availability even charger we shut down our website the user can still claim their asset from ethereum so you don't need to worry about your fixed income tokens sitting with some structure it is not it's sitting on chain and we have false withdrawal so if you want to withdraw and we don't reply in certain period of time then you will trigger a vacation mode so then the whole platform will just get evacuated so you don't need to worry about the the safety of your assets Anthem structure and then we do the compatibility we use crc20 and to make sure that we have a compatibility with other protocol particularly we use the DK2 up so when we roll up you directly roll up to layer one so you can easily to use this Bank token with the with the value to interact with other protocol in addition to the combustibility I also want to mention that we will build the protocol label interoperatability with other protocol for example The Borrowed position if you land if you borrow sorry if you borrow three months at the maturity date if you don't want to repay for now and you want to just keep it and you want to place an order at a better price to borrow you can shift your borrowing position from terms charger to for example Ave or compound and a level here whenever you get that you borrow your three months or six money at the tokens at your preferred price then you can shift your position borrowing position from Ave back to term structure similarly for lenders if you have a like a bond tokens and you have a maturity date or you sell the bond tokens you want to buy you don't want to buy it today you want to take a profit of your Pawn token and you want to sit and wait for a few weeks of time and you can park your money your tokens right at the Ave and then you decided to move back to come to buy the bond tokens three months later you can do that so this is what you can do and of course we use auction and all the book right so that is the key process that for you to decide the price you trade it's not the ticket or leaving and here on the reopen and the primary dealership this is the system for you to act to uh to make sure that you are comfortable with the liquidity we use reopen uh what what re-over means in uh fixing her Market it means you are we will we will have a December 30 days for same token a month so that AVR when we do auction you can find the same bounds that the auction an hour ago or a day before so that the same erc20 token will continue to be minted on term structure so you can use that to make sure that you you have a higher volume the fifth Road in Market so we do that and then uh of course that we use the primary dealership to enhance the liquidity so we use the primary Market secretary Market River Market together to unlock D5 so this is a solution we're going to provide and let's look at the evolution okay do we have a just speakable three angles the first angle is the cost in addition to the Ang Chen Landing protocol paying the guest fee which can be high or low it depends on the timing that it is uh of your transaction and then the version to become the layer two fees but we are building the customized Decay as I mentioned you don't need to pay guest fee if you press the order or cancel order so you only pay when you have a transaction down you pay transaction fees the second angle is the efficiency right I talk about the appear to pull earlier but the other efficiency is the automatic Market maker versus the detail of the book like I said the automatic Market maker you can only do the technology and the market would not move if there's no transaction of course on the other book The Market will move according to the market news or whatever uh incentive for you to translate in to transact at a higher or lower price doesn't need we don't need a rear trade to be closed to move the market so this is the the another evolution of a p2p2 and prostheticate order book the third angle is the security with scalability so initially we have a centralized exchange they use custodial wallet so you have a scalability but some people are concerned under security in terms of the credit risk and then we move on to unchain then we have a non-custodial wallet that you have a security but you lose you compromise your scalability but here we have a VC version which you will maintain your non-custodial wallet but we use DK to make sure that you have a scalability you want so with the c angle we provide we will just give another evolution of course that we believe there will be V4 V5 V6 to continue to move on what about the use cases who are the users this is the common questions are being asked so first of all when we talk about the physical Market the group of people feel the most excited about is the option Traders they are looking for forward Market they are for looking for fixed interest rate to pay they want to pay fix they want to receive fix but they have no Market there's no way to do it now that I've seen the uh option traders in uh one of the Hong Kong event on the stage talking about options hedging they how do they find the forward Market to hedge they find this uh they the first they trade options they use the option pricing to re-engineer to get a full price and I had to call to try to find the market to trade with them this is just like if you are a real estate broker you sit in the apartment you use the price of the Departments to be sold to find the price of the raw material the bricks the Steels this is what the re-engineers are doing which is not efficient we should go back from the beginning the top the bottom right we have a money market yes we needed to build a fixed income and the interest and step up to the forwards and then of course investors and emerging investors they needed fixed income Market to provide the fundamental uh investment products and then they can use Ripple to do Leverage and the miners of course that they have a receivables they need to hedge they can sell forwards that's for them to hedge their future receivables and then we have a stable conditions the use case for stablecoin use is a very interesting one if you think of the the stablecoin issuers all of their liabilities are current liabilities you can think of an example who are having 100 liabilities being current liabilities that's its VB so they have a similar liability structure if you look at their parentship right this is now their fault because in Diva there is no such instrument for dental h but here with the fixed interest rate the fixed income Market primary markets they can come they can be the borrower to borrow the three months six months against their three main six months treasury bills but of course it comes with the cost name to pay interest rate but that gives them the sustainability right I believe the community would like to see that and then we have a crypto service providers they provide a structure product to retailers and then they need to package structure products to get by using the fundamental fixed income products plus the options or like a structure authorities to add on top of that and to sell to to their customers and then account receivables this is another interesting use case in the future that you can think of that if you want to pay 100 dollars at the end of the year but today you only need to use 95 dollars to buy the bond token which give you 100. next at the end of the year and you can use that to do the payments this is very good for the supply chain payment where you don't need to pay today you pay 90 days later and with this you can use that to uh for the payment media like I know some uh stablecoin issuers working with like credit card companies trying to build up the payment in real time right for whatever you purchase but of course what about the payment interviews payment in reals means that you do the payment in the future right so you need to do you need to find something to carry the time value with the exam Factor so that you can pay and then real world asset investors of course those real estate methods they need to H So currently we've seen some real essay uh products in markets what they do is they use usdc for as an example right they assume uscc versus US dollar is one one versus one forever so that's why you don't seem to have risk but what about if you want to use eth to invest real estate you can't because there is no futures there's no time Futures there's no forward market for you to hedge you may earn 10 percent but in EDH you may lose 50 one year later so that's why this is very important this is the foundational infrastructure for D5 Paul uh the uh from trifi that we can learn this is so many things that are similar from this terrified word to Divine this is on the top of the side you see about the RMB internationalization so CNY is the RMB traded or used in China we call it on show RMB cnh is the RMB traded or used outside of China we call it the offshore of cnh so people starting from 2004 the people are allowed to Mint cnh by using CNY right we're sending their C1 to the Cleveland bank then you can take the signage from us like for example Hong Kong outside of China so you then they can also redeem cnh back to CNY but here is one versus one always just like what we mean to US dollars through the um uh through the stablecoin issues to a stable coins and then one versus one and you can reading One Versus One so gradually the market use the cnh for payments and that's false like a certain payments only because there's no other place the cnh can be used there's no investment tools there is no demand for borrowing there's no demand for Lending similar to most of people think today or like a two years ago so in D5 we have a compound developed and that is also uh for us to use um the crypto asset payment token right but up there in cnh they use signature payment currencies and gradually we developed the fixed Foreign Exchange Market in this Foreign Exchange Market cnh and CNY they are not one to one anymore so there is different friction which makes the price difference and then we have a curve we have a unit swap which serves a similar purpose and then about 10 years later we've seen the fixing monkey in cnh became uh became to to to emerge so there are two tiers of fixing a marketing cnh one tier is there's still a lot of progress that we can learn from here right how do we move from the payment to investment currency I think that's the thing we wanted to we want to think of and this is the last slide I have so a brighter future this is something we want to do build of course that the community has to work with both regulators and the developers to build the full uh P5 ecosystem with Innovation with uh blockchain infrastructure default infrastructure all the market infrastructure and at the end of the day we needed to have a defy to be a as a service let's say for example as a payment medium for real time or for future payments and then D5 is a product that we see a lot of products that we can develop from here and then eventually we will reach out to the financial inclusion there's no code so like a bank of the people and Bank the people so this is something that the world want to build in the future thank you thank you very much and this is the uh uh this is the feedback that if you have any feedback you can uh provide it to us we're happy to listen uh what you think and uh just to quickly announce that uh our test net will be launched about two weeks later we will make an announcements soon thank you thank you Jerry [Applause] [Music] [Music] [Applause]